• Natural Gas News

    [NGW Magazine] GECF sees a glorious future for gas


This article is featured in NGW Magazine Volume 3, Issue 15: NGW interviewed the secretary-general of the Gas Exporting Countries Forum, Yuri Sentyurin, on the sidelines of the World Gas Conference in Washington, DC, late June, to see what has changed since its establishment.

by: William Powell

Posted in:

NGW Interview, Natural Gas & LNG News, World, Premium, NGW Magazine Articles, Volume 3, Issue 15, Carbon, Renewables, Gas to Power, Corporate, Political, Regulation, Intergovernmental agreements, GECF, Infrastructure, Liquified Natural Gas (LNG)

[NGW Magazine] GECF sees a glorious future for gas

NGW interviewed the secretary-general of the Gas Exporting Countries Forum, Yuri Sentyurin, on the sidelines of the World Gas Conference in Washington, DC, late June, to see what has changed since its establishment. 

Much has happened since the GECF was founded: new projects are starting up or on the way in Africa; many more countries have become importers. How has this affected your business?Yuri Sentyurin (Credit: GECF)

Since the establishment of GECF in 2010 the natural gas market has been evolving significantly both on the supply side and demand side. After the oil price collapse in 2014, the markets saw a considerable decline in investment with new LNG projects declining 30%.  This is in addition to the issue of sanctions that limited the ability of some of the GECF member countries to invest. Meanwhile new players entered the gas market as LNG exporters. On the demand side, there is a gradual shift from countries with developed economies to regions where industry and power generation are growing fast.

GECF countries have also been affected by gas market developments. In this regard the GECF Secretariat provides its members with insights so they can adapt. GECF producers have already proven their credibility and reliability over the decades, with cost effective supplies providing a competitive advantage over the newcomers. In terms of LNG, exporters could be competitive with new non-GECF projects in terms of the price and also their historical, commercial relationships, their access to the markets and their first-mover advantage. Likewise at GECF we stress co-operation between all market stakeholders as the key to efficiencies and lower trading costs.

How do you perceive the challenges ahead for gas exporters? Is your position weakened or strengthened by the rise of renewables?

Natural gas exporters face major challenges, including uncertain gas demand and revenues in important consuming regions. Gas demand is significantly affected by unclear and unstable policies that often do not recognise the key role of gas in the transition to a clean and sustainable energy future. We can see countries in Asia, such as India, Indonesia and Japan or in Europe, such as Germany, Poland and Turkey, still supporting coal despite its high carbon intensity. Moreover, we observe policy hesitation on the future role of nuclear in some countries, including Japan.

Another challenge is related to uncertainties in revenues with the emergence of spot trade, that conflicts with the key role of long-term contracts and indexation to liquid oil prices. The latter have mitigated investment risks and gas price volatility. The GECF strongly believes that security of gas demand and revenues is a prerequisite to secure funding and investment for capital intensive projects and security of supply.

Renewables and natural gas can be valuable complements in the transition to a low-carbon future. Aggressive development of renewables, supported by subsidies and privileged regulation in power supply, has hit gas in power generation, especially in mature, liberalised markets particularly in Europe. This has led to dysfunctional markets, as they block reliable and flexible gas power plants that can support the natural intermittency of renewables. We have also observed an important increase in the end use price of electricity driven by taxes and levies to support renewable.

We think that the widespread and costly deployment of intermittent renewables can only go so far. The GECF believes that it is time for policy-makers to focus on supporting viable options that allow renewables to integrate and provide secure and affordable electricity. Natural gas is the solution.

Many advantages support gas’ complementarity with renewables, mainly: the technical flexibility of gas-fired power plants and their ability to respond rapidly to large variability in renewables’ output;  and the ability of gas-fired power plants to operate economically and competitively under different regimes, including baseload, intermediate or peak. This competitiveness is driven by lower investment costs and the higher energy performance of gas, which also brings flexibility through gas storage and linepack tolerances. Gas can then improve the flexibility of energy systems, which is increasingly required by renewables.

In other words we believe that fossil fuels will remain an integral part of the global energy mix in the foreseeable future. But in order to realise one of the global agendas, particularly in the UN’s 2030 agenda for sustainable development and the energy transition and meeting emission targets, there has to be a fundamental shift towards fuels that are reliable and with less or no emissions. The credentials of natural gas – abundant, affordable, clean, versatile and flexible – make it a key fuel for such a transition, more so than other fuels and that includes much-talked-about renewables.

