Gas: supporting a future global growth
Our forum is being held under the motto “Sustaining Future Global Growth”. It expresses the main task that stands before us, the energy and gas companies today, – to as soon as possible meet the growing energy demand and at the same time improve energy’s ecological index.
According to demographers, the world’s population will reach 8.5 billion people by 2035. Experts from different countries are using the same horizon for predicting the results of implementing possible strategies for global energy development. In the meantime, the 7 billionth person on our planet was born on September 3, 2011. These billions of people today need a favorable environment and energy for an economic growth.
It is quite possible that the future lies with renewable energy sources and technologies, which are still in the experimental stages. At present, however, fossil fuels account for the main source of power generation. Moreover, the need for available energy at affordable prices is now so great that we have seen – with great concern – the rapid increase in the use of coal, the most intense source of hazardous emissions. The rate of growth in the global energy demand is clearly outpacing the development of energy technologies based on solar, wind, tides, or trapping of hydrocarbons from industrial emissions . This means that for a sustainable development, the global economy urgently needs an energy alternative. Natural gas offers such an alternative.
The untapped potential of hydrocarbon energy is quite large – whereas the world’s recoverable oil reserves are estimated at 182 billion tons, the total recoverable natural gas reserves are estimated at about 850 trillion cubic meters. Technological potential is even more untapped – gas technologies are almost ready for expanded use in the world economy, while the economic efficiency of using natural gas to achieve environmental objectives in the energy sector is well known to experts. Experts and analysts are more and more confident about the coming of the "Golden Age of Natural Gas".
However, in order to fulfill its mission and provide the world economy with "default fuel" , the gas industry itself must stay on the path of sustainable development, and integration in the broadest sense is the key to solving this problem: integration of markets, integration of technologies, integration of innovations with reliable ideas that helped the gas industry reach today’s levels.
The gas industry has undergone significant and truly revolutionary changes in the last decade. It seems that not so long ago, the gas world was divided by seas and oceans into regional segments, within which pipelines "ruled" undividedly. The rapid development of LNG technologies within a decade changed the picture dramatically, raising hopes for an all-out globalisation of the gas business, and for the wiping of boundaries between markets located in different continents.
However, industry planners had hardly formed a new global picture of the gas business, before a breakthrough in the commercialisation of the so-called "unconventional" gas production technologies again made significant changes to the rules of the game – now it is a normal practice to say that the future of the gas industry lies with alternative sources of natural gas. Now we are witnessing a new prospect of the widespread conversion of gas importers into exporters, almost a total self-reliance and restructuring of the entire global system of the gas business on the principles of stock trading and full liberalisation of markets.
In these circumstances, we believe that we need to have a sober look at what is happening. We need to see the prospects not as we would like them to be, but as they could be, if we would act based on today’s realities. What are these realities?
The global gas business has entered a stage of comprehensive diversification and structural variety. In 2011 alone, global gas trade increased by 4.2%. This growth was due to increase in exports from Russia, Qatar and Turkmenistan. Moreover, despite the high growth of LNG supplies, pipeline transport is still the leader. Regional pipeline systems are continuing to develop rapidly, while interregional transportation facilities for network and liquefied natural gas complement them, responding to the dynamics of global growth.
With the development of international trade, export gas pipelines, which previously connected two countries – the exporter and importer – began a transformation into transcontinental systems. Today, there is a cross-border gas market in the North American continent. The EU is working to create a single European gas market. Integration processes in the growing Unified Gas Supply System of the former Soviet Union are continuing.
Despite the powerful factors of globalisation, in reality there are three macro-regional markets today – North America, Europe and East Asia. Each of these markets retains its regional identity. Regional specificity is reflected, in particular, in natural gas price indices in various regions. Global LNG suppliers are not yet able to satisfy demand so as to organise gas-to-gas competition at a level sufficient to equalise prices on a global scale. Prices in East Asia are significantly higher than the European level, not to mention the American prices, which are actually behind a protective barrier of government policies aimed at using natural gas as a means of restarting the American economy.
Whereas North America is planning its economic future based on self-sufficiency in raw hydrocarbons, the reverse process can be seen in Europe. European consumers will need increasing volumes of imports.
The East has its own peculiarities. Developing economies in Asia are demanding more and more energy, while often not able to be guided by environmental considerations in determining their energy priorities. In this region, the issue of access of the growing population to modern energy sources and the issue of ensuring energy sources in accordance with economic growth are gaining the greatest relevance. Data show that major energy demand will come from countries like China and India in the coming years, and this demand will maintain the appropriate tonus of the Asian gas market.
