The Second Summit of the Gas Exporting Countries Forum (GECF), which was attended by the heads of state and government of the GECF member countries, representatives of observer countries and members of the international energy organizations, ended in Moscow on 2 July 2013. During the two-day meeting, the heads of delegations discussed a number of issues including boosting of gas consumption, prospects of global gas market and possible steps to protect the interests of gas producing countries.

Following the Summit, a Joint Declaration was adopted reflecting the principled positions of the GECF member states on international cooperation in the gas sector. In the document, the parties expressed their determination to strengthen GECF as a platform for defining and advancing the member countries’ position on challenges and issues of international gas markets; supported the existing gas pricing based on oil indexation; noted the need to enhance coordination of actions to protect the interests of Gas Exporting Countries; and expressed their willingness to foster the consistent growth of natural gas usage to increase its share in the world primary energy mix.

Speaking at a working meeting of the heads of state and government of the Gas Exporting Countries Forum, Vladimir Putin stressed the importance of the gas industry and the growing responsibility of exporters.

“Global demand for natural gas today is growing faster than demand for oil and outstrips overall energy consumption. The International Energy Agency forecasts that demand will increase by more than 16% a year through to 2018 and will reach a figure of 4 trillion cubic metres. This offers big opportunities for gas producers and also places big responsibilities on us all, especially now with the global economy going through a difficult juncture. Our countries account for two thirds (65%) of proven global gas reserves. We account for almost half of the world’s gas exports. Our priority goal is thus to ensure stable supply for the global market over the long term,” the Russian president said.

Vladimir Putin also noted that there is a growing pressure from importers of gas, which, according to him, lies in attempts to impose on producers economically unacceptable conditions for supply via pipeline systems, abolish the principle of supplies based on long-term contracts, peg contract prices to oil and petroleum product prices as a market price indicator, and lower the level of compulsory gas purchase volumes.

“Unfortunately, the advocates of these policies often do not realize that abandoning the basic principles of long-term contracts would not only deal a blow to the gas producers but would ultimately create big losses for the customer countries and undermine their energy security. We should not forget that gas use responds to another of the global challenges we face. By increasing the share of gas in overall energy consumption, we can substantially improve the environmental situation. Of course, we all need to pay for energy and environmental security. This is only fair and is fully in keeping with the spirit of market relations free of politicized considerations,” Vladimir Putin said.

Commenting on the results of the meeting, Laura El-Katiri, Research Fellow at the Oxford Institute for Energy Studies, noted that the GECF is not yet an organization with any concrete gas market impact but its meetings are welcomed from the point of view of gas producers.

“It opens up one more opportunity to talk and communicate – which is key to all energy market, where transparency is important. Nothing concrete was expected to come out from this last meeting and in this regard, expectations were fulfilled. At the same time, the GECF is an opaque institution, and we do not know all the processes going on in the background,” she said in an interview with new agency “PenzaNews.”

According to her, the GECF is very far from any sort of Opec-style, cartel-like structure, but it could be an excellent forum to raise and promote gas market transparency across the world.

“Gas markets, like many commodity markets, suffer from imperfect information, various inefficiencies, ambiguous pricing signals and a general lack of qualitative data. An enormous contribution could be made by a data collection tool, such as JODI for gas, as has been announced before. Realizing such projects could also help the GECF achieve credibility as an institution that can do more than host yet another talking shop,” Laura El-Katiri added.

In her opinion, gas markets are at the verge of a very important structural shift: away from gas as a commodity whose value is primarily determined by oil, towards one whose price is increasingly determined by supply and demand factors.

“While we certainly will not see North American conditions in Europe over the next ten years or more, it is certainly a factor increasingly influencing gas price and contract renegotiations with key suppliers such as Russia. This is primarily a step in a maturing market for an energy source that no longer stands in the shadow of oil. The value of natural gas for key markets such as Europe is by now so high in and off itself that from the point of view of both producer and importer, current pricing mechanisms deserve reconsideration,” the expert noted.

