Speech by Alexey Miller about global gas industry outlooks and problems at 4th St. Petersburg International Gas Forum
Esteemed colleagues, dear friends!
The topic proposed by the organizers can certainly be considered overarching – the global gas industry outlooks and problems.
Speaking of the main problem of the global gas industry, it lies in the fact that at the present moment the outlooks don’t work and neither do the strategies based on these outlooks. There are certainly some undisputed facts; concerning the long-term perspective, we believe that by 2050 gas in the global energy mix – I stress it, natural gas – will account for one-third and its worldwide production will exceed seven trillion cubic meters a year. Power industry will be the number one industry consuming natural gas. This is it about the undisputed things.
We believe that by 2050 gas in the global energy mix – I stress it, natural gas – will account for one-third and its worldwide production will exceed seven trillion cubic meters a year.
Let us have a look at the mid-term strategies and outlooks. Not long ago everyone was arguing that one of these days the gas market, the world gas market would become global. This was supported by well-reasoned, as it seemed then, explanations and assumptions of why it would happen. These outlooks and strategies were based on the idea that liquefied natural gas production would grow. Liquefied natural gas trade has a number of qualities specific for the classical oil exchange market. The strategy and the outlook envisioned that growing LNG production and the increase of its share in the world gas market would make liquefied natural gas a tool for the integration of major regional markets and, secondly, LNG exchange pricing would become the basis for the global gas market pricing.
As we all can see and understand now, it hasn’t happened. We observe an entirely different picture. We observe the development of several major regional markets – the North American market, the Asia-Pacific market, the European one. But these markets develop following their own trends and what’s most important – the outlooks for these markets are also quite different. Moreover, liquefied natural gas production, having occupied a 30 per cent share in the global trade, stopped at it. Thus, it may be forecasted today that the LNG share in the global trade won’t change in the mid- and long term and would remain at the level of 30 per cent. Liquefied natural gas failed to integrate regional markets into the global market, but it became a wedge to divide the major regional markets.
The LNG share in the global trade won’t change in the mid- and long term and would remain at the level of 30 per cent.
Quite recently the same role in the global market formation was assigned to shale gas. We are all well aware that only a short time ago everyone was saying that, firstly, shale gas would considerably change the gas market structure on the global scale and, secondly, it would have a significant impact on pricing mechanisms. None of this has happened. The shale revolution was quite fast to go into shale underground, while shale gas production turned out to be a local element of the North American market strategy. If it comes to the global market forecast, I suppose that today we will all agree that we won’t see any global gas market either in the mid-term or long-term future; what we’ll witness will be the development of certain major regional gas markets around the globe.
A few words about the North American market, its problems and outlooks: I’ll say just a few words because actually it is not the market we work in. I think the North American gas market will be dealing with its problems for the next 10 to 20 years. The main problem of this market is that it lacks its own natural gas resources. Natural gas reserves are insufficient to maintain the North American market balance in the long run. That is why the main problem of the market is replenishing natural gas reserves and figuring out how the North American market will compensate for the drop-out from its balance of this presently important upstream component.
I think the North American gas market will be dealing with its problems for the next 10 to 20 years.
Until recently it was maintained by the means of shale gas production, but as we see, the prospects of shale gas production are not boundless and apparently we’ll be observing some fixed limit concerning the structure of shale gas production in the North American market. It looks like the role of the North American market in the international arena will be rather limited and, I’m stressing it, in the midterm the market will be focused on resolving its own issues and problems.
As we know, the Asia-Pacific market is the most dynamic, fast-growing and most promising. What problems may be forecast for this market? First of all, these are certainly the so-called growth problems. Secondly, we may suppose that intraregional competition for resources will be tougher, I mean the intraregional competition in the Asia-Pacific market itself.
As we know, the Asia-Pacific market is the most dynamic, fast-growing and most promising.
We as Gazprom has entered this market this year, concluded a very profitable contract that will yield us USD 400 billion (it is the contract price for 30 years). But in fact, it’s just the beginning and the prospects of pipeline gas supply to the Chinese market are simply tremendous. Even now we can say that in the near future the volume of our supply may grow to 60 an even to 100 billion cubic meters of gas a year. Though the Asia-Pacific market has been the LNG market until now, and we are aware that the share of LNG in the leading Asia-Pacific countries dominates their gas balance structure, we may probably forecast that the share of pipeline gas in the Asia-Pacific market and the Chinese market will keep growing.
The share of pipeline gas in the Asia-Pacific market and the Chinese market will keep growing.
