"Responsibly energising a growing world" - while dashing for coal?

Take-aways from the 21st World Petroleum Congress

Whether it is despite the latest complications in the international politics or thanks to them, Moscow was in the centre of world of energy for the past couple of months – with the grand opening of the 21st World Petroleum Congress at the Kremlin Palace taking place on June 15 being one of the highlights. What followed was a four-day event, undoubtedly the largest oil and gas industry conference of the year. The World Petroleum Congress gathers once in three years; its programme covers all aspects of the petroleum industry (including upstream and downstream sector – also for natural gas – as well as sustainable management, new technological solutions, etc.) and brings together representatives of the industry, governments, non-governmental organisations, international organisations and research institutions.

World Petroleum Congress Moscow - Source: 21wpc.com
Historical sketch and natural gas within the 21st WPC agenda

The overview of the history of meetings is provided in the publication of the World Petroleum Council, but it’s enough to mention that it was attributed its 80th anniversary since the first congress, which took place in 1933 – and all major problems of the oil industry have been discussed during these events. What’s interesting – Moscow had already welcomed the 8th WPC back in 1971 – it “symbolised the new energy interaction between the Communist and non-Communist parts of the world”. That was the time of the ‘gas for pipes’ deal, which created the foundation for current interdependence between Europe and Russia in energy trade. Most of the discussion in Moscow in 1971 focussed on drilling and production, geology and geophysics, and refining – the oil shocks, which put the issue of pricing on the agenda, happened only after. The 1971 Moscow Congress took place in the wake of Russia's major entrance to the European and world energy market (and can almost be seen as symbolic); the 21st Congress is no less significant in that it marks the beginning of another new era, with key words such as Russia, Asia and Gas characterising it.

Therefore, it is especially interesting to see how natural gas was discussed throughout the Congress. The core challenges to the development of the gas market addressed throughout the Congress include transportation challenges and long distance transportation solutions; specifics of investment in the gas industry; innovations in project design and management; regional supply and demand balances as well as pricing mechanisms; the impact of unconventional gas supply; efficiency gains in GTL, CTL, LNG, CBM and CNG projects and opportunities to monetize stranded gas resources.

“Global gas market develops along its own path”

One of the fundamental questions (not only for a round table, but also for the whole ‘gas agenda’) was: What is the future of natural gas?

the global gas market, as well as the Golden Age of Gas remain a distant perspective (if not to say a dream)
Despite the fact that theoretically gas is viewed as an ‘affordable, acceptable, abundant and reliable’ source, the global gas market, as well as the Golden Age of Gas remain a distant perspective (if not to say a dream). The core problems were identified as the basic difference between the Asian market on the one hand and those of Europe and the US on the other. As Ken Koyama of the Institute of Energy Economics (Japan) noted, “natural gas is going to play an important role, and by that role the gas market is heading toward a more global structure, although it will take time. One important aspect is that gas economics is quite different from oil economics”.

One key issue driving the idea of the Global Age of Gas is the environmental challenge. The increasing need for cleaner fuels has positioned natural gas at the fore of the discussion. However, as Shigeru Muraki of Tokyo Gas put it, “economy and environment go hand in hand, but the price is central”. Of course, gas is used in an increasingly broad range of final consumption segments, the gas value chain is being extended, and the downstream of the gas business is rapidly developing. People all over the world learn more about gas vehicles; gas is entering more households around the world. Small-scale LNG is another development.

However, one of the problems with gas market integration is the fact that not such a large share of gas is in fact traded internationally. Connecting regional markets into one global market requires a higher level of integration with competitive pricing and spot trading. As follows clearly from the latest International Gas Union’s report on wholesale gas price formation, gas-on-gas competition does take the largest share in the international gas trade. Continued rise in gas-on-gas competition from 23% in 2005 to 39% in 2012, and 43% in 2013 has been at the expense of the oil price indexation (primarily in Europe, where more than 50% of all consumed gas is priced competitively).

What matters is the share of competitive pricing in international trade. Pipeline imports account for 19% of total consumption. At the same time, LNG imports made up only 9% of total world gas consumption in 2013 (down from 9,5% in 2012). Gradual rise in competitive pricing for LNG from 13% in 2005 to 33% in 2012 was not sufficient to transform the international LNG markets into a competitive playing field – moreover, in 2013 the share of gas-on-gas competition for LNG imports has decreased to 29%. The core of consumption worldwide is domestically produced gas (72% of total consumption). General increase in gas-on-gas competition from 35% in 2005 to 43% was registered in 2010 (a small decline had followed in 2012 to 41,5%, but then grew to 44% in 2013).

These developments ultimately show that there is a limited basis for a truly integrated global gas market. More specifically, the world is not homogeneous in the use of gas pricing mechanisms. However, the European example shows that with a certain commitment, a significant change in market principles can happen.

