East Med Gas: What About the Markets?

Building stuff is the easy part.

 What about the markets? asked Alexandros Lagakos, Senior Gas Analyst, Shell Energy Europe, Shell S.A., UK, in a session at the Frankfurt Gas Forum dedicated to future prospects for Caspian and Eastern Mediterranean gas exports to the EU.

He commented: “It's very easy to put steel in the ground, but it's very hard to set up the rules in such a way in order to enable people to trade around those assets; in other words, to allow counter-parties to extract the highest possible value out of the energy assets.”

Mr. Lagakos said he would illustrate this by explaining what he did on a day-to-day basis. He explained that he worked for Shell Energy Europe, which was the the European trading arm of Shell for natural gas, power and CO2 permit trading. “And my role is to sit next to the traders and analyze the market on a European basis and eventually provide the traders with 'steers' - trade recommendations – and also provide my views to Shell management of where I think the market is going from the short- to medium-term.”

As he came from Greece, he divulged: “I have this hobby of trying to envisioning how 'East Med' – the region where I grew up – actually turn into an efficient and open market itself.”

He noted that in the present period European market integration was the most tangible response on behalf of the EU against things like excessive market abuse or very high prices, or other obstacles to entering the natural gas market.

Mr. Lagakos said that the Eastern Mediterraneean had to take necessary strategic steps to be able to create a gas market like that in the northwest of Europe.

He presented three pillars by which every energy market had to be built upon: security of supply, diversification of suppliers and flexibility. How did the East Med region fare when placed up against these three fundamental indicators?

In terms of security of supply, he showed a diagram of all of the main sources, starting with Russia's Yamal Peninsula, which he said was the most well known among new upstream investments. By 2015, the annual production of the Bovanenkovo gasfield would reach around 100BCM/annum, offered Mr. Lagakos; this in the context of Russia's annual gas production at 500BCM/year and annual exports at 150-160BCM/year.

“So if all of this gas came to Europe then we would think about doubling the Russian exports out of the country. Of course there are caveats – some of the gas could go to China.

“At the same time we've got the independent producers in Russia,” he continued, “the likes of Novatek or Rosneft, independent gas producing companies that are gaining an ever-increasing share of the domestic market; they're not allowed to export pipeline gas yet – it's only recently announced that LNG exports from third parties, others than Gazprom, would be allowed.”

Meanwhile, according to many experts Russian domestic demand was not expected to grow, due to efficiency in power generation. He said: “This should explain why Russia is putting effort and money into creating pipelines as part of the South Stream project, which is a pipeline that's going to traverse six different countries with the end destination of Austria, on which all energy eyes should be in the future.”

Other alternatives, he noted, included LNG. Mr. Lagakos made mention of potential projects in the Eastern Mediterranean, and the prospects of US LNG exports in the future, which could go online by 2018 according to the EIA. Or what about Caspian gas?

“Azeri gas is already flowing to East Med, in Greece through Botas,” he remarked, offering the tidbit that the Trans Adriatic Pipeline would bear the physical potential for reverse-flow.

“So, not only to allow gas to flow from east to west, but also to allow it to flow in the other direction. Why is that important? Because it gives the ability to the Balkan states, Turkey and the East Med to benefit from gas that arrives at the hub which gets ever-better connections to the rest of northwest European markets – so more competitively priced gas,” he explained.

Countries in the region having access to natural gas priced under a different formula than that from Russia was also an important feature, he said, because it supported diversification of supply and therefore created a foundation for building competition.

TAP, he said, also increased flexibility in the region, as there were plans for the pipeline project to invest in storage in Albania. Meanwhile, physical reverse flow, he contended, would also make a contribution to security of supply in East Med in that it already used an existing route of flowing gas from the Dutch TTF hub all the way down to Italy's PSV hub.

He commented: “This is not an innovation, but something that's been happening for quite some time.”

The reverse flow connection to Greece, he said, would allow the PSV price hub to flow to the Balkan states, which would be great for the region but at the same time, TAP followed pretty much the same route, allowing for flexibility and functionality, which meant money to be made from a gas trading perspective.

The second fundamental pillar upon which every natural gas market needed to be built, according to Mr. Lagakos, was diversification. “You need more than one price out there,” he said, “to be able to get the best possible deal.”

In the northwest European market, he said that this had been achieved through very well interconnected markets.

“Through a big push by the EU all of the countries are trying to alleviate any bottlenecks between countries, making a difference and allowing people to optimize their portfolios on a pan European level,” he explained.

He said he was a very big supporter of creating the necessary foundation and setting the necessary conditions in order to create efficient, open and fair markets that determine prices, moving away from monopolies and excessive market abuse. The question was, how could this be achieved in the East Med?

Mr. Lagakos answered: “Basically by allowing different priced gas sources to have access to the East Med markets, like Caspian gas or LNG – completely different priced gas routes, and eventually increasing liquidity in the market in order to move to a regional hub.

“Maybe, as an intermediate step, you could use other hubs or proxies, for example the PSV hub, which should makes sense given that there will be physical interconnection in the future,” he continued.

The third pillar, he outlined, was flexibility, which was necessary because of price risks for, for example, gas-fired power plants; storage was also essential to provide flexibility.

This could all be achieved in East Med, he stated, by taking the necessary steps: “Purely regulatory steps, to establish hubs. Second, give the opportunity to counter-parties to shift their delivery contracts to the newly-established hubs in order to be able to make optimization, and, finally, invest in storage sites.”

His main takeaway, he said, was that it was expensive to “put steel into the ground” but the cheapest fastest and most effective measure with short-term gain was to invest in regulation. He concluded: “Liberalize the markets and I'm sure every one of us will see the benefits very quickly; second, enable people to shift their contracts to hub indexation and delivery; third, support all projects that help alleviate bottlenecks; finally, invest in projects that promote physical flexibility, such as storage or LNG storage capacity.”