A Future for Long-term Gas Contracts: Some say "Yes"

Will there be a “new deal” between natural gas marketers and producers? That was the question posed to a panel of experts, who grappled with topics such as the future of long-term contracts as well as what the price of gas will be, at the European Gas Conference in Vienna, Austria.

In fact, Pierre Vergerio, COO, Edison, called those two aspects the key questions. Now, he said, is the time to strike a deal regarding the sharing of risk and profit among the two sides – sellers and buyers.

“Now we are coming from 4-5 years of turmoil in the gas market in Europe, 4-5 years of difficult and painful price reviews, sometimes with arbitration processes during which it has been quite challenging to enforce the principals and logic upon when long-term contracts which were founded at the time of their signing," he explained.

As for whether there is a future for long-term contracts, Mr. Vergerio stated: “The answer is obviously yes, there is no doubt.” He said this is evidenced by new projects which are looking for long-term commitments for their gas to secure financing and take final investment decisions. One major exception, he said, is when the size of a project is small in respect to the liquidity of the market, for example for shale gas producers in the US.

“The point is that gas sellers who suddenly have all the advantages in their hands compared to buyers: extra profit, time to negotiate, cash flow; in contrast, buyers are suffering massive losses, have had to struggle to demonstrate the validity of their price review to return to the original balance of the contract,” he said, reiterating the volume risk for the buyer and price risk for the seller.

Marco Arcelli, EVP Upstream Gas, ENEL, noted the very broad range of a forecast for European demand, projected to be 400-800 BCM/annum, due to uncertainties like energy efficiency, renewables and uncertainties regarding investments. Considering the low global oil price, he observed that many projects are being cancelled or mothballed.

Volatility is expected to increase, he said, which is good for traders but not for politicians or citizens, who need to be safeguarded from imbalances.

He commented, “What we can do today is basically try to preserve the existing supplies and peruse the treasure that we still have under our feet, partly in the south of Europe.”

Algeria, he said, is one example of a place that has the potential to supply about half of what Gazprom provides to Europe, but exports from North Africa to Europe have decreased from 26% to 5%. He said, “We're discussing all the time pipelines from Russia and we forget to see that we may lose just as much gas if we don't support investments in Algeria.”

That's why, he said, Enel has begun direct investment in some countries, like in four blocks in Algeria; the company also sees potential in Italy, Spain and Greece.

Mr. Arcelli offered, “If I take the case of Italy, we have the potential to produce and cover 20% of demand for at least 20 years at a cost that is 20-30% lower than the import cost.”

Such opportunities, he said, are necessary to do to keep the supply demand balance, reduce volatility and contain prices.

Vladimir Drebentsov, PhD, Head of Russia & CIS Economics, BP Plc, recalled that what is now happening to natural gas markets, had happened much earlier to oil. “The buyer doesn't have sufficient choice of supply and hence prices, because one supplier can overcharge and the buyer finds the price inappropriately high,” he explained.

There is also an insufficient number of consumers, according to him.

“If you build the pipe and the buyer on the other end doesn't want to take your volumes, you're stuck,” he remarked, adding that such phenomenon did not apply to other commodities like oil or coal. Of that reference, he said: “I think the main difference is that these markets are much better developed in terms of physical infrastructure.

“We will have long-term gas contracts as long as the market is underdeveloped, as long as diversification of supplies and of consumers are insufficient,” concluded Mr. Drebentsov, who added he is looking forward to seeing more competition and diversification in the form of new producers and consumers so that natural gas will resemble other energy markets.

LNG, said Andrew Walker, VP Global LNG, BG Group, is really a global trading space which is contributing to globalizing natural gas markets.

He explained, “The natural gas industry/LNG is at a particular point in its evolution and there is much speculation how quickly it will move down that track towards commoditization, how quickly LNG will become more liquid, flexible, traded, more spot price indexed.”

He noted that LNG had a different affect on various regions, with North America eyeing becoming an exporter; while it is all about imports and growth markets in Asia.

Of Europe, he said: “Europe has really always sat in the middle – the interface between the regulated pipeline system and the interatnional LNG trade. For that reason, it plays a balancing role for the LNG industry."

LNG into Europe, he explained, waxes and wains depending on both the regional and global supply and demand piciture. “If you go back to 2011 there were 65 million tons of LNG coming into this market; last year we saw just under half that,” he remarked, “and we're likely to see about the same level again this year.”

Because of the LNG pull from Asia during a period where local supplies are not growing, but demand continues to grow, he observed. Meanwhile, Europe has low demand requirements and coal substitution is occurring.

“And, of course, Gazprom has played a balancing role in that marketplace: the LNG that's gone has partly been substituted by supplies from Gazprom so we very much have a global system.”

He continued, “At the end of the day, the objective remains the same – buyers want to buy gas; sellers want to sell gas; both want an equitable balance between risk and reward, which means we continue to develop this industry – our objective."

-Drew Leifheit