Energy 28 February, 2018 10:00 am   

Mikulska: Policy must support the development of the gas market (INTERVIEW)

Dr. Anna Mikulska from the Center for Energy Research Baker Institute for Public Policy at Rice University in Houston talks about how active gas policy can support the development of the liquefied gas market, for example in Poland. The thesis about the imminent development of LNG exports is based on the assumption that there will be investments in new export capacities. Is this real in the conditions of a growing oversupply?

Anna Mikulska: Expectations of the International Energy Agency and other organizations may never come true, but show a certain trend. Such analyzes allow companies to determine the factors affecting demand. If the biggest players are now investing in LNG, it means they anticipate a long-term increase in LNG demand and interest in their gas. From their point of view, it pays off. These companies are looking beyond 2020, into the 2030s and 2040s.

Is this the nature of this business?

Investors in deep-sea oil and gas exploration also do the same. They are now investing despite cheap oil, because they expect a profit in ten to fifteen years. As for LNG, investments from the USA, Qatar and Australia have been already well on the way.  It is also worth looking at developing countries like China and India, which also count on LNG as part of their energy mix. They will still use a lot of coal, but they are investing in the gas sector. The Middle Kingdom is developing not only import at home, but also has invested in export terminals in Indonesia, Russia and Australia, to name a few. This shows that they want to ensure secure access to liquefied gas for the years to come.

There are many skeptics about viability of LNG imports in Europe. According to their arguments, the majority of  liquefied gas will go to Asia, so there will not be much left for Europe.

This is a matter of displacement. Asia cannot absorb all LNG produced globally. Any LNG that reaches Asia, displaces natural gas produced elsewhere, which will be free to go to other markets, including Europe.  For example, this way LNG from the Russian project Yamal LNG implemented by Novatek can be competitive enough to displace…

…Gazprom a competitor of Novatek, from the Strength of Siberia pipeline?

Yes. Or other volumes. The most important will be the ability to access to gas and take advantage of the opportunity. You can imagine a situation in which, due to the significant supply in Asia, there is a growing amount of liquefied gas from the USA on the market, which is sold at a discount and is enjoyed by customers in Europe. Transmission infrastructure is necessary for this and that is why EU countries, like Poland, are investing in it.

What will be the impact of this factor on price formulas in Europe? The Polish energy minister revealed that in the PGNiG-Centrica contract the price depends on the hub pricing.

These will be trends. Hub and spot prices will increasingly become a reference point Indexation for oil prices is artificial and was introduced for historical reasons. With time, it will probably disappear. Prices in Europe have already been subject to revision. This is also happening in Eastern Europe. Russian gas loses its monopoly. Infrastructure determines the choice. LNG can reach Poland today and from there, given sufficient infrastructure; it will be able to reach customers throughout Central and Eastern Europe, whenever a shortage occurs. Gazprom loses its dominant bargaining position to demand higher prices or political concessions as consumers can easily turn to other sources of supply.

On the other hand, Gazprom sleeps on gas and has the cheapest mining in the world. Can it use dumping indefinitely?

Gas in Russia is cheap to extract, but profits are not only Gazprom’s to use. They are also intended to provide revenue to the state. Gas sales are also source of geopolitical influence. If Gazprom effectively lowers gas prices to match the competition, budget revenues and political leverage will weaken. The gas will cease to fulfill its task, which will entail negative economic and political implications.

Is Gazprom able to withstand this pressure?

Up to a certain point. The company  may be able to persuade some Europeans to give up investment in diversification and drive competition out from Europe. Here, however, the role of gas policy in Central and Eastern Europe is crucial. The possibilities of storage and transmission, and generally access to alternative energy sources should be increased. The role of energy policy is to help the market that initially will not be conducive to such investments. However, thanks to those investments, Gazprom will not be able to raise prices too high without the threat of being crowded out by the competition.

First the chicken, then the egg. Infrastructure first, then lower prices.

Gas prices in Eastern Europe have been historically higher than in Western Europe. It should be the reverse given higher transmission price that the West pays based on distance from the source. Why is that? The differences in infrastructure development. In the western part of the continent, infrastructure is well developed, unlike in the East. Some exceptions (from the excessive pricing) exist in the Commonwealth of Independent States, like Ukraine, which in history enjoyed low gas prices from Russia. However, it was subject to political concessions. In exchange for stationing the Russian army in the Crimea, moderate foreign policy and other concessions, Ukraine was getting cheap gas from Russia. When Ukraine started to ally itself with the West, Russia stopped subsidizing supplies to this country and the price was adjusted to market levels. The move had, however, little to do with markets but rather was politically conditioned, just like the subsidies before.

Poles could sleep peacefully, but the Nord Stream 2 project appeared, which, according to its critics, could lead to the consolidation of Gazprom’s position in our region.

Without diversification of gas sources, new routes will not improve the situation. The increase in supplies from Russia through Germany will help Gazprom in the fight for the market. The Hungarian think tank REKK calculates that the creation of Nord Stream 2 may harm the market development in Central and Eastern Europe…

…and the price in the region will eventually increase.

However, there will be no expected price reduction in Western Europe. That can happen. If Nord Stream 2 is built, a number of investments in new sources of supply throughout the European Union may not come to fruition. It is the role of a prudent energy policy not only to look at the market but also the structure of supply. There is a difference between the actions of Gazprom dictated by the Russian government, and Cheniere Energy and other private companies that make decisions independently of politicians. The US government may encourage certain actions, but it cannot directly influence business decisions these companies make. Considered this way, gas trading from the US is safer.

Is this gas more expensive?

American natural gas is expensive if we count all costs. However, often – and certainly today in a situation of oversupply-  only variable costs are considered. These are low enough for US suppliers  to offer competitive prices in the European market.

Why do we need Baltic Pipe, if we already have access to LNG?

Generally, the more diverse sources of supply, the better. In the event of a hypothetical malfunction or other problem, there is an alternative. According to some studies, full security of supply is guaranteed only by access to at least three different sources. This is not always a matter of politics but also a technical issue. From a purely market point of view, this is not profitable, but it is important for security reasons. One of our students in her research presents an econometric model, which estimates the effects of investment in the FSRU terminal in Klaipeda on the reduction of gas prices by Gazprom. It is worth noting that FSRU in Klaipeda still has problems with profitability. However, from the point of view of the state, this investment could pay off.

Interview conducted by Wojciech Jakóbik