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Global Gas Markets: Energy Policy and Energy Security

May 29, 19:46 UTC+3
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Three trends are shaping the global gas market: the increasing US LNG exports, the overall increase in LNG significance, and gradual replacement of long-term supply agreements with spot transactions. These trends have prompted Russia to consider further diversification of its gas sales' channels and markets.

In the last 15 years, global gas consumption has been growing on average 2.5% per annum, and its share has reached 24% of the overall energy supply.

  • BP believes that over the next 20 years the natural gas consumption will be steadily growing at a rate of 1.6% on the annual basis (vs. 0.7% for oil and 0.2% for coal).

The growth rate in the liquefied natural gas (LNG) segment will outstrip that of the conventional gas by a factor of seven. By 2035 the LNG is expected to satisfy almost 50% of the worldwide demand (up from 32%).

  • A significant increase of LNG supply is in the forecast for Australia (predominantly serving Asian markets), as well as for the US that, among other things, will compete with Russia in Europe.
  • In the meantime, the US, that has greatly benefited from the recent shale gas boom and has become the largest gas producer in the world, is expanding its gas exports to Europe. In the first two months of 2017 alone, the US made four LNG deliveries to European buyers (vs. three shipments for a total of 0.5 billion cubic metres in 2016).
  • The US natural gas production is expected to grow at 4% annually over the next several years, in part due to massive investments into LNG export terminals and petrochemical plants.
  • In addition to shale gas, new products that are now becoming part of the gas fuel market include coal bed methane and methane hydrate. The latter is claimed to be an alternative to conventional fossil fuels. The US, China and Japan lead the way in the methane hydrate segment. However, according to the International Energy Agency, the hydrate gas production still remains prohibitively expensive ($175–350 per thousand cubic metres).

Russia is the second-largest gas producer in the world (the US being the first), and has the largest domestic gas reserves.

  • In 2016, Russia produced 640 billion cubic metres of gas. According to the Ministry of Natural Resources, the combined booked free and associated gas reserves amount to 73.2 trillion cubic metres.

Last year, Russian gas exports reached a record high of 179.3 billion cubic metres. The national energy strategy sets the 2030 gas export targets (including LNG) at 270–294 billion cubic metres.

  • Unfortunately, revenues from gas sales follow the downward trends in oil prices. In 2016, the average Urals price was 18% below the 2015 levels, and Russian gas was sold to European markets for 42% less than the year before.

Other challenges to Russian gas exports:

  • European buyers (i.e. major clients of Gazprom, whose market share in the EU is 34%) consistently insist on replacing long-term supply agreements tied into oil prices with spot contracts. This affects spot deliveries to European gas hubs. Russia has already applied spot delivery terms to its pricing schemes. However, oil price still remains the main reference.
  • Russian gas pipeline projects face fierce opposition in Europe (cf. Nord Stream 2). One accusation is that this project threatens the EU energy security and has been conceived based on political, rather than business considerations.

However, the overall Russian gas exports' outlook remains promising.

  • The ability to offer a combination of traditional pipeline and seaborne LNG supply, under a single agreement, if necessary (e.g. during peak demand periods), puts Russia ahead of the competition. The only delivery mode available to other major market players (USA, Malaysia and Qatar) is limited to LNG tankers. Others (Iran, Turkmenistan and Azerbaijan) are handicapped by the limited availability of pipelines' infrastructure.
  • And the new Power of Siberia pipeline, currently under construction, will help Russia secure its market share in China.
  • Other promising avenues include deep-cut processing, and in particular, production of motor fuels and helium.
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