Session Summary. Russian Gas Exports: New Challenges and Opportunities
February 4, 2010
The speakers on the Russian Gas Exports panel focused on issues that all relate to the ultimate question: will demand for Russian gas fall in Europe, or will the investment that Gazprom is making today be profitable? The spirited discussion effectively pitted experts against Gazprom and NOVATEK.
“I do not have very good news for Russia,” Fatih Birol said during the kickoff. He expects a gas glut driven by increased shale gas production in the US, a surge in LNG supply (Michael Stoppard’s estimates suggest a 25% increase in capacity over the next two years) and a decrease in gas demand in Europe: consumption was down as much as 8% last year and is now at the level of 10 years ago. The key assumptions going forward, according to Mr Birol, hinge on global economic performance, the success of energy efficiency projects in Europe and whether the US’ shale gas experience can be replicated anywhere else, including Central Europe. Mr Birol foresees that a growing chasm between the contracted Gazprom prices and the cost of the spot market gas will lead many consumers to opt for the LNG option.
Although the demand for LNG is going to grow, Gazprom is more likely to be hurt than benefit from it, most speakers agreed. The is because plenty of non-Russian capacity already exists and the additional volumes from Nigeria and Australia may soon start pushing the LNG that currently heads for the Pacific into the Atlantic basin – the same region that Gazprom’s Shtokman project has ambitions to serve. The economies of Japan, Taiwan, Spain and other major current consumers of LNG are growing slowly, and the LNG producers will have to make a “big push” into northwest Europe and the US almost irrespective of price, Mr Stoppard predicts.
As a result, most panelists agreed that a gas glut is a serious long-term threat to Russia. According to Mr Birol, it could reach 200 bcm by 2015. Tim Lambert qualified this by saying that while Russian LNG would find it hard to break into the US, pipeline gas will remain competitive in Central Europe. Sergey Komlev disagreed with the entire polemic, saying that he expects a shortage of 130 bcm by 2020 and 250 bcm by 2030. Gas demand has dropped slower than expected, and customers are not asking Gazprom for any reductions in volumes, he added.
Mikhail Korchemkin made a counterintuitive point: in order to stem the shale gas threat, Gazprom needs to allow for higher transit of Central Asian gas to Europe in order to create more competition, deflate prices and make shale gas production unprofitable, considering the high upfront investments.
The key point of agreement was the difficulty in foreseeing trends even a couple of years forward, much less long term. Michael Lynch noted that just seven years ago, an 1,800-page authoritative study of gas trends in the US hardly mentioned shale gas at all, and Asian consumers were worrying that the US would compete away their LNG supplies. Now, shale gas developments are labeled a “revolution” and the US is turning back LNG tankers. Mark Gyetvay agreed. With an investment time lag of five years or more, a company needs to make a punt now and invest accordingly. NOVATEK is investing now so as not to be caught short if the trends again reverse toward growth, as they have done in the past.