Building up on CID’s visit to the Energy Expo in Kazakhstan earlier this year (about which you can learn more here and here), it was our pleasure to return to the region and visit – presumably – the world’s most important energy player: Russia. Between October 3rd – 6th 2017 CID participated in the St. Petersburg International Gas Forum, which was part of an even larger Russian Energy Week in which President of the Russian Federation, Vladimir Putin, participated. The purpose of this article is to review the key insights into the international energy market that were discussed at the Forum.
The event was useful platform for Gazprom and ultimately, the Russian Government to show how important the country is from an energy perspective, particularly in the natural gas space, and to project what the future of the energy world may be like and the role Gazprom wants to play in that future. This purpose was served by the plenary session entitled: The Role of the Russian Gas Complex in the World Energy Balance, moderated by Phillip Lambert and attended by The Minister of Hydrocarbons of Bolivia, Luis Alberto Sánchez Fernández, the Deputy Chairman of the Management Committee of Gazprom, Alexander Medvedev, the Chairman of the Executive Board of OMV AG Rainer Seele, the Chairman of the Board at Uniper SE, Klaus Schafer, and a member of the Executive Committee of Royal Dutch Shell Maarten Wetselaar.
The chair of the session pointed out that the energy industry is wondering whether gas will be the next big thing. For Phillip, the answer was a definitive yes given that energy consumption globally is equivalent to 280 million bbls of oil per day: 23% of this number is natural gas with 6% being renewables. Given that renewables’ share is expected to grow, natural gas will be ever more important as it is fully compatible with the stochastic nature of renewables. This is a view that experts of the Center for Industrial Development broadly agree with.
According to the moderator, there are two untruths about natural gas that needs to be revoked. Firstly, gas is considered to be a dirty fossil fuel, which – according to the speakers at the conference – is not the case, as gas is compatible with renewables and in the future, may be even substituted by hydrogen, which will make it completely clean. Secondly, gas is considered to be unpredictable source of supply given that, with 190bcm/year, Russia is Europe’s largest supplier of gas. Even though this argument is historically sound, some Central and Easter European states, like Poland, may emerge as challengers to the perceived Russian monopoly on European gas. In order to learn more about this perspective we encourage you to join the Center for Industrial Development at the first annual Polish LNG Conference, where CID will be participating as a key U.S.-based media partner of the event.
The Minister of Hydrocarbons of Bolivia pointed out that growth of GDP of 4.5% in his country was possible mainly due to developments in the natural gas sector. The Minister hoped to export piped gas to Argentina and Brazil in the near future with the expectation that relevant contracts will be signed by the end of 2019. Alexander Medviedev from Gazprom pointed out that gas fits perfectly with the energy trilemma, while acknowledging that domestic production in Europe is declining with the Groningen field being the best example. Therefore, from Gazprom’s perspective, Europe needs long-term predictable partners, such as, of course, Gazprom. Based on that outlook, Gazprom is investing in Nord Stream 2, as well as the Turkish Stream projects. The company believes that pipe gas is the only reliable gas supply option for Europe and two mentioned off-shore pipelines remove political risk for both Gazprom and its final customers in Western Europe.
Rainer Seele from OMV, agreed with his Russian colleague on the point of declining domestic production – from 120 million tons currently to around 80 million tons in 2030 – and expressed a belief that Gazprom is a reliable supplier of natural gas to Europe. According to OMV’s Chairman, the European automobile industry is very excited about electric vehicles and in his opinion, no one questions what will be the source of clean fuel for this envisioned fleet. At the same time OMV senses that the automobile industry is afraid of advocating using natural gas for electricity production. However, from Rainer’s perspective, there is no other way forward than combing renewables with gas for supplying demand coming from e-mobility. Consequently, OMV envisions the death of coal in Europe and full substitution of coal with renewables and natural gas.
Quite surprisingly from the U.S. perspective, Rainer expressed an opinion that U.S. sanctions on Russia are detrimental for Europe. In this light, he was not particularly positive towards U.S. LNG, which – as he stated – should be competitive with pipe-gas. It is a pity that none of large U.S. oil & gas companies were present to rightly argue that U.S.-LNG is indeed competitive with pipe-gas due to the unique pricing system developed in the U.S. Supply and demand forces can directly be translated into the price of U.S. LNG, further increasing its competiveness on the global market. Furthermore, one can rightly argue that competiveness of the pipe gas from Russia is driven by the new wave of U.S. LNG, so the pricing relationship goes in exactly in the opposite direction to the one suggested by Rainer. Moreover, U.S. LNG and LNG in general offers a unique opportunity for countries to break the geo-political boundaries, which large players may wish to exploit. In the work the Center of Industrial Development does with both U.S. and non-U.S. based energy stakeholders, we see first-hand that U.S. LNG is a game-changer for competiveness of the global energy sector and national security of numerous countries, such as: Poland, or Lithuania.
