LNG from Qatar: Govt going to import costly gas

[AhsanAmin]

I found these two news articles interesting regarding the trading and pricing of LNG/Natural Gas.

Paying the piper; Gazprom and European gas markets - Power Engineering International

Paying the piper; Gazprom and European gas markets
2014-01-02
European efforts to reduce the Russian state-owned company's sway over gas prices have been partially successful

THE combustibility of natural gas makes it a potent weapon. When Gazprom, a giant gas company controlled by the Russian state, cut off supplies to Ukraine in early 2009, in a dispute over unpaid bills, Europeans farther west suffered too. Gazprom provides about a quarter of their gas, to heat homes, fire industrial furnaces and fuel power stations, much of it via a pipeline through Ukraine. European utilities and regulators have since tried to reduce the Russian company's market power. Although they may seem to be winning the battle, Gazprom could yet outmanoeuvre its customers.

The main battleground is the method of setting the price of gas. Gazprom is keen that its European customers continue to buy expensive gas on long contracts, sometimes lasting decades, with prices linked to the cost of oil. Gazprom makes a nice profit on such customers, since oil is pricey but it produces its gas cheaply from vast fields developed in the Soviet era. However, a high and rising proportion of European gas is now traded on spot markets at lower prices, set by supply and demand.

When gas was first sold internationally in volume, in the 1960s, there was no market to set its price. Since it was used as a substitute for oil in heating and power generation, it seemed sensible to link its price to that of crude. Long contracts also made sense. Building pipelines from, say, Siberia to Europe was costly. Producers wanted to be sure of recouping their investments. Buyers were glad to secure supplies.

The cracks began to show when Europe's gas markets were shaken by both recession and the boom in American shale gas. From around 2008 Qatari liquefied natural gas, once destined for America but now surplus to requirements there, was redirected to Europe, adding to the continent's tiny spot market. Meanwhile, crude prices rose steadily from early 2009, taking oil-indexed gas with them, and demand for gas waned. All this opened a big gap between the spot price and the oil-indexed price asked by Gazprom, Norway's Statoil and other big, state-run suppliers.

Utilities and gas wholesalers, tied to long contracts, were undercut by unencumbered smaller rivals buying in the spot market. The pain was intense. Gazprom's customers were losing billions and heading for ruin. A few begged for mercy: in 2010 both Gazprom and Statoil are said to have introduced some spot-pricing into their contracts. Some buyers invoked a contractual right to arbitration. In 2012 Germany's E.ON and Poland's state power company reached a settlement with Gazprom. Arbitrators sided with RWE, another German utility, insisting that Gazprom rejig its formula to take spot prices into account and awarding RWE a refund. In November Italy's Edison said it too would seek arbitration.

The European Commission has also weighed in. In September 2012 the commission began an antitrust investigation, to examine whether Gazprom was hindering the free flow of gas across the European Union, blocking rival suppliers in central and eastern member states and imposing unfair prices through oil indexation. Gazprom rejects the accusations. However, the investigation has worried the company, because Europe provides 40% of its revenue. Recently it has been rumoured that Gazprom is close to agreeing a settlement.

The proportion of Europe's gas bought in the spot market rose from 15% in 2008 to 44% in 2012. By now it is more than half; in north-west Europe it is around 70%. Statoil, seeing how the European market is going, has embraced the shift, selling around half its gas at prices indexed to the spot market. This has further undermined Gazprom's position. Its contracted-gas prices were only 5-6% above spot prices in the first half of 2013, against 70% in 2009 (see chart). Thierry Bros of Société Générale, a bank, explains that this is due to concessions and rebates, as well as rising spot prices in the past couple of years.

Gazprom has been adjusting to the new terrain. Although its bosses insist that oil indexation will remain, it already sells some gas on spot markets and has expanded its trading operations from a handful of people in the suburbs of London to 900 around the world.

However, it is far too soon for Europe to declare victory. It is buying more from Gazprom, not less. In 2013 the company expected to export 160 billion cubic metres (bcm) of gas to Europe, the most since 2008. It has the potential to send another 90bcm. By ensuring that it will remain Europe's marginal supplier, Gazprom can influence spot prices, according to Howard Rogers of the Oxford Institute for Energy Studies.

It has the pipes as well as the gas. The struggle between Russia and the EU for political influence in Ukraine partly reflects the country's importance to both sides as a conduit for Russian gas. But Gazprom appears to have started work on an alternative route: South Stream, a $38 billion pipeline with a capacity of 63bcm in the "Southern Corridor", bypassing Ukraine via the Black Sea. Nord Stream, under the Baltic Sea, already gives Gazprom plenty of capacity beyond what its current long-term contracts require, says Peter Hughes, an industry analyst. The company also has plans to add more storage in Europe, allowing it to release gas swiftly onto the market.

Gazprom will still deliver plenty of gas on long-term contracts. Though these will be based on the spot gas price rather than the oil price, its position as Europe's marginal supplier will give it influence over spot prices—and hence on what its customers pay. Gazprom may have a say on European gas prices for years yet.

The EU's policymakers, obsessed with renewables but still presiding over the burning of lots of coal, have not given gas the attention it deserves. Their efforts to liberalise gas markets look good on paper but implementation has been too slow. Interest in encouraging alternative gas supplies has waned. Support for Nabucco, another pipeline, which would deliver gas from Central Asia to Europe, fell away. In December investment was finalised for a much smaller pipeline, proposed by a rival consortium, to bring gas from Azerbaijan. Its lack of capacity is unlikely to encourage the development of supplies from Iraq, the Kurdish region and Turkmenistan.

European policy seems to be to encourage the transition to spot prices and wait for competition to Gazprom to come along. High prices will eventually encourage more supplies, but this will take time. More mature markets for trading gas and derivatives would also help to reduce buyers' risks. Meanwhile, Gazprom will still have plenty of opportunity to cash in.


Copyright 2014 The Economist Newspapers Ltd.

Singapore Emerges as LNG Trading Hub | The Diplomat

 

[niaz]

There is an LNG Conference being held in the Goodwood Park Hotel, Singapore during February 24 -26, 2014.
It clashes with the Institute of Petroleum Conference scheduled for February 17 -20, 2014 in London. Even though retired, I still have a ‘Consultancy’ retainer from my ex-company and I am heading the company delegation to the IP-Conference, therefore despite being invited, I can’t go.

The topic is “LNG supplies for Asian Markets. Rising demand for LNG versus Consumer price resistance, can there be a compromise?”

I would suggest that any member who is genuinely interested in the LNG industry should attend. Link is noted below:
http://www.cconnection.org/event//LNG SPA/2011/resources/CC14265_LNG2014_WB.pdf