Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why Gazprom Will Bite The Bullet - Soon

Commodities / Natural Gas Mar 03, 2013 - 05:22 PM GMT

By: Andrew_McKillop

Commodities

WHEELS WITHIN WHEELS
One of the most classic-possible rent situations exists in Europe, with its overpriced energy markets. Sometimes the rent is only created inside the bloc, and consumed there by its owners - the corporate, bankster State price fixing fraternity. But in other cases like oil and especially gas, the rent is shared with foreign partners of the elite crowd: for gas price gouging, this is now unsustainable.


European gas supplies, mostly imported, are in no way overstretched or limited. The claim is they are, and this "dangerous import dependence" has geopolitical spinoff. Russian hesitation whether to keep backing Syria's Bashr el Assad, or let his regime fall to opposition forces backed by the West and the Arab Gulf states is described, by some analysts, as linked with Russia's longterm attempt at keeping Europe dependent on Russian-controlled gas. What Russia might lose, if the el Assad regime falls, is control over one more if very big potential new gas line taking Gulf region gas to Europe.

In July 2011 with Russian backing, Iran, Iraq and Syria agreed to build a gas pipeline from the South Pars gas field in Iranian Gulf waters to Lebanon and then across the Mediterranean to Europe. The pipeline would have been mostly financed and wholly managed by Gazprom, and the highest estimates of what it might have shipped ran to more than 100 billion cubic meters of gas per year.

Assuming that about a quarter of the gas would be consumed by transit countries, this would leave around 70 billion cubic metres for sale to Europe, at prices in 2011-2012 as high as $12 - $15 per million BTU, or $350 - $425 per thousand cubic meters.

From a standpoint of 2011 the price outlook was good, but by January 2013 due to global change in energy markets, supply and pricing, European-landed coal was priced as low as $8 per million BTU, making coal far cheaper than gas for power production, even with compulsory European CO2 emission permit costs added. According to Deutsche Bank analysts, as of Jan 2013 European-landed coal prices would need to rise 63% to restore any competitive advantage to natural gas, in Europe, for power generating. Alternatively of course, gas prices have to fall.

LOOKS GOOD ON PAPER

Europe's longterm gas buying potential is surely high: for 2011 using EU statistics and data, close to 400 bn cubic meters of gas was imported, of which about 88 bn cu metres was LNG. Growth of LNG imports has been explosive: for 2010-2012 LNG supply to Europe expanded by around 50% according to major gas market entities including BP, Qatargas, DONG, Ruhrgas and others. From a supply level of about 7% of all gas consumed in Europe in 2000, LNG has carved a market share of an estimated 16.5% in 2010, and a forecast 20% in 2013.

Price however does not yet explain LNG's growing share in a flat gas market in Europe - total gas consumption fell by 10.5% in 2011 against 2010, and has yet to regain 2010 rates, but more volatile LNG prices still tend to be slightly above pipeline prices per unit energy, compared with previously large or massive LNG/pipeline gas premiums as recently as 2011.

The rational outlook is for both to fall, and the rate at which both fall will certainly affect - and may already be affecting - Russian interest in "holding on to Syria", as well as part-financing new very high cost long distance gas lines. While European import gas supply has for more than 30 years been a major focus of geopolitical, rather than economic or energy pressures, interests and considerations, the geopolitical concern is ebbing fast, due to the overall gas supply picture having been transformed by increasing real and potential supply, and by a slump in recent gas demand trend and outlooks.

Added to this, major shale gas potential in many or most EU27 countries creates a possible mega shift in the longterm trend of continually falling indigenous gas production in Europe.

SLOW DEMAND GROWTH - RISING SUPPLY

Gas is grappling itself a slow growing share in a very slow-growing energy world: annual growth of world gas demand is running at about 1.7%, from pre-2009 trend rates as high as 4% a year. For Europe however, after a 10.5% "big dip" cut in consumption through 2009-2011, and slow growth afterwards, the outlook is that European gas comsumption will grow at most 0.4% annual for several years ahead, possibly to 2017-2020.

Source/ http://www.atkearney.com/documents/10192/70a85021-5426-488a-afea-d5d469ec4df3

Some energy analysts go further and forecast complete zero growth for as long as 5 - 10 years ahead. Factors driving this outlook include slow economic growth, fast growing renewable energy output and energy policies targeting a net reduction of national electricity consumption, sometimes by as much as 33%-50% by 2025 in several EU27 countries, including Germany.