“Demand (mis)behaviour is stronger than regulation efforts”

But that is only one side of the European gas market story. One message, which seems very interesting in this respect, came from Juan Antonio Vera Garcia of the Spanish oil and gas company CEPSA, placing the European gas market into the global context:

demand in fact poses a larger challenge than regulation
“The real changer was demand (and not so much the gas price divergence). We at CEPSA, while developing our gas strategy, never expected this to happen: Europe went for renewables, and wind suddenly replaced gas. Wind took a large part of portfolio, while coal in the European generation mix became a swing source between wind and non-wind. Gas died. The market simply did not absorb the amount of gas that we foresaw”. Looking at it from this perspective, demand in fact poses a larger challenge than regulation. “Two years of changing demand has had stronger impact on the regional gas market than ten years of regulatory process,” – concludes Garcia.

“Pipeline transported gas has been resilient and stable (and even growing)”

Despite the expectations, quite typical for the last decade, of a continued growth of LNG trade, the reality of 2013 is that the LNG trade remains at the same level, below the peak of 2011 (International Gas Union LNG report). Laurent Maurel, Total, asks: “Is LNG going to become a commodity like oil? In order to have a commodity market, there needs to be a certain level of infrastructure. For LNG, we need regasification capacity. I am not aware of any commodity for which the cost of transportation is a significant share of the final price. We see that the cost of transportation is higher than the cost of gas on the US market. What does this mean for the future market for gas? That's a serious handicap for the gas market.”

It’s not all so negative however: “New transport solutions, instead of cannibalizing the market, have expanded the overall market for gas,” says Nils Andreas Masvie of Norwegian DNV AS. The fact that the role of pipelines is set to remain strong is, for example, proved by the joint study conducted by the Energy Research Institute of the Russian Academy of Sciences and the Institute of Energy Economics (Japan), which was also presented at one of the round tables of the WPC, and an important conclusion is that there is space for pipeline projects even in the Asian gas market, traditionally seen as purely LNG-oriented. But that conclusion is contested: “Due to geopolitical issues, Asian countries prefer imports through LNG terminals rather than transnational gas pipelines,” – says Suman Mishra from Indian Oil Corporation.

“Asia, Asia, Asia”

It is expected that gas demand will increase more in Asia than in any other region of the world. Despite the fact that all new liquefaction capacity is contracted, two-thirds of the total required Asian regional LNG supply in 2030 remains un-contracted,

The Asian market will have to adapt effectively to a world where the interactions between different fuels, markets and prices are intensifying
as Daniel Champlon and Armelle Lecarpentier of Cedigaz mentioned in their presentation. They also note: “The most important natural gas market growth driver is the boom of emerging markets. In most of them, natural gas is making a growing contribution to the energy mix, under the effect of supportive energy policies and fuel switching requirements from oil to gas, especially in the power sector. The Asian market will have to adapt effectively to a world where the interactions between different fuels, markets and prices are intensifying. Evolutions in pricing, trading and contractual conditions will also open real opportunities for growth of the Asian gas industry”.

Jialiang Lu of the Research Institute of Petroleum Exploration and Development, part of the China National Petroleum Corporation, calls for strengthening the regional dynamics: “Several measures must be adopted to ensure the stable and safe gas supply of North-East Asia. These necessary measures include: to accelerate the research and development of theories and techniques concerning natural gas, to facilitate the exploration and exploitation of domestic conventional and unconventional natural gas, to strengthen regional cooperation and interconnect regional gas pipeline network, and to import natural gas in multiple ways and through multiple channels”. This is a call for regional integration and cooperation from China, as well as a statement that China needs to diversify its partnerships.

And still, we dash for coal

Talking about the Golden Age of Gas, some participants would say that the US is getting there. China would like to go down a similar path. But “the reality is different: what we see is the Dash for Coal,” – says Dick Benschop of Shell. “Both renewable energy sources and coal grow faster in power generation than gas. It looks like ‘coal plus renewables’ pathway is becoming the chosen pathway for Europe. The drivers are price in the case of coal, and subsidies in the case of renewables”.

This vision is further supported by the findings of recent study by Ralf Dickel “The New German Energy Policy – What Role for Gas in a De-carbonisation Policy?”. Enhanced role of coal as well as stronger presence of Asian coal consumers on the world coal market could also become a reality – as seen from the Other Asia scenario in the “Russian and Global Energy Outlook Up till 2040”.

Following the discussions of the 21st WPC on the future of gas markets, there are several key messages. Firstly, participants expect that the gas market will actually become more global.

inter-fuel competition from coal and renewables is becoming tougher and creates extra challenges for the gas industry
Secondly, some issues on the way of market development are sometimes not so much regulatory but rather demand-driven. Thirdly, new technology (specifically in the field of transportation) has a large impact of course, but traditional solutions should not be underestimated. Fourthly, the interconnections between markets for different fuels strengthen, and inter-fuel competition from coal and renewables is becoming tougher and creates extra challenges for the gas industry. And finally, whatever happens next in the gas markets, it will be rooted in Asia.