Expert calls for review of global gas pricing mechanisms
July 14 2019 08:37 PM
Dr Sergei Komlev, head of Contract Structuring and Price Formation Directorate at Gazprom Export, de
Dr Sergei Komlev, head of Contract Structuring and Price Formation Directorate at Gazprom Export, delivering a lecture at the ‘GECF 38th Gas Lecture’, organised recently in Doha by the Gas Exporting Countries Forum.

Producers and exporters of natural gas should evaluate current pricing paradigms to curb the negative impact of below optimal pricing, according to an analyst of Russian company Gazprom Export.
Speaking at the ‘GECF 38th Gas Lecture’, organised recently in Doha by the Gas Exporting Countries Forum (GECF), Dr Sergei Komlev said it was time to evaluate results of the buyer-side efforts to impose pricing mechanisms based exclusively on supply and demand instead of the traditional forms of pricing in Europe and Asia.
Citing critics of oil-indexation in long-term contracts (LTCs), Komlev stressed that “gas should be priced at a price of gas and not that of oil/oil products.” 
“But that dichotomy is wrong,” argued Komlev, who added that natural gas is a unique commodity as two forms of competition gas-on-gas and gas-on-substitute are simultaneously determining its price. 
Despite all the attempts to change pricing paradigm, Komlev said global gas prices are still a reflection of the scarcity of oil rather than gas both in Europe and Asia.
Komlev, who heads Gazprom Export’s Contract Structuring and Price Formation Directorate, said: “Although a strategic goal of putting supply and demand instead of oil in the driver’s seat of the natural gas, price developments were not achieved; reforms created the malfunctioning hybrid pricing mechanisms. 
“Still dependent on LTCs’ price levels, hub prices add only excessive volatility to the gas prices. Hub prices leave investment projects in the industry out of money, thus creating a risk of missing the next investment cycle. Exporters of gas should come to a common assessment based on an unbiased analysis of the problem and work out practical measures to resist negative trends in pricing.”
According to Komlev, global transformations will eventually boost the importance of natural gas within the group of fossil fuels as a crucial ingredient of the world’s effort to shift toward less-polluting forms of energy, which, at the same time, are abundant and affordable. 
“However, these transformations could take much longer time as required and incur high unneeded costs…the mission of the natural gas industry is to facilitate these transformation by expediting coal-to-gas and oil-to-gas switches. 
“The natural gas industry also has to position itself properly in its interactions with renewable forms of energy in the low carbon and carbon-free world. In the carbonless economy, it has to become a major source of ‘blue’ hydrogen. Producers and exporters of natural gas have to play a vital role in these transformations. There are various impediments natural gas has to overcome to accomplish its historic mission,” he said.
Komlev emphasised that below-optimal prices make natural gas unattractive due to the low returns. Oil-to-gas switch is a slow organic process resulting simply from a higher longevity of natural gas, he said.
Citing Wood Mackenzie Consultancy, Komlev said the weighted average international rate of return for liquefied natural gas (LNG) projects is currently about 13%, compared with 20% for deep-water projects and 51% for unconventional oil developments like shale. “Under these circumstances, it is hard to prioritise gas developments over oil,” Komlev pointed out.
He also said: “A clear signal that natural gas prices typically do not fully represent its value is the tremendous losses incurred in the process of its production. Industry research group, CEDIGAZ, estimates that only 81% of gross natural gas production became a commercially viable product in 2017. Nearly 900 bcm of gas produced worldwide, which equals to a combined demand of the US, Canada, and Mexico, was wasted one way or another.”
Among the actions to be taken by producers and exporters to accomplish the natural gas industry’s mission, Komlev noted that “gas-on-gas pricing mechanism is not a universal solution for the natural gas industry problems, as it may seem, but rather a problem in itself leading to below optimal pricing. 
“Oil-indexation pricing mechanism retains its historic role of a troubleshooter and should be promoted by producers and exporters as much as possible. In the LNG business, oil-indexation coupled with the LTCs is the only way to secure long-term finance.”

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