GECF reiterates importance of 'fair value' for natural gas
January 23 2021 07:38 PM
GECF reiterates importance of 'fair value' for natural gas

Gas Exporting Countries Forum (GECF) has reiterated the "importance of fair value" for natural gas in order to ensure "sufficient investments" through the entire gas value-chain and the necessity for equitable risk-sharing among all gas market stakeholders to sustain the security of demand and supply of natural gas.

GECF “believes in the future of long-term contracts indexed to oil prices,” stressed its secretary general Yury Sentyurin. Moreover, supporting long-term contracts is one of our fundamental principles as stated in the 2019 Declaration of Malabo at the outcome of the 5th GECF Summit of Heads of State and Government in Equatorial Guinea: “GECF support the fundamental role of long-term gas contracts as well as the gas pricing based on oil/oil products indexation, to ensure stable investments in development of natural gas resources”.

In an interview with Gulf Times, Sentyurin said, “I would like also to share a few words about the pricing mechanisms in the current LNG market, which is relevant to Qatar as a leading global LNG supplier and a member of the GECF."

“As we know, the structure of the trade is a combination of long-term contracts and spot/short-term contracts, with various pricing mechanisms such as oil indexation, hubs indexation, and hybrid models, dictating the price.”

Prior to the Covid-19 pandemic, spot prices were softening as LNG supply growth outpaced the increase in LNG demand, Sentyurin noted.

However, he said the impact of Covid-19 restrictions globally led to a drop in gas and LNG demand around the world, which hastened the decline in spot prices.

Particularly in April and May 2020, spot European gas prices fell below the spot gas prices in the US. In addition, spot Asian LNG prices dipped below US$2/mmBtu.

The “record” low spot prices created a mismatch between spot and oil-indexed LNG prices with LNG buyers favouring lower priced spot LNG. Also, it is worth mentioning that from a historical perspective, in the last 10 years or so, spot and short-term contracting has increased from less than 25% in 2008 to 34% of all LNG trade in 2019 (119mn tonnes).

Although some LNG buyers have been pushing for more hub and LNG-on-LNG pricing, Sentyurin noted oil-indexed pricing is preferred by some LNG buyers in Asia. This is reflected in the recent LNG contracts signed between Qatargas and China’s Sinopec as well as Qatar Petroleum and Signapore’s Pavilion Energy.

These phenomena of ‘buyers’ market’ and increasing competition from LNG stakeholders to secure long-term contracts have given leverage to negotiation for lower oil-indexed slopes.

From the perspective of LNG buyers, Qatar, as well as other GECF Member Countries, adhere to the main principles of the 2019 Malabo Declaration, adopted at the 5th GECF Summit of Heads of the State and Government, which fully supports the fundamental role of the long-term gas contracts as well as the gas pricing based on oil/oil products indexation, to ensure stable investments in the development of natural gas resources.

Such a principle, he said provides a “solid base” for the LNG buyers to gain a long-term visibility of their cash flows on LNG supplies and equip themselves against price volatility.

Gas Exporting Countries Forum (GECF) countries represent 71% of the global proven gas reserves, and even more untapped gas resources. The Member Countries enjoy a great potential to develop these resources and continue to be leading the gas suppliers worldwide.

About cooperation among GECF Member Countries, Sentyurin highlighted that “cooperation is the core value” of the Long-Term Strategy of the GECF.

Therefore, all GECF Member Countries are committed to cooperate under what is dictated by the Statute of the forum, its Long-term Strategy and the Summits’ Declarations, and each GECF Member Country has a crucial role to play in this regard.

“The forum offers a great platform to MCs to exchange short-term and long-term views and information on the gas market,” Sentyurin said.

As per the GECF projections, natural gas will be the “fastest-growing” fossil fuel in the global energy mix, increasing its share from currently 23% to 28% by 2050, with the forum members representing 52% of that share.

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