“However, we should not commit the fallacy of believing that pricing mechanism equals price level, that is, that a move away from gas indexation to oil towards more gas-to-gas for instance will result in lower prices,” she emphasized.

According to her, Europe is most likely to continue to seek to diversify its energy sources and its sources of supply, but gas is definitely going to stay an important integral part of the European energy system.

“Its value may yet rise once higher efficiency and environmental standards are agreed, under which gas can play a critical role in stabilizing power grids with a high renewables share,” Laura El-Katiri said.

In turn, Mikhail Korchemkin, the Founder and Managing Director of East European Gas Analysis, noted that the long-term prospects of the gas industry can be described as very promising, despite the expected slowdown or decline in European gas consumption in the next few years.

“I do understand the desire of Europeans to increase the share of renewable energy sources. By the way, Holland that is rich of natural gas began to develop wind power industry long before the EU directives. Now the investments in new renewable energy technologies have begun to bear fruit: the cost of producing solar and wind power is falling rapidly. Of course, the issues of efficiency and cleanliness of burning traditional energy sources – primarily coal and natural gas – remain very important, as well as the use of natural gas as a motor fuel,” the expert said, adding that the most important in ensuring energy security is efficiency and renewable resources.

Arno Behrens, Head of Energy and Research Fellow, Centre for European Policy Studies (CEPS), stressed that the energy sector in the EU continues to be dominated by fossil fuels.

Meanwhile, in his opinion, in the face of climate change the only promising strategy in the long-term is cost-effective decarbonisation of the energy sector.

“In fact, the EU is determined to reduce greenhouse gas emissions by 80–95% until 2050 compared to 1990 levels. Renewables will play an ever increasing role, posing a large challenge to electricity networks. It is important to note though, that the energy mix will remain in the domain of member states for the foreseeable future,” CEPS research fellow noted.

While the world might be entering into a “Golden Age of Gas” (IEA, 2011), the EU, according to the expert, may be drifting on a different course.

“To what extent natural gas will play a role in Europe’s future energy mix depends on which decarbonisation scenario will materialize. According to the projections included in the Energy Roadmap 2050, if new low-carbon technologies – such as Carbon Capture and Storage – should become commercially viable by 2030, gas may keep a robust position in the European energy mix. However, without CCS deployment, natural gas would need to be gradually phased out to reach the EU’s climate policy objectives indicated in the Roadmap for moving to a competitive low carbon economy in 2050,” Arno Behrens explained.

In his opinion, Europe need to address several issues to ensure energy security, including completing the integration and liberalization of EU internal market for electricity and gas, and providing for the integration of an increasing share of renewables into the EU electricity grid, which means developing flexible systems able to balance variability of renewables.

“While Russia is a respected and stable trading partner in terms of gas, it does make sense for the EU to also engage in alternative sources from other exporting countries (Southern corridor), LNG and in the longer term potentially also domestic resources such as shale gas,” the expert noted.

However, International experts differ on prospects for shale gas production in Europe and in the whole world. Thus, Arthur Berman, a veteran petroleum geologist specialized in well assessment, analyzed actual well data from major shale gas regions in the US and concluded that the shale gas wells decline in production volumes at an exponential rate.

According to the expert, this could be the reason why the US shale gas producers, loaded with billions of dollars in potential lease properties bought during the peak of prices, have recently been desperately trying to sell off their shale properties to naïve foreign investors.

Arthur Berman believes that shale gas is anything but the “energy revolution” that will give US consumers or the world gas for 100 years.

Antony Froggatt, Senior Research Fellow at Energy, Environment and Resource Governance, Chatham House, noted that shale gas development in Europe might influence the prospects of the gas industry; however, he did not make any specific suggestions in this regard.

“There is no easy answer to this question as it will depend on a number of geological, environmental, political and economic considerations that have yet to be assessed,” the expert emphasized.