Uniper’s CEO Klaus Schafer started his presentation acknowledging that his company is currently going through a very interesting time of being subject to potentially hostile take- over bid from Finnish Fortum. Klaus proceed to paint the picture of what the energy future of Europe looks like: Germany, Belgium and to some extent France are cutting down on nuclear energy. Furthermore, European countries are cutting down coal-based electricity generation. From Uniper’s perspective, this missing capacity cannot be filled by renewables only, and therefore demand for natural gas in Europe will grow. Especially given that gas-powered generation offers dispatachable capacity which strengthens the security of supply in an energy system with a large share of renewables. In line with previous speakers, Klaus agreed that LNG is great from a profit-maximization perspective, but does not score high on energy security dimension. Therefore, pipe-gas – mainly from Russia – has a bright future in Europe.
Maarten Wetselaar from Shell started with a parallel: Shell has been present for 125 years in Russia, since 1892, when the company delivered the first oil cargo from Russia to Singapore. Also in 1892, Norway hosted the first ever ice skating championships. Interestingly enough, till present day the world record in ice skating established 125 years ago was broken more than two times. From Maarten’s perspective, the same is true of the energy industry: one always has to strive to be better and push boundaries of what is possible. This simple story provided Shell’s representative with ability to draw some conclusions for the mindset required to succeed in the energy sector. Firstly, one needs the right conditions to succeed. Secondly, one has to commit to a life-time of self-improvement. Otherwise, the competition will take you over in no time. Therefore, we have to see energy transition as a great challenge and great opportunity for the gas industry. Having said that, immediate problems such as methane leaks from the pipelines are of great concern and need to be addressed. Not only will resolving this issue prevent the compromising of the environmental benefits of natural gas, but the producers will also have more gas to sell, which is great for the bottom line: a true win-win.
Participation in the St. Petersburg Gas Forum also allowed us to listed to a very insightful presentation on the prospects of LNG markets globally delivered by Guy Broggi from Total. Guy identified that the question whether short-term forms of supply will prevail over long-term forms of LNG supply is the key question facing the industry right now. Of course, the revolution in the LNG markets globally can be attributed to the fracking revolution from the U.S. which in turn killed the peak oil theory. Building on those changes, 70mln of LNG export capacity in the U.S. is under construction as we speak. At the same time, capacity utilization of receiving terminals hovers around 32% with 258 million tons of LNG being imported and 795 million re-gasification capacities in operation last year. Moreover, the accident in Fukushima created an unexpected demand push for energy commodities, and LNG was the only fuel to respond to this sudden demand. From Guy’s perspective, COP21 marks the era of the end of fossil fuels and the beginning of the peak demand theory. In today’s world, the supply of energy is abundant, though demand projections are unclear. Therefore, LNG is currently a buyer’s market and the sellers are in the race to monetize the resources they own as there is a chance those become worthless at some point in the future, possibly sooner than some may expect.
St. Petersburg Gas Forum also hosted the Youth Gas Days. Almost two thousand students applied to be selected for participation in the event with only 200 invited for the event. The most impressive applicants were invited to form national teams with the goal of participating in the case study competition. It is interesting to note that three out of six teams decided to talk about ExxonMobil. The Dutch team decided to talk about Royal Dutch Shell. The Russian team focused on a relatively unknown and yet very important player in the global gas market: Sonatrach from Algeria. Finally, the Chinese team talked about CNPC. The German team, presenting ExxonMobil’s LNG business strategy, won the competition. The Center for Industrial Development wishes to congratulate the winners, as well as each participant of the Youth Gas Days. We would also like to encourage eligible students with passion for the natural gas to apply for participation in next year’s edition of the event, and to submit any written research to CID.
The St. Petersburg Gas Forum was also host to the trade show, which gave the opportunity for service providers to the industry to showcase their product offerings. Within all familiar brands such as always-present Gazprom and Linde, we found Belarusian harvester producer Palesse showcasing a brand-new concept of a natural gas-powered harvester. According to the producer the harvester is as safe as similar diesel-powered machine and is also 35% more fuel efficient per ton of harvested grain. Finally, the Gas Forum saw the completion of the NGV Rally "Blue Corridor - 2017: Iberia - Baltia." Gas-powered trucks and cars participating in the rally travelled more than 5.500 km [3.417 miles] through the territories of Portugal, Spain, Italy, Germany, Poland, Lithuania, Latvia, Estonia and Russia to make it on time for the St. Petersburg Gas Forum.
Time spent at the St. Petersburg Gas Forum was eye opening opportunity on multiple levels. Firstly, we could understand the view on the global natural gas markets through Russian and European lenses. Secondly, we were able to connect and engage with those players with the hope of creating long-term relationships stretching over the Atlantic and the Pacific.
We hope that with this article we are able to share some of the intelligence gathered in and on Russia. If you would like to know more about what we have learned in St. Petersburg and engage with our Russian and European partners, please get in touch with us – we will be delighted to help you as much as we can.
Mateusz Ciasnocha is constantly on a mission to “unleash dormant potential.” He specializes in agriculture, energy, and Africa, and is also passionate about innovation and entrepreneurship. Mateusz currently studies at ESCP Europe Business School and the University of Oxford, where he is receiving a Masters in Energy Management and Philosophy Certificate, respectively.