Opinion

Spot market not a reliable pricing mechanism, says GECF leader

Dr Yury Sentyurin cautions against relying on gas-on-gas pricing

Edward Gomersall

Research Manager, Gas & LNG

Edward brings a deep understanding of the LNG value chain, including project development and trade flows.

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We recently spoke to HE Dr Yury Sentyurin, secretary general of the Gas Exporting Countries Forum (GECF), about the organisation's views on gas pricing and the role of the GECF. He warns against an increasing reliance on gas-on-gas pricing, shares concerns on ensuring timely investment for new supplies, pushes the message that gas is the most environmentally friendly of the fossil fuels, and touts the GECF's ability to aid the sustainable growth of natural gas for its members.

Read the Q&A and get Wood Mackenzie's latest report on gas prices below.

Piped gas and LNG are seeing ever greater diversity of pricing; what is the GECF's position on the development of gas and LNG prices?

Although the global gas market has been evolving towards an increased share of spot pricing, driven by a continuous push from consumers for more gas-on-gas pricing, we believe the global spot market is insufficient to support this pricing mechanism as the bulk of gas and LNG sold is on an oil-indexed pricing mechanism under long-term contracts. The oil-indexed pricing mechanism ensures the security of supply for consumers and is generally less volatile than gas-on-gas pricing. Historically, gas-on-gas pricing, which follows the fundamentals of supply and demand, could result in price fluctuations without control when supply or peak demand changes.

Gas projects are highly capital-intensive, and low and volatile gas prices could affect project economics and lead to a decline in investment, which has been observed post-2014. As such, traders and marketers of gas prefer the oil-indexed pricing mechanism as it allows a sustainable revenue stream based on a reliable index. However, in some markets, they may use competing or replacement fuels as an index for gas pricing. There is an important need for a risk-sharing approach for oil and an oil products-indexation pricing mechanism in long-term contracts to ensure there is timely investment in the gas value chain.

Lastly, the oil-indexed pricing mechanism is a win-win mechanism as it guarantees a stable gas market and security for all parties involved in the gas business: suppliers, buyers, investors, infrastructure companies and banks.

As far as the GECF is concerned, it does not intend to set or influence the prices. Moreover, our long-term strategy emphasises co-operation as a core value of the GECF in accordance with its statute. Such co-operation could be reflected through common approaches for investment and technology, including technological research and development that stimulates gas demand, sharing of best practices and lessons learnt, support of security of supply and demand, and adoption of principles of equitable risk-sharing among the relevant stakeholders.

Have GECF strategies as published in 2017 been achieved or are being met?

One of the priority objectives of GECF countries is 'maximising gas value' and we are pursuing opportunities that support the sustainable maximisation of the added value of gas for members. To this end, the GECF, while managing risks, identifies and disseminates growth opportunities in all parts of the natural gas value chain.

The GECF continues to support its growth and sustain its market share by supplying the global gas market in a reliable and resilient manner despite all the turmoil the market has experienced, particularly in Asian and European markets. For instance, if we look at GECF pipeline gas exports, we’ll see that GECF countries are working hard on creating new gas pipeline infrastructure to maximise gas value and serve the world with uninterrupted supplies of an environmentally friendly source of energy.

GECF member countries dominate global gas production

Over 140 bcm/yr  of new gas pipeline capacity from GECF countries is forecast to come online in 2018-2020, with Russia accounting for 89% of this.

In addition, total GECF gas production continued to increase sustainably. It recorded growth of 0.8% in 2017 compared to 2016, rising 85 bcm to 1.64 Tcm and representing 45% of global production. Sixty-five per cent of the total incremental gas production of 2017 was attributed to GECF member countries.

  • 140 bcm/yr

    Forecast new GECF-member pipeline capacity, 2018-2020

  • 45%

    GECF-member share of global production, 2017

  • 65%

    Total incremental gas production in 2017 attributed to GECF member countries

The other objectives of the long-term strategy in terms of views on the gas market, co-operation, promotion of gas and international positioning of the GECF saw initiatives that have been reflected in the summits declarations and ministerial meetings resolutions.

Among such initiatives, we can mention the creation of the GECF Gas Research Institute in Algeria, as a co-operation among member countries in the area of technology and human resources development; the Joint Organisations Data Initiative (JODI), the global gas outlook.

Other initiatives are being matured in the forum for partnership in the future to expand our relations with major stakeholders.

Are there any obstacles for existing GECF members to pursue some of their own agendas?

As with any gas producer, there are challenges imposed on them by the market. As far as the GECF is concerned, one of the main issues that is hostile to the availability of funds for gas projects and threatens the sustainable supply of natural gas to the global markets is the sanctions imposed unilaterally, unfairly and unjustifiably against some of the GECF member countries.

In this regard, as emphasised in the fourth GECF summit declaration, the heads of states of the forum expressed their deep concern about extra-territorial application of laws and regulations and their objection to unilateral economic sanctions in the gas sector, and particularly against GECF member countries that are not authorised by the relevant organs of the United Nations.

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About the GECF

The GECF (Gas Exporting Countries Forum) is a grouping of 19 gas exporting countries, which together hold about 70% of global proven gas reserves and make up around 45% of the world's output. The group estimates its member countries account for 64% of pipeline gas trade and 54% of LNG trade.