The map of gas market regulation looks very uneven. Most countries prefer regulation to market pricing. Objectively, the market continues to be traditionally organised. This must be taken into account for the stability of the entire global gas supply system, especially when it comes to improving the pricing and contracting system in the gas industry.
It seems to us that the primitive, almost Orwellian scheme “hub is good, while indexation is bad" – is not relevant today. We believe that in the search for optimal solutions, we must first think about ensuring the investment attractiveness of gas production and transportation. Moreover, we must not forget that despite all the business innovations in the era of LNG, long-term contracts have retained their importance as a means of sharing risk and ensuring long-term investments.
Now is the time to identify ways of improving this system. Contracts can be based both on the principles of spot pricing and on conformity with prices for alternative energy resources. We believe that contracts based on the price of substitute resources, can be adapted as much as possible to the objectives of sustainable development of the industry. The new element could be choosing renewable resources in the future, rather than exhaustible ones, as an alternative energy source for price determination (indexation).
Whereas in the past, at the dawn of the gas industry under the Dutch model of long-term pricing, oil served as such a sustainable alternative to the exhaustible Groningen gas field, today, such an alternative could be provided by renewable energy or electricity prices derived from it.
However, until this happens, we need to very carefully consider the proposals to abandon oil price indexation. We need to use the means available to neutralise the negative effects of the transformation of oil futures into a speculative tool at the stock exchanges.
The trend of rising oil prices is clearly shown on the slide-chart, reflecting the dynamics of oil prices (in 2010 prices) over the past half century. This trend is considered to be the main reason for the gap between the prices of indexed contracts and spot contracts on natural gas. However, we believe that a much greater obstacle to sustainable development of the industry is not in the upward trend but noticeably growing volatility – as seen in the chart of a selected time scale. This volatility reflects uncertainty and lack of confidence in the development prospects, and this uncertainty is a factor adversely affecting investment activities. In our view, long-term contracts are the means of reducing volatility and risks associated with the uncertainty of the future, and protecting the economic interests of supplier and consumer.
The issue of liberalisation of natural gas markets also requires responsible approach. Liberalisation meant to provide the best quality of the supplier's services and the lowest price, may backfire under certain conditions.
Liberalisation of markets is dependent on regional characteristics and the level of resource availability. The most liberalised markets in North America and the UK emerged in their present form during periods of high self-sufficiency. When it comes to markets that depend on external supplies, even a high level of diversification of suppliers cannot be a full guarantee of continuity of supply.
Availability of suppliers, who have long-term commitments, and guaranteed delivery and marketing systems, provide such guarantees. In this case, a vertical integration of suppliers becomes a tool for stimulating the development of mineral resources and production capacities. That is, liberalisation and energy security are far from being synonymous. The most reliable path to energy security is a flexible balance between different approaches, between the old (well established) and the new (promising new benefits and prospects), including the balance between spot and long-term contracts.
Assessing the prospects for sustainable development of the gas industry, Gazprom establishes its own corporate priorities with the maximum degree of responsibility, pursuing not only the goal of maximising profits, but also the long-term interests of the broader community of stakeholders. In our calculations, we rely on our vision of a new architecture of the global gas markets, on our real opportunities, available resources, technical equipment, geographic location of reserves, production and transportation capacities.
In our plans, we assume that global demand for gas will grow by 55% by 2035. More than 80% of this increase will be provided by developing economies of countries outside the OECD. We also believe that gas reserves, including those owned by Gazprom, are sufficient to meet annual demand at 5 trillion m3. If necessary, production may be increased by another 0.5 trillion m3. However, in this case, the closing prices of production will increase by approximately 50%.
We anticipate further development of interregional and intercontinental trade in natural gas due to the uneven distribution of resources. Moreover, we expect that after the completion of gas pipeline systems in Eurasia between Algeria and Western Europe, as well as between Russia and China, a giant transcontinental gas market covering Europe and Asia can be formed. An analysis of possible scenarios of traffic flows by 2035 shows that Gazprom’s transport and export activities will be based on supplies that are carried by pipelines laid on the land and the sea.
