Gas market integration: for a sustainable global growth
June 5, 2012
Due to participation of Alexey Miller, Chairman of the Gazprom Management Committee in the official visit by the Russian Federation President Vladimir Putin to the People’s Republic of China, the keynote address at the 25th World Gas Conference will be delivered by Alexander Medvedev, Deputy Chairman of the Company’s Management Committee.
Dear Ladies and Gentlemen, Colleagues,
Our forum is being held under the slogan “Sustaining Future Global Growth”. The slogan reflects the key challenge we, energy and gas experts, are facing today – to promptly ensure we can meet the growing demand for energy carriers and, at the same time, bring about the improvement of environmental performance in the energy sector.
According to the demographic forecasts, the population of the Earth will come to 8.5 billion people in 2035. Experts from various countries predict the implementation results of possible global energy development strategies for this very timeframe. Meanwhile, the world’s seven billionth baby was already born on September 3, 2011. Today these billions of people need favorable living conditions and energy that support the economic growth.
It is likely that the future is with renewable energy sources and technologies that have not yet come out of research laboratories. However, nowadays the bulk of energy is generated from fossil fuels. Furthermore, today’s need in available and affordable energy is so high that with a great concern we watch over the growing use of coal, the most intensive source of harmful emissions we know. Growth rates of the global demand for energy obviously surpass the development rates of power supply technologies based on the energy of the wind, sun, tides as well as the carbon capture and storage (CSS) technology. Therefore, the sustainable development of the global economy immediately requires an energy alternative. Natural gas provides such an alternative.
The unused potential of hydrocarbon energy is rather high. The global recoverable oil reserves are estimated at 182 billion tons while the total recoverable natural gas reserves are roughly estimated at 850 trillion cubic meters. The untapped technological potential is even higher – gas technologies are almost ready for the extensive application in the global economy, and the cost-effectiveness of natural gas in achieving environmental goals in the energy sector is well known by experts. Experts and analysts speak more and more confidently about the possible dawning of the “Golden Age of Natural Gas”.
However, the mission of supplying the global economy with the “default fuel” requires that the gas industry keeps going its own way of sustainable growth. This challenge can be tackled by integration in the broad sense of the word: integration of markets, integration of technologies, integration of innovations with best practices that enabled the gas industry to reach its present-day positions.
In the recent decade, the gas industry has undergone significant, almost revolutionary changes. It seems that not long ago the gas world was divided by the seas and oceans into regional segments with pipeline gas dominating inside each segment. The rapid development of LNG technologies drastically changed the situation within one decade and generated hopes for total globalization of the gas business, elimination of borders between the markets situated on different continents.
In the recent decade, the gas industry has undergone significant, almost revolutionary changes.
Just when the industry planners finished with the development of a new global picture of the gas business, the breakthrough in commercialization of the so-called non-conventional gas production technologies considerably changed the rules of play. Now, it’s common courtesy to say that the future of the gas industry hinges on alternative sources of natural gas. We stand before the new perspective of all-round conversion of gas importers into exporters, nearly the total self-sufficiency and reformation of the whole worldwide system of the gas business according to the principles of exchange trade and full liberalization of markets.
Under these circumstances, we consider it vitally important to have a realistic view of the situation. We should see the perspective as it could be if we act within the realities of today, not as we wish it to be. What are these realities?
The world gas business entered the era of full-scale diversification and structural variety. The world gas trade grew 4.2 per cent in 2011 alone. The growth was underpinned by increased export from Russia, Qatar and Turkmenistan. Meanwhile, in spite of a rapid growth in LNG supplies, pipeline gas is still holding its leading position. Intense development of the regional pipeline systems is underway, complemented by the interregional complexes for pipeline gas and liquefied gas transportation responding to global growth dynamics.
The world gas business entered the era of full-scale diversification and structural variety.
Gas export pipelines previously connecting two countries (exporter and importer) due to the development of international trading started their transformation into transcontinental systems. Today we have a transcontinental gas market in North America. The European Union is trying to create a unified European gas market. Integration processes in the expanding Unified Gas Supply System of the former Soviet Union countries are still ongoing.
In spite of the powerful factors of globalization, there are three real macro regional markets at the moment – North America, Europe and East Asia. Each of the markets has its own regional specificities. In particular, regional specificities can be found in natural gas price levels of various regions. Global suppliers of LNG cannot meet the demand in a manner required to maintain gas-gas competition sufficient to level out prices on a global scale. The East Asian price is much higher than the European one. Meanwhile, American prices are above the safety barrier of the state policy aimed at natural gas usage as a tool for the American economy restart.
In spite of the powerful factors of globalization, there are three real macro regional markets at the moment – North America, Europe and East Asia. Each of the markets has its own regional specificities.
