Massive Transit: Gas and Pricing Trends
Extend Nabucco to Poland, Make it Reversible, and Other Ways to Free Up Price
“Talking about price and price trends is a risky business,” admitted Grzegorz Pytel, European Commission Advisor and Energy Expert at the Sobieski Institute, who spoke about the effects of unconventional gas upon trading and prices in Europe at the European Unconventional Gas Summit Paris 2011.
Mr. Pytel quipped that he was not taking any responsibility if anyone took a fall based on his assertions.
“There are definitely aspects of looking at trade-supply from an Anglo-Saxon perspective and from a European perspective, like in the eyes of France or Poland.”
He showed conference delegates a chart of US gas production versus gas prices (converted to BCM) since 2000.
“We see a slight growth and little bit of decline,” he said, “but it doesn’t account for demand from imports. In 2005-06 there was overall decline for gas in the US.”
Regarding the impact on price, he said it showed a huge variation, jumping up and down. “GDP growth, etc. are basically hidden behind these graphs,” he added.
According to Mr. Pytel, production of unconventionals had shown a steep upward trend from the year 2008. “It’s quite clear that small changes in gas withdrawals produced much bigger changes in the prices,” he explained. “The price changes on the margins of production. So if we have just slight oversupply, prices decline.”
He said, as a side note, a similar impact could be felt in Europe with LNG supplies.
“The price of European spot gas follows closely the Henry Hub price, whereas the Europe contract price stopped following it around 2008-09.”
Pytel continued: “The gap between spot and contract prices seems unsustainable in Europe. We have to expect some sort of convergence in prices, but the question is how it’s going to happen - which will go up or down - but they are likely to come together at an equilibrium point.”
He contrasted liberal versus non liberal market models. “If it is non liberal there’s very little competition - just look at the upstream delivery chain, and downstream they’re selling to individual customers,” he said.
In the liberal market, said Pytel, basically many players were feeding into the market.
“Up to recently, shale gas as a revolution is an upstream element,” he explained, saying development of unconventionals would lead to an “unbundling” of price. “From Western Europe to the east, we see monopolistic producers,” he noted.
“A market is as liberal as the least liberal part of its value chain.”
Central and Eastern Europe (CEE), Pytel contended, was key to an EU liberal market.
He tallied demand for a number of countries including Finland’s 9 billion cubic meters (BCM), Poland at 15 BCM, and Hungary’s 12 BCM. The grand total for CEE, said Pytel, was 65 BCM, while the remaining countries in Europe consumed around 400 BCM/year.
“There’s no integration of these markets,” he said, noting that Russia supplied around 150 BCM per year.
Pytel spoke of the need to double the transport of natural gas capacity. He said that while there was lot of talk about Nabucco, nothing was to be seen.
“Poland has politically significant shale gas potential, so it would make economic sense that Nabucco should be extended, and making it reversible would make more sense,” he said.
Pytel said he believed an extended and reversible Nabucco could have a liberalizing effect on Europe’s natural gas market.
He outlined a number of infrastructural links that could also facilitate the trade of unconventional gas sources in Europe, like a trunk line allowing distribution of locally produced gas, a new route of gas supply to Finland and the Baltic states, and integration of a 50 BCM Latvian storage facility.
Pytel said new significant natural gas producers like Poland, Austria and Hungary could be linked with inter-connectors, making for seven gas hubs for Europe.
He noted that gas prices were based on the biggest producer in Europe, Gazprom.
“There’s no universal reference point, because of the small size/low liquidity of continental Europe trading hubs, a fragmented market (which needs interconnection), and because 90% of consumed gas is based on long term contracts signed by ‘national champions’,” he said.
Unbundling the market, combined with new producers, opined Pytel could have a beneficial effect. Having production close to local markets and more companies producing on competive basis would be added boons, he said.
One of the participants at the Summit asked Mr. Pytel how much coal he thought could be displaced by Poland’s shale gas.
“Don’t expect energy produced by coal to disappear,” he said. “It’s such a strong thing in the Polish economy.”
He added that in connection with the (pre-Fukishima) push for nuclear in Europe, if gas production became certain, gas powered plants were cheaper than nuclear.