The end of the era of cheap gas

Energy Trade

The beginning of the 2008 marked with the fact that Russia has agreed to increase payments for Turkmen gas from $100 to $130 for every thousand cubic meters of gas. Since the H2 of 2008 the price of gas will rise to $150.

It is noteworthy that in 2009 the Central Asian countries are planning to sell their own gas to Russia on European prices. This development has resulted in circumstances that Turkmenistan has suspended the filing of natural gas in Iran since January 2008. At first, Turkmenistan explained this step with an unusual drop in air temperature and the need to use the gas in the domestic market. However, gas supplies are not resumed to this day. Perhaps this fact is explained by the fact that Turkmenistan gas to Iran to release relatively low price of $75 per thousand cubic meters. Compared with the price of gas, which pays Russia, the price can no longer satisfy Turkmenistan. Denying the possibility of exploitation of their deposits because of the lack of necessary capital, Iran needs the natural gas imported from Turkmenistan, to provide them for the population and industry, densely populated in the north. For this reason, Iran has unilaterally agreed to a possible increase in prices for Turkmen gas, with the aim of resuming its filing.

It is noteworthy that the missing, because of the filing of suspension of gas from Turkmenistan, Iran has acquired from Azerbaijan. Since early 2008, Iran purchased 30 million cubic meters (mcm) of gas at a price of $300 per thousand cubic meters. Deliveries of the Azeri gas to Iran provided through gas pipeline Gazi-Magomed - Astara (Azerbaijan) - Bind-Biand (Iran), which is 1474.5 km in length and a capacity of 10 billion cubic meters (bcm) per year. Because of reason that, unlike such a product as oil, natural gas does not have a market where could depend on it by harmonizing the price of supply and demand, is to define according to what the European natural gas prices are.

It is noteworthy that the main exporter of gas in the Eurasian space is Russia. This country possesses the largest gas deposits, as well as energy transport infrastructure, passing through the territory of that country, is the sole exporter of Central Asian gas to European markets. Hence the natural gas price is determined by the decision of Gazprom, the Russian monopoly in the gas sphere. And so, the European price is the price of natural gas which is defined on the border of Germany and Poland, from which the transportation costs deducted. Today, this price is around $250.

It is expected that the price of European borders by 2009 will be about $300. Bearing, the price of $250 for a decision, it is worth noting that Russia politically motivated diversifying the price of gas for different countries. Such as, Armenia, which is a strategic partner of Russia in the South Caucasus region, until recently, paid only $110 per thousand cubic meters of gas. However, Gazprom has decided that the price of gas to Armenia increased to $165, which apparently is still much lower than European prices. As stated by Gazprom, the price for Armenia will not change within three years.

However, where not any signs of act of altruism by Gazprom. Despite the fact, that Russia declared Armenia as “own outpost" in the Caucasus region, she defines relationship with this country purely on market interests. Such as, in exchange for a guarantee natural gas supplies to Armenia, at a price lower than Europe, Russia has already got almost all of strategic enterprises in Armenia.

Armenia handed over 75% of stakes in the enterprise “ArmRosgazprom” which implements gas distribution to end-users, to Gazprom. In addition, the company acquired a newly built Iran-Armenia gas pipeline. This purchase will allow Russia to control possible future export of Iranian gas to Europe through the territory of Armenia and Georgia. This attitude is traced back to Russia’s move against its political ally Belarus. For many years Russia supplied to Belarus oil and gas on notoriously low prices and then starting from 2007, this situation has changed dramatically. The price of gas for Belarus is determined in accordance prices for this energy source for Poland minus transit fees and export. This represents 67% of the price paid by Poland today, and will be equal to $180. The price of gas for Belarus in 2009 will be already 80% of the Polish. But even for the fact that prices remain at current levels, Belarus has transferred half of the company “Beltransa” to Gazprom. How much Belarus “paid” for energy supply from Russia in the future is unclear.

The increase in energy prices has already adversely affected the economy of the country. Belarus economy, which is essentially based on production of the heavy industry, managed to compete in the world markets only because of low prices of its products. However since the increase of prices for oil and gas from Russia, the industrial production of this country is becoming increasingly uncompetitive. The situation in the future could lead to a severe economic crisis with political consequences.

