Spotting the Market
We live in a quickly changing world. The pattern seemed pretty simple a short while ago. A physical gas market existed only in America, even as deliveries of gas in Europe and Asia were made through oil-indexed long-term contracts that had nothing to do with demand-supply fluctuations.
Europe was the first to fall under the pressure of free market principles. According to the latest Société Générale report, issued on September 11, this year will see 45% of European gas trade to come from the spot market. ‘In Europe, the rationale for oil indexation disappeared many years ago, so hub pricing makes more sense today,’ the bank said.
As usual, the boss of Gazprom was offering an opposite view. ‘The spot market model,’ Alexey Miller argued on September 24, ‘is not sustainable even in a medium-term perspective. There is no doubt that long-term contracts have been, and will continue to be, the basis of energy security in the EU countries.’
The consumers, however, place their bets on alternatives, and the Russian monopoly witnesses the flow of exported gas decreasing. In the first half of the year, the volume of Gazprom’s exports plunged 11.8% against the same period of 2011.
In Asia, the first consignment of spot-traded LNG reached consumers in the beginning of 2011. Over the last year, LNG swap deals priced off one of the Asian markers have averaged about one a week. Now even the staunchest bastion of the non-market mechanism of gas trade, Japan, appears on the verge of crumbling. Japanese Minister of Economy, Trade and Industry Yukio Edano called last week for a radical change. ‘There will be a paradigm shift with the emergence of new production,’ he said addressing an audience in Australia. ‘There is no longer any rationale to support the current oil-linked pricing system. It should be replaced by a new methodology.’
The minister warned that without modification of the regional pricing system, some Asian nations would have to turn to emissions-intensive coal because LNG was too expensive. The current gas price in the Asia-Pacific was $18 per million British thermal units, while it was $3 per mBtu in the United States, Edano said adding: ‘For the private sector and for the Japanese government it is a great challenge to maintain access to low-cost LNG.’
His suggestion was echoed by Kwon Young-sik, who heads LNG procurement for South Korea’s Kogas, the world’s biggest buyer of LNG by volume. He told The Wall Street Journal that the company wants to ‘maneuver away’ from oil-indexed pricing.
This is bad news for Gazprom, which expects the Asian gas process would remain high enough to justify the construction of long pipelines from Eastern Siberia and LNG facilities on the pacific shore.
Mikhail Krutikhin, RusEnergy
Published with the kind permission of RusEnergy. RusEnergy is an independent privately-run company established in 2000 by a group of Russian experts with a long experience in consulting and publishing business. Based in Moscow, it specializes in monitoring, analysis and consulting on oil and gas industry of Russia, Central Asia, Azerbaijan and Ukraine.