Europe is the number one market. Let’s see what has been happening here with the strategies and forecasts created just within the recent five to ten years. Firstly, everyone is familiar with the 20-20-20 energy strategy. Surely, it is a strategy with good intentions: renewable energy sources, eco-friendliness, price reduction. But what do we see in the end? First of all, we see that over USD 400 billion has been spent on the renewables, but what is the result? Greenhouse gas emissions have grown compared to the level registered at the beginning of the program implementation. Secondly, about the prices themselves. If we take a look at the initial cost structure in the European industry, we’ll see that power consumption by the European companies has increased. But what’s most important, among other things it led to the drop in the competitive ability of European products. Does this strategy work? It seems like not.
If we take a look at the initial cost structure in the European industry, we’ll see that power consumption by the European companies has increased. But what’s most important, among other things it led to the drop in the competitive ability of European products.
However, there are other strategies for the gas and power generation industries in the EU market, which are leading or have led to the same result. The strategy of gas supply diversification and resource supply diversification. Europe has constructed a great number of LNG receiving terminals, which are presently only 20 per cent loaded. Why is it so? It’s because they’ve lost the price battle for LNG to Asia-Pacific.
Another strategy is represented by Southern Corridor aimed to deliver Caspian and Central Asian gas to the European market. But what do we see in reality? Southern Corridor’s prospects have faded. At present, only 10 billion cubic meters of gas supply from these regions is left on the negotiating table. There are industry professionals in this room today who understand what 10 billion cubic meters of gas mean for the European market – it’s actually just a drop in the bucket. They failed to diversify their resource base.
Europe has constructed a great number of LNG receiving terminals, which are presently only 20 per cent loaded. Why is it so?
In this context, the market strategy based on spot trading and hubs has also collapsed because the failure to supply gas from diversified sources didn’t allow the trading platforms to become liquid. They do not fulfill the pricing function in the gas market today. The conclusion is very simple as well as the forecast – it seems like new approaches to gas pricing may evolve and these new approaches may cut out spot platforms and hubs in the European gas market.
As for Gazprom’s predictions and strategies, of course we face some questions here, too. First of all, I’d like to tell the moderator – as far as Gazprom’s balance is concerned, Gazprom primarily works applying the balance method, we know our obligations to our foreign consumers, because our activities are based on long-term contracts and we are aware of our obligations in the domestic market.
New approaches to gas pricing may evolve and these new approaches may cut out spot platforms and hubs in the European gas market.
As for our mid- and long-term forecasts and plans for gas production and supply to the market, these forecasts are very accurate. In any case, they are accurate enough for having a relevant resource base that allows us to face all the market challenges in a timely manner. Today Gazprom owns excess gas production capacities. Apparently this year we’ll produce 463 billion cubic meters of gas, but currently our production capacities total 617 billion cubic meters of gas year on year. Well, certainly, these capacities are required not only for meeting this or that market challenge, but for enabling us to smoothly pass the winter period, the autumn-winter maximum.
Gazprom’s mid-term strategy in Europe was based on our aiming for the end consumer. We aimed for the end consumer and created value chains from geological exploration and production, transmission, storage, distribution with an outreach to end consumers. Within each link we try to establish joint projects with our international partners in order to diversify risks within every link of this chain as well as to provide for additional value. Does this strategy work today? I suppose that the correct answer is – it does, partially.
Currently our production capacities total 617 billion cubic meters of gas year on year. Well these capacities are required not only for meeting this or that market challenge, but for enabling us to smoothly pass the winter period.
First of all, the European Union market is currently not a consumer market, and since it’s not a consumer market, we should probably ask ourselves a crucial question – is it really necessary to aim for the end consumer in the market which is not a consumer market? Then another logical question arises – should we pay so much attention to creating value chains from geological exploration and production to the end consumer? This question is under consideration. We do not know the answer as yet, neither can we say that this strategy works.
What we can tell you for sure in this hall today is that Gazprom critically analyzes and reviews the strategies it has been following recently. It doesn’t mean that we are going to change these strategies and approaches, but it is possible. Anyway, it is quite possible that we’ll be critical about some projects which we planned to be the projects within the separate links of the value chain. What can happen to these projects? They might at least undergo some changes and be modified in a certain way.
Gazprom critically analyzes and reviews the strategies it has been following recently. It doesn’t mean that we are going to change these strategies and approaches, but it is possible.
But in the end there is only one conclusion to be made: the gas market around the globe has been developing very dynamically lately, changes have been taking place very fast and the market strategies pursued by companies have been quickly going out of date. It seems like all the gas market players – in the North American market, the Asia-Pacific market and the European Union one – are facing the necessity to choose new strategies and approaches. Going back to the global market, we can say: no, there won’t be a global market, but there will be global players, global positioning and there is no doubt that the markets will influence each other more and more.
The 20th century was the era of oil, the 21st century is the era of natural gas.
To sum up my speech, I’d like to tell you something totally indisputable and everyone in this hall will agree with it. As we put it, the 20th century was the era of oil, the 21st century is the era of natural gas.