On the supply side, the transformed outlook since around 2009 is shown by the explosive growth of LNG supply and a sharp cutback in an increasing number of major pipeline projects aimed at adding pipeline supply capacity for European consumers. Pipeline cutbacks are likely soon to be followed by cuts in LNG terminal building projects, but as of late 2012 these were still continuing at a high level. By February 2009 Gazprom was forced announced it would delay the start of gas deliveries to Europe through its South Stream pipeline, pushing forward the start date from early 2013 to end-2014 or 2015.

One reason is simple: costs continue to spiral. For South Stream, Russia's Energy minister Sergei Shmatko in 2009 told investors the project may cost $20 billion, but by 2011 estimated costs for this gas line bypassing Ukraine under the Black Sea to Bulgaria were raised to over 24 billion euros ($31 billion), by Gazprom. Final costs are almost certainly going to be yet higher. Under a worst case scenario, the pipeline will be downsized - or even abandoned.

Russia's Gazprom, as recently as 2009, supplied almost exactly one-third of Europe's total gas needs (33%), but by end 2011 was providing only about a quarter of Europe’s gas. Gazprom gas export receipts, driven by tariffs which had reached as high as $410 - $450 per thousand cubic metres on some contracts, were declining both in volume from a high of more than 170 bn cubic metres per year before 2009, and in price to $300 per thousand cubic metres or less. Worse, for Gazprom, is coming.

GAS GEOPOLITICS AND REAL WORLD REVENUES

Rather than only geopolitical clout, revenues were always a goal of Gazprom and Kremlin deciders, and for as long as gas prices were oil-indexed or oil-related, guaranteed high revenues were locked-in. In technical terms, the oil rent cross-subsidized and created gas rent. While the longstanding concern of US and European politicians and geostrategists was summarized by the three words "Russian gas dependence", by late 2012 Gazprom’s strategic concerns focused declining dependence on Russian gas, and these were also Kremlin concerns. Speaking in Sept 2012 at an EU summit shortly after his presidential mandate was renewed, Vladimir Putin made it crystal clear to the European Union that he considers Gazprom to be "a strategic asset" of the Russian state. No anti-trust action against Gazprom by European importers, especially concerning gas pricing, was receivable for him. This however was much more an admission of weakness than strength.

Russia's problem, since at latest 2010 is that the gas world has been transformed far beyond anything that Russia, and other gas exporters could have imagined. The South Stream pipeline is as noted above, very likely to be underutilized and under worst case scenarios might have to be abandoned. The second Nord Stream line, completed with pomp and fanfare in late June and commissioned in October 2012, to supply Germany and western EU27 countries, was almost certainly not needed given forward trends for gas demand in Europe. Gazprom's very high cost "Eastern strategy', featuring the Shtokman and Sakhalin gas-and-oil development projects has been cut back to near zero since 2011, but spending so far has left a $100 billion gap between the Gazprom market price and its underlying asset valuation based on its "performing assets", mainly west Siberian gas fields.

For the moment, with apparently surprising but real "objective allies" such as major European oil, gas, energy and power producers, and national governments Gazprom is forced to argue for a "slow and ordered" abandonment of  longterm oil indexed gas supply contracts, that is linking or indexing gas rent to oil rent. The base of this was simple: For as long as oil prices remained high, so would gas prices. Since midyear 2012, Gazprom has increasingly "conceded" that oil-indexed pricing will have no role and place in global gas pricing by as early as 2015.

On the ground this has had a major and measurable impact already: Gazprom has radically shifted its geographical focus for gas exploration and  production (E&P) spending. Shifting from the frozen wastes of east Siberia and offshore north Pacific, Gazprom is now very active in east Africa, seeking a share of the region's truly massive offshore stranded gas resources.

THE WRONG STRATEGY

Major, even critical problems for Gazprom concern when and how, or sometimes if it should develop its massive eastern gas reserves, notably Sakhalin III, and how it should treat its Shtokman resource development options, as well as its LNG prospects from the giant Bazhenov and Achimov fields. One problem is simple to explain, but has complicated results: Gazprom has impressive oil-only output growth potentials, and gas condensate liquids production growth. At this time, oil rent could seem the safer goal, or lure to Gazprom, as gas rent pales and shrinks. 