Now that the US is poised to become a major exporter, will that affect the course of the GECF?

The expansion of US gas exports brings both challenges and opportunities to the gas industry in general and to GECF in particular. US LNG is expected to compete with GECF LNG exports to Asia, as well as with GECF exports to the European market.

As I have indicated earlier, GECF producers have first-mover advantage thanks to their well-established gas industry, their low production costs and the lessons learned. The reliability of their supplies to customers is unquestioned, after over half century in the market.

It is important to recall that GECF accounts for 60% of global pipeline trade and 54% of global LNG trade.

On the other hand GECF could easily increase its market share via pipeline gas exports as well as LNG. They have around 60mn mt/yr of LNG projects awaiting final investment decisions.

Coming back to US gas exports, they will definitely help promote gas worldwide. There is enough room for all gas exporters, given predicted steady and resilient gas demand growth. Every year more and more countries expand gas imports or express interest in switching to gas in their energy mix. Which is a glorious sign for the future of natural gas.

How does the GECF help its members?

The role of the GECF as an international organisation in the global energy scene is not limited to exchanging view and information, although establishing common views and positions on the developments of the global gas market is one of its strategic goals.

GECF was established to support the sovereign rights of its member countries over their gas resources and their ability to independently plan and manage the sustainable, efficient and environmentally conscious development, use and conservation of natural gas resources for the benefit of their people.

The policy provisions of the forum are expressed in its founding documents and the decisions of its governing bodies (summit declarations, ministerial meetings resolutions and executive board decisions) as well as the long-term strategy of the GECF.

Priorities include promoting gas and maximising its value; helping to meeting future world energy needs; ensuring global sustainable development; responding to climate change; pursuing opportunities that bring long-term added value for the member countries. The future role of the GECF and its position in the global energy scene will concentrate on these objectives.

It should be mentioned that GECF defends the interest of its members using soft instruments, owing to greater awareness of the demonstrable benefits of gas over other kinds of fuels, even in the long-term.

How has pricing methodology changed? Are your members relaxed about oil indexation losing ground to spot or is there a mix of opinions?

Generally, pricing mechanisms have evolved over time in tandem with the dynamics of regional gas markets. Liberalising gas markets hubs boosted gas on gas competition in north American and European hubs. in addition, Asian buyers have started to reduce the price of LNG imports through different strategies, such as joint LNG procurement; the revision of the price formula; relaxing the destination clause; shortening contracts; and establishing independent LNG pricing mechanisms through hubs.

These kinds of gas market developments have produced different pricing mechanisms and different price levels in regional gas markets and we could see hybrid pricing.

However, while consumers want to see new, gas to gas pricing mechanisms, we believe that the spot market is not adequate for the global gas market, as the bulk of pipeline gas and LNG are already sold on oil indexation. This formula still dominates international gas trade because it can provide security of supply for consumers. That is why some consumers are also interested in extending their long-term contracts. It is a win-win mechanism that ensures stable gas markets and security for all the actors: banks, investors, suppliers and buyers.

Moreover gas to gas pricing could be more volatile: the price of gas is determined by supply and demand of gas, as has been seen in the US and UK gas markets. When gas supply or peak demand change, prices fluctuate without control.

Gas export projects, whether by pipeline or LNG, are highly capital-intensive. Low and volatile gas prices could result in lower investment. Traders and marketers prefer to secure sustainable revenue based on a reliable index like oil, although in some exceptional markets they might use competing fuels or replacement fuels as an index. In fact a risk-sharing approach is needed, with the link to crude oil and products in long term contracts ensuring timely investment in the gas chain.

In conclusion, the spot pricing mechanism alone is not enough to stabilise the gas market in the longer term and the co-existence of oil indexation pricing mechanism in long term contracts, with spot pricing mechanisms, is necessary to ensure the security of supply and demand. In addition contracts under oil indexation are designed to help both sides and are essential to suppliers, buyers infrastructure companies and banks.

Did the GECF anticipate how competitive the gas market would become especially for LNG?

It is obvious that the market is becoming more competitive, traditional players are expanding production and exports while new players are entering the lobal gas market.

