Editor’s Note: The following segment is one in a series by NGI’s LNG Insight focused on exploring how the global liquefied natural gas (LNG) market works. The conversations in this series will also analyze news and the issues that matter most to the industry in North America and beyond.
Yury Sentyurin is the secretary general of the Gas Exporting Countries Forum, an international organization of some of the world’s largest natural gas exporting countries that works to increase the level of collaboration among its members. Sentyurin is a diplomat who has held various high-level positions in the Russian government. He graduated from the Institute of Foreign Languages, Russian Academy of Foreign Trade of the Ministry of Foreign Economic Relations and Trade, and from the Russian Academy of State Service.
NGI: Can you tell me more about GECF and how it’s working to expand the use of natural gas worldwide?
Sentyurin: Since its inception, GECF has successfully built a mechanism for a more meaningful and strategic dialogue between gas producers and gas consumers for the sake of stability and security of supply and demand in global natural gas markets.
The organization supports the sovereign rights of its members over their natural gas resources and their abilities to develop, preserve and use such resources for the benefit of their peoples, through the exchange of experience, views, information and coordination in gas-related matters.
The current Member Countries of the forum are Algeria, Bolivia, Egypt, Equatorial Guinea, Iran, Libya, Nigeria, Qatar, Russia, Trinidad and Tobago, and Venezuela. Angola, Azerbaijan, Iraq, Kazakhstan, Malaysia, Norway, Oman, Peru and the United Arab Emirates have the status of observer members.
The coalition represents 72% of the world’s proven gas reserves, 46% of its marketed production, 55% of pipeline and 61% of LNG exports across the globe.
NGI: As you noted, the forum represents the majority of LNG and pipeline exports across the world. Have the changes we’ve seen in recent years with more gas supplies, more LNG spot trading and more transactions linked to global gas benchmarks benefited or hurt your members?
Sentyurin: The bulk of LNG supply for exports from GECF member countries are tied to long-term contracts with buyers, which ensures the security of gas supply. GECF remains committed to fulfilling its contractual obligations for the supply of gas with flexibility, especially during exceptional circumstances, such as Covid-19.
Such flexibility from our member countries includes the postponement of delivery on some LNG cargoes to the second half of the year due to the pandemic. In contrast, the U.S., which recently became a significant LNG player globally, has been acting as a swing producer. However, this is based on pure economics since the short-run marginal costs of U.S. LNG rose above European gas prices, forcing some LNG offtakers to cancel LNG cargoes for loading in 2Q2020 and 3Q2020.
These cancellations have not come without financial implications since offtakers are obligated to pay the liquefaction cost whether or not the LNG cargo is lifted.
It should be noted that the gas market is cyclical and experiences periods of high and low spot prices mainly due to the lack of stable investment in gas export projects. Historically, the gas market has always been able to balance itself, at lower spot prices, during periods of oversupply without any need to curb production.
However, we are facing exceptional circumstances, which have forced high-cost gas and LNG producers and exporters without a firm hold in the market to lower their production. GECF member countries are amongst the lowest-cost producers globally and are able to weather this storm — or any other — particularly through their LNG supply, since most of the operational LNG projects in member countries have recouped their initial investment.
All GECF member countries have responded to the recent unfavorable conditions by implementing their own corrective measures. For instance, various national oil and gas companies have announced a reduction in their investment budgets while others have decreased gas supply to the regional and global markets. And this has been done independently — not collectively — by member countries as a normal reaction to the market dynamics.
We believe that despite the current unfavorable conditions, there will be an emergence of new opportunities for the global gas industry in general and for GECF members in particular. That is why we consider it important to step up the promotion of natural gas as a destination fuel and a fuel of choice as well as to support our member countries in evaluating and foreseeing developments on gas markets up to 2050 and beyond.
NGI: Sticking with the topic of broad changes for LNG, are member countries that have long shaped the gas export market, like Qatar, offering more contractual flexibility to their customers as a way to adapt?
Sentyurin: As we’ve discussed, the natural gas market is undergoing some fundamental changes due to its dynamic nature. All the market’s participants need to adapt to the new normal. Our member countries are no exception.
As main suppliers to the natural gas market, and at this inflection point in the global business, they are determined to continue playing their vital role towards the world’s energy security. Most of them have a long history of a resilient, sustained and secure supply of natural gas to their clients, which they consider as partners, and which makes them reliable trading partners for natural gas consuming countries.
No doubt, the recent developments at the global level, notably the Covid-19 pandemic and the emergence of new suppliers of natural gas in the market, have imposed some changes. As a result of these market changes, we’re witnessing shorter-term contracts, and some hybrid pricing mechanisms. As far as the GECF is concerned, we believe that long-term contracts guarantee sufficient investment in the capital-intensive gas projects and reinforce the security of supply to a world in constant need of cleaner energy.
Some of the contracts of GECF member countries expired in recent years. However, due to the established history of collaboration between GECF’s main producers such as Qatar, Russia, Algeria, Trinidad and Tobago, and Nigeria, and the main consuming countries, most of the contracts have been successfully renewed or new contracts have been signed.
NGI: Going forward, are state-owned companies operating within member countries where LNG expansion projects are underway or planned likely to change the structure of any new commercial arrangements as prices fall and more short-term spot volumes become available?
