Gas Summit: Market changes could imperil gas supply, demand

The accelerating pace of change has brought a new dimension to supply and demand security, said participants at the 12th International Gas Summit in Paris Oct. 17-18.

Doris Leblond
OGJ Correspondent

PARIS, Oct. 25 -- The accelerating pace of change that has turned the gas market from relatively simple to increasingly complex and risky, has brought a new dimension to supply and demand security, said participants at the 12th International Gas Summit in Paris Oct. 17-18. The conference was sponsored by Institut Francais du Petrole, publisher-consultant Petrostrategie, and SPTEC Conseil.

Nordine Ait-Laoussine, president of Geneva-based consultant Nalcosa, set the tone in his introductory address. He blamed the European Commission for putting both demand and supply security at risk through proposed measures to restrict foreign ownership of downstream assets in the European Union and to extend the unbundling of production and transport to all investors, European and non-European alike.

If adopted, Laoussine warned, these measures "would raise the twin issues of supply security for the consumers and demand security for the producers." The Commission's proposed measures, he said, could "provide an added justification for exporting countries to pursue more vigorously the creation of the so-called 'Gas OPEC,'" as producers "want to access the downstream gas sector to achieve demand security."

Gaz de France Chairman and CEO Jean-François Cirelli also noted that applying the Commission's unbundling of production and transport-marketing to companies investing in the proposed Nabucco pipeline to Europe from the Caspian Sea area, for example, would cause those companies to have second thoughts about investing, and a derogation [partial repeal of the unbundling measure] would be required for it to go ahead. "Derogation means that there is a problem: If there is no derogation, there will be no investment," he said.

In the circumstances, the proposed EU measures could only increase already grave concerns about gas supply and demand.

Camillo Gloria, senior vice-president of Eni SPA's gas and power division, echoed other speakers' concern, saying gas purchasers and sellers are "caught in the middle of various forces that are currently reshaping the market." Supply security, he pointed out, is a constant challenge in an EU market permanently perceived as short: 200 billion cu m of gas will be needed to fill the supply-demand gap by 2020 at a cost of $800 billion in supply contracts.

Contingent issues on the demand side, such as the growing convergence of gas and electric power, also will likely impact gas supply security, Gloria said. Such a convergence is leading to the international electricity trade's affecting local [national] gas demand. In addition, mergers and acquisitions in the electric power industry are limiting or altering demand-side diversity, he said.

He added that these market changes are also bringing uncertainties to gas suppliers as "new, nontraditional" supply schemes flourish and negatively impact revenues from long-term gas sales, "which are often a relevant slice of suppliers' [gross domestic product]." These market changes also alter the traditional risk allocation between long-term buyers and sellers.

These views were shared by most speakers at the summit, including Sonatrach Executive Vice-Pres. Chawki Mohammed Rahal, who spoke of "an increasingly risky environment" that is "changing the nature, the goals, and the strategies of the operators."

The fast developing LNG trade has shifted the security of supply and demand balance across regional gas markets, noted many speakers. Jochen Weise, a board member of E.On Ruhrgas AG's gas supply and trading division, saw pipeline gas and LNG increasingly competing to 2020 as an additional source of supply for the EU. But in the long run, he warned, LNG will have to be cost-efficient and profitable compared with pipeline supplies, with oil-indexed long-term contracts and short-term gas trading continuing to inter react.

IFP's Jean-Pierre Favennec said LNG international trade volumes are projected to more than double by 2015—with a growing share from Middle East and Atlantic exporters—and they would be enough to supply a 2.5%/year demand growth. However, Patrick-G. Walliez, gas adviser to the CEO of Suez-Tractebel, cautioned that recent LNG supply projections continue to slide. Supply will be tight if some projects are postponed in Nigeria, Australia, and Iran, he ventured.

Total SA's Middle-East Pres. Ladislas Paskiewicz cautioned about Middle East gas supplies. Qatar and Iran aside, he said, "Little production (in the Middle East) remains in excess of local demand," and gas imbalances in some countries will result in new production being redirected towards local markets.

High gas prices that render alternate fuels for electricity competitive could lead to gas demand destruction, impacting demand security, pointed out a number of speakers. Rahal said Sonatrach's approach to such uncertainties involve maintaining flexibility and portfolio diversification, capacity investment in LNG regasification terminals and export pipelines, and the holding of downstream positions through dedicated affiliates—a strategy that broadly echoes what both gas consumers and suppliers were advocating to counter fluctuating capacity risks.

Adding to the concerns expressed at the conference, Stuart Bradford, Shell's general manager of LNG commercial advice, introduced what he called "the wider challenge for LNG trade" —shipping. A rash of decisions about the number, type, and size of ships required as well as decisions about port and terminal locations underlie the strategic question: "Should my country develop an LNG shipping industry?"

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