Summary: Putin urges retention of basic principles in long-term gas contracts
(Interfax – MOSCOW, July 2, 2013) Abandoning the basic principles used to draw up long-term gas contracts will in the final analysis undermine the energy security of gas importing countries, Russian President Vladimir Putin said at the Gas Exporting Countries Forum (GECF) summit in Moscow on Monday. He told delegates at the organization’s second meeting that the application of new technologies in the gas industry is not a reason for rejecting time-tested instruments such as long-term contracts or the take-or-pay principle. He went on to say that the key task of the GECF is to forge a unified position on gas pricing, and he admitted that while price coupling remains gas exporters’ priority when determining gas prices, some consumers would prefer a transition to spot prices. He also urged traditional gas exporters to resist “unjustified pressure” from the Third Energy Package.
Predictable, comprehensible rules
The rules of the game on the gas market must not be dependent on the trends of the moment, including those of a political nature, Putin said.
“We believe it is vital that predictable and comprehensible rules of the game be established on this sensitive market, rules that would guarantee not to change for a long time, or at least, would not be changed unilaterally, and that would not depend on various shifts in the wind, including political ones,” Putin said at a Kremlin press conference following the GECF summit.
Both producers and consumers need to have the ability to compose their investment plans well in advance, so that they can have confidence investment will be recovered, Putin said.
That will guarantee the reliability of the global economy’s energy foundation and the stability of social development in the long run, he said.
Long-term contracts
Abandoning the basic principles used to draw up long-term gas contracts will in the final analysis undermine the energy security of gas importing countries, Putin said.
Putin pointed to the rapid technological development of the gas sector, the improvements in the technologies used to produce and transport this commodity and, consequently, its strengthening position on the global market.
“However, at the same time the pressure on exporting countries is growing. I see this as a serious challenge for all of us. First and foremost, this is the attempt to dictate economically unacceptable terms for producers on deliveries of pipeline gas, the desire to alter the principles for gas deliveries that are the basis for long-term contracts, cutting the contract prices free of the price of oil and oil products as market and price indicators, lowering the level of the gas volumes that must be taken up,” Putin said.
The application of new technologies in the gas industry is not a reason for rejecting time-tested instruments such as long-term contracts or the take-or-pay principle, Putin said.
“Definitely, new technologies for extracting and transporting hydrocarbons increase the elasticity of supply on the gas market, new price guidelines appear, including spot (guidelines). However, this is not a reason to reject those that are time-tested and promising in practice, including long-term contracts and the take-or-pay principle,” Putin said at the gas summit in Moscow.
A rejection of the basic principles of long-term gas contracts would ultimately undermine the energy security of the country buyers themselves, Russian President Vladimir Putin said at a gas summit in Moscow on Monday.
Technologically, the gas industry is developing rapidly, and the equipment used to produce and transport it is improving. As a consequence, this resource is gaining a stronger foothold on the global market, Putin said.
“However, this also increases pressure on the exporting countries. I see a serious challenge for all of us here. I’m primarily talking about attempts to dictate terms of pipeline gas supplies that are economically unacceptable for producers, about the desire to change the principles of gas supplies on the basis of long-term contracts, to detach contract prices from the value of oil and petroleum products as a market and price reference point, to reduce the level of mandatory volumes of gas to be removed,” Putin said.
Gas pricing
The key task of the GECF is to forge a unified position on gas pricing, Putin said.
“I think the forum’s key task should be to elaborate a shared position on pricing issues, to create conditions to reduce excessive price volatility and to raise transparency in the industry, which will generally facilitate the development of gas transport infrastructure and increased reliability of supplies,” the Russian president said.
He said that oil price coupling remains our priority when determining gas prices, although some consumers would prefer a transition to spot prices.
“Some consuming states are persistently trying to sway us towards spot prices. We think the contract price of gas ought to be based on the price of oil and petroleum products as a market indicator,” Putin said.
“Not even the world financial crisis is a reason to act in a non-market way. You can make some small gains in some small segment, but everything will turn out for the worse later. If we lower prices today, and limit producers in their investments, this will restrict world economic growth tomorrow,” Putin said.
“What happens next is hard to tell. Oil trades on exchanges – this is a global market with its own instruments and volumes. The gas market is an aggregate of regional markets: the United States, Europe, Asian countries. As trade in LNG (liquefied natural gas) grows, when there are a lot of these gas carriers, the situation in the gas market alters and it becomes just as global as oil trade, then this market will have features resembling the oil market,” he said.
“But as of today, coupling the price of gas to oil and petroleum products is the fairest and most market-based,” he said.