Pipelines are the basis of Gazprom’s strategy of ensuring sustainability of the natural gas supply system for both Russian and foreign consumers. The Nord Stream project has become a new word in supply security in the European market. The laying of another export gas pipeline under the Black Sea will be a development of this success. The reason for our confidence is obvious enough – behind this project is the real gas from Russian gas fields, in an amount sufficient to service a new channel (Southern Gas Corridor) for Europe’s energy supply.
We have no doubt Russian gas will be in demand in Europe. This is evidenced by the assessment of our direct partners. This is indicated by forecasts of international energy organisations. Moreover, despite the fact that Europe has set for itself the task of reducing the energy intensity of its economy, and despite economic growth challenges, we continue to consider the European market as a priority and we expect that the Russian (Gazprom’s) gas will occupy 30% market share in Europe.
With regards to LNG development, we adhere to the principle of sufficiency, taking into account the direction of the main gas flows and their development prospects. The Pacific direction is supported by a complex of measures based on the Sakhalin project and a prospective project in Vladivostok. We will get into the area of maritime transport in the Atlantic basin, based on the Shtokman field development project.
We believe that the strategy of relying on conventional natural gas resources is Gazprom’s most justifiable development strategy for a sustainable development of the global gas industry. Unconventional resources are in the focus of our attention. In this case, we rely on the assessments of our experts (Gazprom VNIIGAZ), according to whom, in the global structure of unconventional gas resources, coal gas and natural gas of low-permeable reservoirs exceed in general the estimated shale gas resources. Here, low-permeability gas reservoirs – followed by coal-bed gas – dominate in Russia by quantitative index. We therefore give priority to the development of coal gas production technology, leaving shale resources as a strategic reserve for future generations.
We see our work on building a balanced strategy for the company as a contribution to the implementation of the forecasts that by 2035, Russia will be the largest contributor to the global increase of supplying the world economy with natural gas.
Combination of large-scale supply of pipeline gas, carried out by Gazprom Group companies, and opportunities for intercontinental trade in LNG, allows us to engage in solving global problems of energy supply, driving our business to a global scale, integrating Russia into the global gas market and more broadly – into the world energy market.
Understanding our role as a key natural gas supplier to the Eurasia markets, we also think about what actions need to be taken, to the extent possible, in order to prevent climate change in the coming decades. We think that we need to unite our strength in expanding the use of natural gas. Transport is the area with the most prospects in this regard.
Transport accounts for 27.5% in the world energy balance with a forecast of growth to 30.8% by 2035 . However, it also accounts for about 28% of CO2 emissions. Meanwhile it is known that the use of natural gas in road transport can bring significant economic effect. Moreover, the level of harmful emissions will drastically reduce.
Expanded use of natural gas is quite a clearly visible prospect. More investments in technologies for natural gas use, including in transportation, will be the result of the gas boom that we see today in North America. Eventually, this will lead to expansion of the market for natural gas as motor fuel.
We have been working on this topic for a long time. Even in the former Soviet Union, a technology for the use of natural gas as fuel not only for cars but also for other types of vehicles such as railway locomotives and aircraft in civil aviation was developed.
Being the leader in the NGV market in Russia today, Gazprom is actively working on the development of corresponding segment of the national auto transport. However, international efforts are needed to achieve tangible results. Automakers and companies willing to cooperate in international fuel infrastructure projects should be involved in the overall activity.
Gazprom is ready for such cooperation. In order to promote its initiatives on introducing gas-engine fuel, Gazprom together with the National Gas Vehicle Association, annually holds a specialszed exhibition GasSUF, an International Scientific Conference "Gas in motors", regular auto races Blue Corridor, and also supports the Russian rally-raid team Yo-auto.
According to Gazprom, in those cities and regions where the Blue Corridor was held in the previous years, growth in the sale of gas-engine fuel reached 17% after some time. We propose to expand the geography of "blue corridors". We all need an international project whose goal is to expand the infrastructure used in maintaining and refueling NGV, as well as additional measures aimed at stimulating and expanding the range of vehicle production. Such a project can be a real contribution to the fight to prevent climate change and generate new momentum for economic development.
The word "gasification" has a second meaning in Russian language. It means expansion of gas supply in the utilities and consumer sectors in the regions of Russia. It seems to me that at the global level, we should move from forecasts of a likely coming of the "Golden Age of Natural Gas" to a practical and quick action on gasification of the world economy. Enhanced international cooperation in the area of NGV could be a step in that direction.
Thank you for your attention.