The efforts by OPEC and non-OPEC oil producers to curb crude output and stabilize global oil markets should also help restore balance in the natural gas market by around 2022, earlier than previously expected, Seyed Mohammad Hossein Adeli, secretary general of the Gas Exporting Countries Forum, told S&P Global Platts in an interview.
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As gas prices largely remain linked to oil prices, rises in and stabilization of oil prices -- which have risen following a deal by OPEC and non-OPEC crude producers to cut their combined production by 1.8 million b/d since the start of the year -- should be reflected in rising gas prices, Adeli said.
"If oil exporters and producers do their best to help stabilize the oil price, this will help the gas price as well, because whether you like it or not, gas and oil are two substituted fuels, and there are lots of contracts that are oil-indexed," he said.
Oil prices reached two-year highs last month, rebounding from a dramatic collapse in 2014-2015.
"As this agreement between OPEC and non-OPEC is more or less holding, and it seems that it may continue, I expect that the present relatively stable situation may continue," Adeli said. "If it continues like this, it may have a positive impact on the stability of the gas price as well, and eventually help investors decide on their investment."
The OPEC/non-OPEC coalition is discussing a potential extension to the pact, possibly until the end of 2018 but a similar joint effort on behalf of gas producers is highly unlikely, Adeli said.
"I'm a bit doubtful to what extent it would help the regional market due to the different nature of gas and oil," he said. "Some regions are dominated by LNG, some by pipeline, it is very difficult to imagine that this will become one commodity, a global commodity, to be able to regulate it [by putting] a cap on production."
Gas markets around the world have suffered a sharp drop in investment in the past two years because of the overall economic situation, a decline in gas prices due to oversupply, and a shift to short-term and spot trading which has increased uncertainty for producers, Adeli said.
But that situation should change around 2022 as underinvestment leads to gas shortages, he added.
"This situation is not going to be sustained after 2022. We believe demand will increase. The rebalancing will occur sooner than expected before, maybe even before 2022," he said.
Struggling with finances, producers sharply cut 2016 investments, funded almost no new projects this year, and promise no growth in 2018, he said.
"This is going to be quite risky for the near future where demand may overshoot supply," he said.
The existing oversupply resulting from new projects launched five to eight years ago, especially in Australia and the US, is not secure given the uncertainties about the profitability of some of them, he said.
Meanwhile, demand in Europe and China is rising above the previously expected pace, alongside the emergence of other countries such as Pakistan and Egypt as gas markets, is expected to accelerate the rebalancing, he said.
LONG-TERM, OIL-INDEXED CONTRACTS TO PREVAIL
A revival in the popularity of long-term contracts would also give producers greater security, encouraging investment, Adeli said.
The favoring of spot and short-term deals in recent years "has not been helpful for the stability of the market" as producers have less certainty that gas from new projects will find a market, he said.
Some markets -- especially in Asia, the fastest-growing gas consuming region, and Europe -- have seen the trend reverse, with greater call for long-term deals since mid-2016, when long-term prices often came below spot prices, he said.
The trend has continued this year, with US LNG delivered to Japan at $11/MMBtu in early 2017, while the long-term oil-indexed Japan price was $7/MMBtu, he said, adding that pipeline gas has seen similar price behavior.
"What we see now is that many customers that were in favor of spot trading and short-term trading found two flaws in this. One, the price is not always competitive. Second, these contracts are not secure," he said. "The more long-term contracts we have, the higher the possibility investment will come back."
Most of the end-users going back to long-term deals are not utility companies, which cannot rely on occasional LNG consignments and need a secure, sustained gas flow, he said.
At the moment, some 70% of the gas market operates under long-term contracts and 30% under spot, about flat on the year, compared with an 80:20 split around 2010, he said.
Adeli also sees oil-indexation prevailing as the dominant price-setting mechanism, despite recent deviations to alternative mechanisms, such as US Henry Hub-tied pricing.
"I think oil-indexation will continue to be dominant," he said. "Oil- indexed contracts would ensure security for consumers as well as enable suppliers to plan for future investments," he said.
A rise in LNG trading and spot sales has prompted a move away from oil-indexation in gas price setting to hybrid pricing, or hub pricing, but Adeli sees it as a "transition and trial period" that will pass.
"In some cases, the trial has failed, and people have gone back to oil-indexation. Our monitoring tells us that in Far East Asia, including Japan, the dominant price mechanism is still oil-indexation," he said.
LNG VS PIPELINE GAS IN EUROPE
Despite the increase in global supply, Adeli does not see LNG coming to dominate in the European mix.
"Europe will continue to see pipeline trade dominance," he said.
Europe, which has only imported occasional US LNG cargoes since the country started exports in 2016, is expected to set a new record in pipeline gas imports from Russia this year.
The region will be diversifying its imports with LNG, but from the financial point of view, it would be unreasonable to abandon the existing pipeline infrastructure, he said.
"You have the pipeline, you have a good contract, and you forget it and go buy some LNG which is more expensive? It doesn't make sense," he said.
Adeli expects Europe to continue increasing natural gas imports, including from Russia, as its demand is forecast to increase amid a decline in domestic production. In light of this it is "a smart idea" for Russia to build new infrastructure to carry the gas flow to Europe.
Russia plans to launch two new export pipelines by the end of 2019 to send more of its gas to Europe, Nord Stream 2 via the Baltic Sea to Germany, and TurkStream via the Black Sea to Turkey and later onto southeastern Europe.
The latest US sanctions law against Russia, passed in August and allowing US President Donald Trump to impose measures against companies helping build Russian energy export pipelines, has put under scrutiny the financing of Russian pipeline projects but Adeli does not see the sanctions carrying a risk of project cancellation -- only of additional costs.
"Being Iranian, I don't believe sanctions will affect this. Sanctions only make it expensive," he said.
Adeli has served two terms as GECF secretary general since 2014 and is to leave the office at the end of 2017. Last week, GECF ministers elected Russia's deputy energy minister Yuri Sentyurin to succeed him.