Sentyurin: First, we have to single out the important point that each member country enjoys autonomy on the use of its natural gas resources for the benefit of its people. Further, the respective state companies have complete sovereignty on all commercial decisions in respect to their contracts and trade operations.
Nevertheless, we believe that the current commercial agreements are already attractive with oil indexation formulas that avoid any price fluctuations. The GECF supports oil indexation formulas to sustain heavy upstream investment. Moreover, a hybrid formula — prices linked to gas hubs and oil indexation — is another flexibility that suppliers are giving to buyers which helps finalize several ongoing price revisions without ending up in international courts, which in a way does not reflect a spirit of partnership. In addition, one of the major aspects of the “destination clause” is now much more flexible than in the previous contracts, whereby buyers are no longer limited to one port or country, but rather to regions. This will allow the buyers to have much more flexibility when reselling their cargoes.
Meanwhile, we have to recognize that in recent years, the tendency for new long-term contracts is a maximum duration of 10 to 15 years. Moreover, the share of short-term and spot deals is continuing to increase. It was 34% in 2019 and likely to rise again in 2020, and these factors could change the market structure in the long run. However, the share of short-term and spot contracts remains much lower than long-term contracts and as GECF member countries have always endeavored for long-term partnerships, this bodes well for them.
NGI: Can you talk at all about how your members have coped with the weak market caused by Covid-19?
Sentyurin: GECF members are no exception to the weak global market and have been impacted. Their export revenues decreased over the last six months. Most of the national gas companies incurred losses in the first half of 2020, which forced them to cut their expenditures, including capital investment. Such a situation poses a threat to security of gas supply in the medium term, which is not only a concern for gas exporting countries but also for gas importing countries.
Although the coordination within GECF in collectively cutting production or supporting gas prices is not envisaged by its statute, which distinguishes it from the Organization of the Petroleum Exporting Countries, the forum may consider various scenarios to rebalance the market and mitigate risks.
In this context, it is interesting to examine the exports of pipeline natural gas (PNG) and LNG. GECF countries account for 100% of the extra European Union PNG imports. In the first seven months of 2020, these imports decreased by 19% year/year to 149 billion cubic meters (Bcm), with all suppliers, including Russia, Norway, Algeria and Libya, registering a drop in supply. That drop was driven by the declining gas demand amid the Covid-19 outbreak as well as by the growing LNG supply and high storage of gas. It is crucial to stress that the decrease in gas supply was caused by the policies of importing countries, which have reduced their PNG offtake to a take-or-pay level. In the meantime, some exporting countries have only reduced the volume of gas they offer for spot trade, but that represents just a small share of total supply, which is largely based on long-term contracts.
Further, GECF LNG exports also declined by 2% year/year to 138 million tons in the first eight months of 2020, driven by the weakening market and a growing competition with non-GECF supply, which rose by 9%. Out of 13 GECF member countries which exported LNG in this period, at least six countries increased their supplies, while the other seven reduced their supplies, with Egypt standing out. Meanwhile, some members reduced their spot LNG supply, which seems reasonable taking into account the record low spot prices.
NGI: When does GECF expect the global gas market to improve?
Sentyurin: Current gas market conditions are already sending positive signs of improved hub-based prices.
On the demand side, we adhere to a cautious optimism and consider that last year’s level of gas consumption could be achieved only by 2022, based on the assumption of a second wave of coronavirus and weaker-than-expected economic activity in 2021, but we are not anticipating global lockdowns or severe containment measures that were in effect in the first half of 2020. The Asia Pacific region will be the main driver of demand recovery, supported by attractive gas prices, ample supplies and coal-to-gas switching.
On the supply side, we see a delay in some projects. This decelerated pace in upstream activities will result in a reduction in production in 2020 and will make a gap between our updated production forecast and the previous one for 2021. However, we expect a turning point in late 2021, and the gap is expected to narrow over our outlook horizon.
NGI: As things bounce back and nations across the world keep trying to curtail emissions and move away from fossil fuels, is this a threat to GECF or does it believe its members have a role to play in the energy transition?
Sentyurin: The effort to curtail carbon emissions constitutes a real opportunity for natural gas. We see that natural gas can support emissions reduction in three ways.
First, switching and penetration against carbon intensive and pollutant fuels, particularly coal, is important. We have monitored over the last decade countries that achieved substantial carbon intensity reduction and discovered that a large part of these countries have improved the penetration of gas against coal. The UK, the United States and China are good examples of this. The expansion of gas in the transportation sector, through natural gas vehicles and LNG bunkering is also a lever to reduce emissions in addition to the adoption of tougher emissions standards.
Second, natural gas allows for improvement of energy efficiency, since gas-based technologies, including combined-cycle gas turbines and gas boilers, offer good energy performance compared to other technologies.
Finally, we see that gas-fired power plants are good complements and enablers of renewables progress, providing the necessary flexibility to balance variability and keep power systems within the stability requirement ranges.
Over the long term, we see emerging options to achieve deep decarbonization of gas such as hydrogen production or carbon capture, utilization and storage. So far, the utilization of gas to produce hydrogen has proven to be the most competitive option. Also, capturing carbon dioxide from plants consuming natural gas offers a cost-effective route for decarbonization, since it requires less investment for processing because of fewer carbon and pollutant contents that need to be removed from the emitted gases. Because of all these benefits, we believe that emissions reduction is an opportunity more than it is a threat for GECF.
*Excerpts in this segment have been edited for brevity and clarity.
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