As for the pipeline gas market, more than 140bn m³/r of new pipeline capacity from GECF countries is forecast to come online in 2018-22, with Russia accounting for 89% of this with Nord Stream 2 and TurkStream to Europe. The Southern Gas Corridor represents 19% of Europe’s gas demand in 2017. Meanwhile the Power of Siberia represents 16% of China’s gas demand in 2017. The exports through the 16bn m³/yr Tanap pipeline started this summer.

As for the LNG market, in the next three years global liquefaction capacity is expected to grow by 86mn mt/yr from 376mn mt/yr to 462mn mt/yr driven by supply from the US and Australia. Among the GECF member countries, only Russia will contribute to this growth with 11mn mt/yr. Global LNG trade was 290mn mt in 2017, representing an increase of 11% over 2016. We predict LNG exports will exceed 310mn mt in 2018 and over 350mn mt in 2019.

However we predict that there will be enough room on the global market for all new capacity. Traditional importers will contribute to growing demand driven by various reasons. For instance China is switching from coal to gas. Meanwhile new LNG importers are emerging in different regions of the world, including east Asia and the Caribbean. The supply of natural gas has grown significantly, especially with the shale gas revolution in the US, At the same time, more countries are discovering natural gas reserves, for example Mozambique.

LNG has been considered a global commodity and there is very close competition between LNG exporters worldwide. LNG demand growth has been particularly robust.

The attractiveness of LNG is that importers may satisfy and secure their demand through the most convenient supplier. Technology has lowered costs along the LNG supply chain and given the lack of pipeline trade, for the time being, LNG is the only way new competitors may enter the market. Moreover, as some producing countries, such as Qatar, can be reached only by sea, LNG enables importers to widen their supplier portfolio.

LNG’s importance is stressed by the growing demand trend. Forecasts show a considerable rise. According to the GECF Global Gas Outlook, it will rise by an overall 53% from 3,534bn m³ in 2016 to around 5,395bn m³ in 2040, representing compound annual growth of 1.8%. The share of gas in the overall energy mix will rise from 22% in 2016 to 26% in 2040 and gas will be the fastest growing fossil fuel in 2050.

Having said that, the share of LNG trade as a proportion of total gas trade is anticipated to reach 49% over the outlook period. The future for LNG export growth is very promising with a forecast average annual growth rate of 2.8%. the volume of LNG trade will increase by around 240mn mt/yr (314bn m³) to reach 498mn mt/yr by 2040.

In spite of that, historically Europe, Japan, China, India and South Korea have accounted for the bulk of LNG demand. New sources of supply are required for new gas markets. Henceforth significant demand growth will come from niche markets such as Pakistan, Jordan, Lithuania and Poland. This trend is expected to continue with a number of other countries beginning to import LNG by 2025 such as Bangladesh, Bahrain and Philippines. These niche markets underscore an interesting and fundamental shift in global gas demand, which collectively has the potential to significantly impact LNG trade.

The GECF counties have the largest share of gas reserves and production capacity in the world. They will continue to play their role in insuring market stability, as well as security of supply and demand. The GECF continues to be a reliable source of gas in the world and long-term partners with their customers.

How do you advance the cause of gas globally in anti-fossil fuels renewables focused environment where even the president of the leading producer is promoting nuclear and coal? Has the opportunity for the golden age of gas been lost?

Despite the progress of renewable energies, fossil fuels continue to supply the majority of global energy needs and will remain major contributors to the global energy mix for the foreseeable future, especially in developing countries. All major energy forecasts are in agreement regarding this fact.

We cannot ignore the fact that coal and nuclear will play a significant role in some countries, depending on their accessibility to resources and technologies and their respective energy needs and challenges. However, what is important to note is that there is an increasing awareness about the need to consider the cleanest and most sustainable ways to use energy and technologies. In this context, gas is the most abundant, affordable and cleanest fossil fuel. As such it has extraordinary potential to meet sustainability expectations.

The GECF sees good prospects for strong growth, given the multiple advantages of gas, particularly in the context of the recent climate agenda set by the adoption of the Paris agreement. There is evidence that natural gas can significantly support carbon mitigation and the gas industry is working hard to further consolidate these advantages specifically by improving efficiency, reducing flaring and halting methane leaks.

The GECF secretariat strives to promote the sustainable role of gas is active in the climate discourse. We have realised this through our application be an observer in the UNFCCC and also through the different analyses and studies we perform on the role of natural gas in the climate agenda.


William Powell