According to him, there are a number of facets to energy security in the EU, some of which are the most pressing.

“Firstly, there needs to be more infrastructure investment, both to replace existing capacity as it retires and to meet the requirements from new energy sources, such as grids for renewable energy or LNG terminals. Secondly, despite the lack of energy consumption growth, as a result of the financial situation, more needs to be done to ensure that when the economy improves this is not accompanied by an increase in energy consumption, as demand side measures are often the cheapest and fastest response to heightened concerns over energy security,” Antony Froggatt said.

In turn, Pierre Noel, Senior Fellow in Economic and Energy Security, International Institute for Strategic Studies (IISS), pointed out the decline in demand for gas in Europe.

“Renewables and coal are displacing gas in power generation; efficiency and electricity are displacing gas in heating; Southern Europe – Spain, Italy, Greece – which accounted for a large share of gas demand growth in the 1990s and 2000s, are in deep economic trouble,” he explained. Check out https://www.ramacorporation.com for the most efficient innovative methods of heating.

According to the expert, the deeper integration of Europe into the LNG market and the better integration of western European gas markets between themselves, in a context of high oil prices, has put enormous pressure on oil-indexed gas contracts.

“Russia has lost market shares to Norway and LNG. Now, with the forthcoming revival of UK production thanks to shale gas, the import needs of Europe are going to further diminish and the marketization of European gas is going to increase further,” Pierre Noel believes.

In the opinion of Oras Tynkkynen, a Member of the Parliament of Finland, representing the Green League, Russian gas has for a long time enjoyed a near monopoly status on many markets.

“This is going to change – and the gas industry will have to change with it. In order to remain competitive, the Russian gas industry will have to improve the carbon footprint of the supply chain and rethink pricing,” the Finnish politician said.

According to him, Europe has made great progress in increasing the use of renewable energy sources, which is the right way forward.

“However, gas, too, can play an important role, if coal use is cut down rapidly,” Oras Tynkkynen emphasized.

From his point of view, the most sustainable ways to improve energy security are improving energy efficiency, increasing the share of renewables, and diversification of energy imports.

According to one of the world’s leading Middle East energy experts Justin Dargin, in order to promote energy security in Europe, the EU must develop a comprehensive energy policy that will promote several mutually reinforcing strategies.

“One of the biggest problems facing Europe in developing a joint energy policy is the fact that its decision making process is quite fractured and various European countries have divergent aims when it comes to developing their energy security. And, in addition, some of the EU member states often work against each other when they attempt to secure their own energy supply and may not attempt to forge energy policies that would benefit the entire continent,” the expert noted.

He also reminded that many European countries are focused on diversifying their natural gas import options and are developing LNG import potential.

“By establishing diversity of supply, as well as promoting energy efficiency polices to lower consumption, Europe would be able to promote its economic, industrial and energy policy interests. But, diversification does not mean that Europe should neglect its traditional suppliers such as Russia. By maintaining good relations with Russia, as a major long-term gas supplier to Europe, that would go far in ensuring its energy security goals,” Justin Dargin concluded.

The Gas Exporting Countries Forum (GECF) is an international organization, which is a platform for the exchange of information and experience.

The GECF was established in Tehran, Iran, in 2001. Until the seventh ministerial meeting in Moscow, Russia, it operated without charter and fixed membership structure. The seventh ministerial meeting, held on 23 December 2008 in Moscow, adapted the organization’s charter. At the same, it was decided to set up an Executive Office and a Secretariat in Doha, Qatar.

The member countries of the Forum are: Algeria, Bolivia, Egypt, Equatorial Guinea, Iran, Libya, Nigeria, Oman, Qatar, Russia, Trinidad and Tobago, United Arab Emirates and Venezuela. The GECF members together control over 70% of the world’s natural gas reserves, and more than 40% of its production, half of which accounts for the Russian Federation.