While North America is planning to back its economic future with own hydrocarbon feedstock, there is an opposite trend in Europe where consumers will need bigger import volumes. East has much more peculiarities. The developing economies of Asia require ever more energy and often have no possibilities to select energy priorities on the basis of environmental considerations. The access of the increasing population to modern energy sources and the availability of energy for the economy growth are becoming most urgent there. Data shows that such countries as China and India will become the key drivers of energy demand in the years to come. This demand will keep the Asian gas market up.
While North America is planning to back its economic future with own hydrocarbon feedstock, there is an opposite trend in Europe where consumers will need bigger import volumes.
The map of government regulation of gas markets is very uneven. Most of the countries prefer regulated rather than market-based pricing. The market quite reasonably preserves its traditional pattern. This fact should be taken into consideration to ensure sustainable development of the world’s gas supply system, particularly referring to the improvement of pricing and contracting in the gas industry.
As we see it, the primitive, almost Orwell pattern: “deregulation is good, indexation is bad” has became outdated so far. We believe that looking for the best practices, we should first think about investment attractiveness of gas production and transportation. At the same time, we should remember that despite all innovations in the conduct of business during the LNG era, long-term contracts are still an important instrument of sharing risks and securing long-term investments.
It’s time to determine the directions for the system improvement. Contracts can be based on either spot prices or corresponding prices for alternative energy resources. We believe the contacts based on alternative energy prices could best suit the sustainable development of the industry. The novelty here is that we could choose a renewable recourse, instead of depletable, as the energy alternative for pricing (price indexation) in the future.
In the past, in the early days of the gas industry, oil was the sustained alternative for the depletable Groningen field as part of the Dutch model for long-term pricing. At present, renewable energy or derived electricity prices could be used as such an alternative.
Meanwhile, one should be most cautious about possible rejection of pegging to oil prices. All possible remedies should be applied for mitigation of the adverse impacts made by oil futures converted into a speculative exchange-traded instrument some time ago.
The upward oil price trend is clearly visible in the diagram reflecting oil price changes (adjusted to 2010 prices) over a century and a half. The trend is considered the key reason for a gap between natural gas prices in spot and oil-indexed contracts. However, we believe that a greater drawback for sustainable development of the industry is not the upward trend itself, but noticeably growing volatility, as it may be seen in the diagram for the selected time period. The volatility reflects uncertainty and insecurity of the development outlook, and such uncertainty adversely affects the investment activity. In our opinion, only long-term contracts can be used as an instrument of decreasing the volatility and risks associated with future uncertainty, protecting the economic interests of the supplier and the consumer.
Natural gas markets liberalization also needs a very responsible approach. Destined to secure the best quality of the supplier’s services and the lowest prices, the liberalization under certain might have an inverse result. Natural gas markets liberalization also needs a very responsible approach. Destined to secure the best quality of the supplier’s services and the lowest prices, the liberalization under certain might have an inverse result.
Natural gas markets liberalization also needs a very responsible approach. Destined to secure the best quality of the supplier’s services and the lowest prices, the liberalization under certain might have an inverse result.
Such guarantees are only provided by suppliers that have long-term obligations and secure delivery and distribution systems. Moreover, vertical integration of the supplying companies induces the development of a mineral resource base and production facilities. That is to say liberalization and energy security are anything but not the synonyms. The most reliable way of reaching energy security is a flexible balance between two different approaches, the old one (proved to be efficient) and the new one (offers new benefits and prospects), as well as a balance between the spot and long-term contracts.
Assessing the prospects for sustainable development of the gas industry, Gazprom defines its corporative priorities with the highest responsibility, keeping in mind not only maximization of the profit but also long-term interests of the largest groups of its stakeholders. Our calculations are based on our vision of a new architecture of global gas markets, on our real capabilities, available resources and equipment, geography of reserves, production and transportation facilities.
Our plans assume that the global gas demand will grow 55 per cent by 2035. More than 80 per cent of the growth will be made up by developing economies of the states outside the OECD.
We also assume that gas reserves, including those owned by Gazprom, are sufficient for meeting the annual demand of 5 trillion cubic meters. Gas production may be boosted by another 0.5 trillion cubic meters. However, the marginal cost of production will nearly double in this case.
We anticipate further progress in interregional and intercontinental natural gas trading, which is determined by irregular distribution of resources. Meanwhile, we forecast that completion of the Eurasian gas pipeline systems stretching from Algeria to Western Europe and from Russia to China could shape a huge transcontinental gas market embracing European and Asian countries. The analysis of possible scenarios for the gas transmission system development to 2035 indicates that Gazprom’s gas transportation and export activity will be based on supplies through onshore and offshore pipelines.
