Gas markets are changing considerably: Anatoly Golomolzin on the outcome of “Flame 2016” Annual International Conference

On 9-12 May in Amsterdam (the Netherlands) Deputy Head of FAS Anatoly Golomolzin took part in “Flame 2016” Annual International Conference. It is the largest European conference, annually gathering together a lot of gas specialists from around the globe to exchange experience, information and enforcement in this field. Deputy Head of FAS outlined some results of the Conference discussions.

Gas markets are changing considerably. The main factors of influence are: the environment (it concerns primarily green house emissions), changes in the liquefied natural gas markets (particularly, due to new projects in Australia, Malaysia, Russia, the USA), changes on Chinese power markets (in particular, caused by structural changes in generation of primary and secondary power and the power consumption structure). Gas markets are transformed from regional (national) into the global ones.

Thy factor of uncertainty prevents proper estimates of changes in generation (including the structure of primary and secondary energy resources, and the role and significance of renewable energy) as well as in consumption structure (for instance, some countries announce plans to substitute fuel with electric power in transport). There are issues with balancing generation and consumption of energy resources (including gas and electric power), subsequently hampering large investment projects and development of infrastructure for regional and national markets.

“Flame” participants took part in a survey when they were asked under what conditions an infrastructure can be built up to receive liquefied natural gas? The point of the matter is that unlike suppliers, an option of developing an infrastructure for liquefied natural gas is not a flexible solution for consumers. Additional reasons are needed to make investment decisions, particularly, the right rules of the game. For instance, at one session most attendees said that investors would not be ready to invest their funds until the European Commission finalizes the rules of the game, making sure that these rules are adequate.

Gas markets are now more politicized as they used to be. It concerns, particularly, the difficulties with regard to a number of large projects, which objectively are able to extend gas-supply options and increase reliability of development and energy safety for countries and regions. Business and the expert community to a large extent are oriented towards economic grounds. A survey conducted at one of the “Flame” sessions showed that around 60% participants find it expedient to implement various options of new gas projects announced by Russia. According to the majority of experts, the current gas supply flows from Russia are competitive against gas supplies from other countries with regard to new as well as current projects.

There is some imbalance in focusing attention on green house emissions; and discussing environmental consequences of poorly forecasted climate changes, and trading carbon dioxide emission quotas. At the same time a number of important environmental concerns are not raised yet: air, soil and water pollution, environmental issues in energy-supply and energy-consumption chains. Environmental concerns also emerge in economic and production chains in the economy as a whole. New technologies can have benefits and risks, including environmental ones, at various stages of their lifecycles.

Natural gas has much better environmental parameters in comparison with other organic fuels. It is also considered in conjunction with renewable energy sources. Many transnational corporations even consolidate the relevant sectoral Departments. Apart from clean environment it is determined by flexible energy supplies since renewables do not have such qualities. So far no cost-effective industrial energy-storing technologies are available, but involvement of large companies and other entities in these processes are quite dynamic.

An analysis of gas price behavior showed their considerable reduction on a lot of markets (by 53 – 54% in the US and the UK; and similar trends at lower scale are observed in other countries). Low world prices are favourable for structural reforms and developing competition because the transition to free prices is not driven by their significant increase.

A general tendency is expanded use of prices formed in hubs during organized trading. They are more representative, reflect expanded competitive markets and are applied as spot markets indicators and contractual price indicators as elements of pricing formulae.

In 2014 - 2015 gas and oil prices correlated considerably. The expert community is arriving to the understanding that pricing methods based on oil prices and the methods based on competitive bidding and /or “gas-gas” competition should not be opposed. Instead they should supplement each other.

“Antimonopoly bodies together with participants of the raw commodities markets concluded that proper long-term flexibility of contractual relations is achieved in combination of both methods”, pointed out Anatoly Golomolzin. Typically producer markets force consumers to adjust pricing to oil indicators. When there is a consumer market, consumers move to gas hub pricing. In the former case reliable development and long-cycle investment projects are supported by long-term contracts. In the latter, additional risk-hedging strategies are required in both long-term and short-term aspects.