The situation in Azerbaijan enjoys broad extent, the only country which is an exporter of energy resources to European markets, possess own necessary infrastructure to produce transportation of oil and gas regardless of Russia. When in 1997 the British company BP, has found large reserves of natural gas in offshore fields Shahdeniz located in the Azerbaijani sector of the Caspian Sea, many may spread disappointment that the deposit was not oil. But already, only 10 years later, it became clear what strategic importance is the opening Shahdeniz deposit.

Geographically, situated in the shortest distance from European markets. By the end of 2006 was built gas pipeline Baku-Tbilisi-Erzurum, which was made possible transport of natural gas to Turkey and Greece and starting from 2012, gas will come to Italy. Strategic role, natural gas from Shahdeniz field played in 2007, popped up once again when Russia increased gas prices for Azerbaijan and Georgia from $100 to $235. Thanks to increasing of Shahdeniz exploitation, Azerbaijan was able not only to abandon Russian gas, but also to begin its exports to Georgia.

Thus, the price of Azerbaijani gas to Georgia was the $120 and it was lower than Russian price. During the year, Azerbaijan has pumped into Georgia 1.3 bcm of gas and is now a major exporter of gas in this country. When Azerbaijan established at the Geogia’s gas market, the state oil company of Azerbaijan, SOCAR, announced that from April 2008 the price of gas for Georgia will increase and its price will vary between $180 and $200 per thousand cubic meters. Despite the fact that this is a serious increase in gas prices for Georgia, it is still below the Russian price, which equals $235. Since late April, Azerbaijani gas again became to flow on Georgian market.

On April 15 2008, a term contract, which determines the price of Azerbaijani gas to Turkey, which rates varies in between $70 and $120, ended. It is noteworthy that 50% of electricity consumed in Turkey is generated by natural gas and up to 80% of its imported from Russia at a price reaching up to $300 per thousand cubic meters. Export of gas from Azerbaijan at the moment is negligible and therefore important for Turkey is not its low price but the emergence of another alternative source of gas imports. At the same time import of gas from Azerbaijan will grow. It is therefore worth expecting that the price of gas to Turkey will reach $200.

Apparently, the price of Azerbaijani gas while determined independently by SOCAR is worth noting that the benchmark for it still is appointed by Gazprom European price. It is possible that at competitive market price of Azerbaijani gas in the short term will be below than Russian. However, as growth in production and export of gas, it can match with the Russian. In this case it must be defined depending on what price will be reached by a European market, to understand the trend of price changes on the Eurasian space. At the outset, it became clear that Gazprom is defining the price. In this case, on the basis of which will reveal a European price?

There is no doubt that the price of Russian gas affects readiness, primarily the European consumer, to pay a price. Gas market is rapidly developing in Europe. Countries in the region increase the share of natural gas in the proportion of energy consumed. There are countries that have only recently switched to natural gas consumption and the market is growing rapidly. Already today the final consumer price depending on the country varies between $600 and $2000. In this case, the import of natural gas for distribution of countries in Europe is still profitable business. It follows the conclusion that there is still some difference in price between exports and retail. Therefore, should not be surprised if very soon the price of Russian gas jumps to $400.

Another important factor that will influence the price of gas is the construction of two gas pipelines: “North Stream” and “South Stream”. On completion of these projects, without intermediaries Russia will be able to go to the markets of Germany and Italy, which in turn in the role of distributors will distribute gas to third countries in Europe. In this case, reducing costs may lead to somewhat stabilize prices for Western European markets. But even this act may mean nothing, because partly natural gas to these pipelines will come from the countries of Central Asia. If Russia keep their promise and will pay the price of countries in the region on European standards, in this case, falling prices couldn’t be expected.

On the other hand, Russia can’t abandon the Central Asian gas. Own production of natural gas is reduced. In parallel with these, the cost of gas production in Russia also increases. The situation could reach such an extent that to fill the “South Stream” Russia will have to buy natural gas from Azerbaijan, which in this case will go to concessions relating to its price.

In the current situation, it can be concluded: cheap gas time has come to end. The price has not yet limit, it will continue to grow and the question is not how much it will be, but how will affect the economies of the countries that will buy gas at the new price.

One thing is clear; all consumers to a greater or lesser extent feel the trends in natural gas prices. The countries with unstable economies will find it more and, if possible will seek ways to further diversify sources of energy consumption. But whether if they can find valid alternatives, this is something time will show. (Turkish Weekly / USAK’s Energy Review Newsletter)


This commentary is from USAK’s Energy Review Newsletter by editor Rovshan Ibrahimov.




The opinions expressed in this article are the author’s and do not necessarily represent those of BBJ.



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