Gazprom’s strategy on securing the sustainability of the gas supply system for Russian and foreign consumers hinges on gas transmission by pipelines. The Nord Stream project has turned a new page in the security of gas supplies to the European market. The successful project will be followed by another gas export pipeline to be laid under the Black Sea. There is a reason for confidence – the project is based on physical volumes of gas contained in Russian gas fields, and these volumes will be sufficient to create a new channel (Southern Corridor) of energy supply to Europe.
Furthermore, there is no doubt that Russian natural gas will be highly marketable in Europe. Estimates by our close partners as well as the forecasts by international energy organizations prove this assumption. Moreover, despite the fact that Europe has set the task of decreasing the energy intensity of its economy and despite the economic growth problems, we still view the European market as the prioritized one and expect that Russian gas (supplied by Gazprom) will account for around 30 per cent of this market.
As for the LNG sector development, we adhere to the principle of sufficiency taking account for the main gas flow directions and their future prospects. The Asia-Pacific direction is underpinned by comprehensive activities based on the Sakhalin projects and an ambitious project in Vladivostok. The Shtokman field development project will enable us to launch marine transportation in the Atlantic Basin.
It is our understanding that the strategy of prioritizing conventional natural gas resources is the most reasonable development strategy for Gazprom to ensure sustainability of the global gas industry. As for non-conventional gas – it is always in the focus of the Company’s attention. At the same time, we trust our experts’ estimates (Gazprom VNIIGAZ) saying that coalbed methane and tight gas reserves altogether surpass the forecast resources of shale gas. Moreover, tight gas followed by coalbed methane is numerically predominant in Russia. With this in mind, we give priority to coalbed methane production and leave shale gas resources as a strategic reserve for future generations.
We see our efforts on building up the Company’s balanced strategy as our contribution to implementing the forecast (International Energy Agency’s World Energy Outlook 2011) saying that by 2035 Russia will be the major contributor in globally increasing supplies of natural gas to the world’s economy.
A combination of the large-scale pipeline gas supplies being made by Gazprom Group, together with the opportunities of transcontinental LNG trading enable us to be part of the decision-making process in tackling the global energy supply challenges and to run our business worldwide, integrating Russia into the global gas market and, to a large extent, into the global energy market.
We understand our leadership role in supplying natural gas to the Eurasian market and we think what we need to do next using all available opportunities to reach our goal of staving off climate change in the coming decades. We believe we need to unite our efforts in expanding the use of natural gas. We see motor vehicles to be most promising in this respect.
Motor vehicles account for 27.5 per cent of the global fuel and energy mix, with the forecast growth to 30.8 per cent by 2035 (Energy Research Institute (Russian Academy of Sciences)). At the same time, motor vehicles account for nearly 28 per cent of CO2 emissions. We know that natural gas vehicles have a considerable economic effect and drastically cut hazardous emissions.
Wider use of natural gas in the future is quite clear and obvious. Facing a glut of gas in North America today, there will be some additional investments into the technologies of natural gas use, including natural gas vehicles. As a result, the market for using natural gas as a motor fuel will be expanded.
In Russia we have amassed a lot of experience in this area. For instance, yet the former USSR developed some technologies of using natural gas as a motor fuel not only in motor vehicles, but in other types of vehicles, including locomotives and civil aircraft.
Nowadays, Gazprom makes every effort to develop the national NGV sector as the sector leader. However, international efforts are required to achieve tangible results. We need to unite efforts with carmakers and those companies that are ready for cooperation in executing international fuel infrastructure projects.
Gazprom is ready for such cooperation. In cooperation with the Russian National Gas Vehicle Association, Gazprom annually holds the GasSUF specialized exhibition, the International Scientific and Practical Conference “Gas in Motors”, regular Blue Corridor motor rallies as well as sponsors Russia’s cross-country rally team, Yo-Auto, in order to popularize the Company’s NGV fuel initiatives.
According to Gazprom, NGV sales grew to 17 per cent after a while in the cities and regions that had hosted the Blue Corridor motor rally in previous years.
We propose to broaden the scope of Blue Corridors. What we need is an international project aimed at expanding the NGV filling and servicing infrastructure as well as additional actions on boosting the production and widening the lineup of motor vehicles. The project can serve as a substantial contribution to preventing the climate change and giving a fresh impetus to the economic development.
The word “gasification” has another meaning in the Russian language. By this word, we call the expansion of municipal and household gas supplies across Russian regions. I think that on the global scale we have to leave aside the prediction of a likely start of the “Golden Age of Natural Gas” and take the practical and prompt actions aimed at gasification of the global economy. The expansion of international cooperation in the NGV sector could be a step in this direction.
Thank you for your attention.