Inteconnectors: Getting Past the Obsession
Obsession with one source of gas in Europe is a misconception that István Zsoldos, Chief Economist, MOL Group, has run into often, as he told delegates at Romania Oil & Gas in Bucharest, Romania.
“Most governments are obsessed with specific natural gas sources,” he explained. “I'm talking about importing from this country or that country.”
In reality, he said, it is more important having access to a liquid market than having access to individual gas sources. “So that requires interconnector infrastructure and that's often not emphasized enough as opposed to individual sources,” he explained.
Of all the talk about LNG imports to Europe, from the US and other locations, Mr. Zsoldos said it is a useful development as LNG does not create dependencies, but also does not lead to significantly lower prices for European gas.”
“Globally, there is plenty of gas,” he remarked, “and gas is very cheap at the source in many cases. So the value of the gas is in the transportation, which adds the value. There is no global gas market - we have enough gas for probably 200 years. It's a lot more abundant than oil.”
According to prices, he noted that there is no such thing as a global gas price: Henry Hub in the US is quite low; Europe has hub-based pricing while oil-based pricing is being phased out.
Because of the recent oil price drop, he said the fuel oil price is not that far from the hub-based price. He commented, “It's an interesting new development.”
Of the two pricing models for gas in Europe, Mr. Zsoldos said there is the old “pipeline model” based on oil and mutual dependency and whose market structure is long-term contracts and lacks transparency, about which he said: “Sellers like it that way.”
He continued, “The new model is more market-based and is more real-time contracts, not long-term but spot-based pricing.”
In terms of infrastructure, he said redundancy is needed for the new model.
“It's not enough to have just enough capacity – you need a lot more capacity and especially interconnector capacity.”
The new model, he explained, is spreading. “Now, more gas is priced based on gas-on-gas competition in Europe than based on oil-price indexation of some way or another, and this is going to continue, in our view.”
Mr. Zsoldos showed what he termed a very rough map to show that such pricing is spreading to the east and southeast.
He reported, “Hungary's building an interconnector with Slovakia which probably will lead to Hungary joining this kind of hub-based pricing – it's already at the edge.”
Moving further south east, Mr. Zsoldos noted the mixture of the old and new pricing models.
He explained why Russian dependence is a bad thing.
“It's not just because of the reliability of the flows, but the pricing as well. If you are a monopolist or oligopolist supplier then your pricing will be very different. If you take the share of Russian gas in consumption and the pricing – if you get the data, then you can see that there is a clear connection between the two.
“So it's a good idea to have multiple sources, not just because of the reliability of supply, but the actual pricing – you are in a lot better position to negotiate a better price than if you are solely reliant on Gazprom supplies.”
Mr. Zsoldos noted that Europe has plenty of LNG import capacity, plenty of it unused. “That tells you that access to this capacity is a better idea than building new ones – that can depend of course on the exact place you are, but Europe has huge capacity.”
Nord Stream, he cited, is not being used at capacity. “So if there's a Ukrainian problem and not just a problem with the totality of Russian exports, then you could use Nord Stream.
“Europe as a whole is already well supplied with infrastructure,” he continued. “You have to connect yourself to this infrastructure – that's the crucial point.”
Meanwhile, he said the US and Australia will likely be supplying LNG in the next few years, practically doubling the available supply globally, “which is a good thing if you are thinking about supply to Europe.”
Still, he opined, such LNG is not likely to be cheaper. Mr. Zsoldos showed numbers from an export contract between Cheniere and Centrica to supply gas from Louisiana to the UK, calculating $3.50-4/Mmbtu, so that it will be equivalent to the price Europe pays now.
“So don't expect prices to collapse, unless you are expecting US gas prices to move significantly lower, which we don't expect.”
In summary, Mr. Zsoldos said everyone's focus shouldn't be so much on sources of gas.
“The key is to connect yourself to existing infrastructure. That requires being more serious about interconnectors. There's been a lot of talk about this, but progress is too slow in my view,” he said, adding that LNG will be good for price negotiation, but is not going to lead to significantly lower prices.
-Drew Leifheit