The outlook for faster erosion of its gas rent on European sales has for at least 3 years years driven its attempt at tapping the remaining high gas rent on gas supply to Asian consumers. To date however, these attempts have met with disappointment. LNG development targting specific high price Asian markets, especially Japan, may offer some consolation to Gazprom but this is far some sure.

Time is very likely running out for Gazprom to dither and hope. For the Kremlin and its energy revenue maximizing strategy, sometimes nicknamed "Putinprom", it is clear that Gazprom is underperforming. Russia's oil revenues running as high as $900 bn in 2012 vastly outrun Gazprom's gas-plus-oil revenue offering, probably well below the net figure of around $210 bn a year for 2012 claimed in Gazprom's deliberately complex accounts.

RISK AND RETURN

Inside Russia, experts are warning that the risks of gas revenues falling faster than is officially admitted are rising. This is backed by the completely opaque, certainly irrational pricing "system" where some countries nearly totally dependent on Gazprom for their gas, like Finland pay less per cubic meter than countries like Poland which source a much smaller slice of their supply from Russia. This pricing "system" is hard to call monopolistic and rent maximizing. Incompetent fits better.

Experts at Russia's Skolkovo Business School warn that European gas demand will probably not recover until 2018 or later, LNG cargoes can be sold at the last minute through Europe's rapidly growing "just in time" trading system, with a clear trend towards declining spot prices. They add that low-priced coal from new and unanticipated suppliers - notably the US - is abundant, and the previous consensus forecast for rapid and continuous growth of European power production from gas is now for the least unsure. Even factors as unexpected as the recent continuous decline and potential future collapse in European ETS carbon permit prices has played against gas, and favoured coal.

At one time a master card, Gazprom's ownership or leasehold on gas pipepline routes into Europe is no longer what it used to be. Pipeline transit fees charged to third party suppliers are tending to fall. Upkeep and infratructure costs and charges on Gazprom-owned lines, in a massive and sprawling network of more than 150 000 kilometres total length, described by some as "madman's macrame", are relentlessly rising. And while Gazprom strives to string existing and new pipelines together and reduce its massive gas losses in transit, estimated to be as high as 16-20 bn cubic metres per year, Moscow has to look over its shoulder at the US shale gas revolution. Here, apart from the near-vertical growth of production the mismatch between existing gas pipeline routes at the start of the shale boom, and needed routes linking new supply regions to existing demand centers has created its own boom-and-bust in new US gas line projects. Gazprom's huge pipeline asset is becoming a liability.

When rather than if Russia has to move away from its existing gas supply sources in western Siberia, and move east and north, also developing LNG capacity, and probably also developing shale sources of gas and oil production, in the 2015-2025 period, Gazprom's nightmare scenario can be sketched. The certain mismatch of future gas transport capacities, with what is needed implies a wall of spending on gas lines and LNG terminals. At the same time, the confortable and seemingly permanent gas rent on sales to Europe will probably shrink by double digit percentages, well before 2020. Most analysts, including the IEA, forecast a fall of around 25%-33% ogainst recent European gas import contract prices, by 2020.

One slim hope for Gazprom is that driving shale gas development in Europe will need higher gas prices than in the US, due to many factors, some as basic as higher population densities and average land prices making E&P costs higher..

Gazprom will soon have to bite the bullet. It can reduce its gas prices, rather than await the threat of price collapse, and tie this to local investor partnering in EU27 shale gas development. More simply and especially in countries such as France where anti-shale gas action by environmentalists is strong, Gazprom could keep shale gas out of or at least limit its growth in Europe, simply by offering a lower gas price. By staying out of any further gas line expansion in Europe and its periphery, already a Gazprom strategy dictated by reality, the infrastructure costs of a future potential shale boom in Europe can be shifted to European shoulders - and pocketbooks. This also will tend to slow EU27 shale gas expansion.

The coming strategic decisions by Gazporm are now overdue, because of the unwillingness of Gazprom to abandon even a part of its huge previous "traditional" gas rent. This will however come:  trying to prevent the future from happening would be the worst possible Russian non-decision.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

Andrew McKillop Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in