Putin said all producers remained advocates of oil price coupling. “They all back this. I don’t know which of our partners is against it – they are all in favor,” he said.
Putin said that Russia is not planning to pressure consumers and calls on them to establish partnership relations. “We are not planning to put pressure on consumers: that is counterproductive and wrong. What we want is to have our point of view heard and our position taken into account,” he said.
On the contrary, it is necessary “to create conditions for forming equitable partnership relations between producing countries and consuming countries, at both the global and regional level,” Putin said.
The GECF will in the meantime be creating its own global gas market model to make its own forecasts. “The next milestone will be the creation of a global gas model, which will enable GECF participants to present their own forecasts for the development of the world markets to the world public,” Putin said.
Third Energy package
Putin urged GECF members to work out joint safeguards against steps like the Third Energy package.
“Some countries, members of the GECF, including Russia, have already come up against some regulatory limitations, due to which consumers are the first to suffer. One example is the Third Energy Package. I consider that we should form a joint preventative safeguards mechanism against steps like this,” he said.
Putin urged traditional gas exporters to resist “unjustified pressure” from the Third Energy Package. Putin recalled “the discriminatory restrictions imposed by a number of consuming nations with respect to natural gas suppliers in recent years. I’m talking above all about changes in European Union energy regulation and law, the so-called Third Energy Package. The enactment of this gas directive seriously restricts the activity of traditional gas suppliers to the EU market,” Putin said.
He said those suppliers had invested their own funds in the development of the European gas sector for decades.
“In these conditions the solidarity of the exporting nations is of key importance, and it would be more effective to resist unjustified pressure, and defend the interests of consumers and suppliers of gas to the external markets together. We want our interests to be taken into account fairly,” he said.
Putin said that working out common positions among the states participating in the forum regarding the main issues of interaction with importing countries was also important in the context of the stronger competition among fuels in the world. “The efficiency, the dependability, the environmental friendliness of gas are objective factors. But this does not mean we have to rest on our laurels, otherwise we would lose the competition with other forms of resources,” he said.
Conventional vs shale gas
Russia has enough conventional and shale gas reserves for itself and its partners in the long-term, Putin said.
“We have trillion reserves of gas for the long term. We will provide for ourselves and our partners,” Putin said, adding that developing shale gas was not on Russia’s agenda right now. “If the technologies improve, we do not rule this out (developing shale gas),” he said.
The GECF also needs to work together to gather and analyze industry-specific data and to support scientific research of the global gas market, Putin said.
Putin also urged GECF members to form technological alliances in gas chemicals and use of natural gas as a motor fuel.
“We spoke about expanding use of primary gas. This is fuel for natural gas vehicles (NGV) and gas chemicals with high value-added processing. Our countries have know-how here and it would be proper to talk about forming technological, cooperative alliances,” Putin said.
No gas OPEC
Members of the GECF have never discussed the idea of forming a cartel along the lines of OPEC, Putin said.
“We do not have the goal of creating a cartel or of entering into any cartel agreements,” Putin said.
“OPEC sets quotas on production of oil among member countries on global energy exchanges,” he said.
“There are no global energy exchanges for gas. Even if it was wanted, it would be impossible to influence the markets, since there are no such markets,” he said.
Coordinated actions
Member states of the GECF will consider coordinated action to defend their interests at a planned GECF summit in Moscow on Monday and Tuesday, a senior Kremlin aide said ahead of the event.
The GECF member countries – Algeria, Bolivia, Egypt, Equatorial Guinea, Iran, Libya, Nigeria, Oman, Qatar, Russia, Trinidad and Tobago, the United Arab Emirates, and Venezuela – together control 62% of the world’s proven natural gas reserves. Nearly half of global gas exports come from those countries.
The Netherlands, Norway, Kazakhstan and Iraq have observer status in the GECF.
The summit would discuss “development prospects for the global gas market, ways to stimulate the consumption of this type of fuel and possible coordinated moves to defend the interests of the producer countries,” said Kremlin aide Yury Ushakov.
“Balance between supply and demand and, on the whole, global energy stability and security largely depend on coordinated action of the forum member states,” he said.
The summit is planned to issue a declaration stating “the positions of the forum member countries on priority issues of international cooperation in the gas sphere,” Ushakov said.
GECF Secretary General Leonid Bokhanovskiy told reporters: “There are several axles that have the interests of gas producers consolidated around them. First, tying gas prices to the oil product basket, and the second element that, as we believe, stabilizes the market and reduces volatility are long-term contracts. In effect, the producer countries have reached a full consensus on these two principles.”