Competition is to Become the Key Driving Factor in Gas Markets

5 july 2016

Competition in just any commodity markets is expected to stimulate the reduction of costs and prices asked by suppliers, quality improvement and emergence of new technologies and commodities. But when it comes to the gas market, this is not of particular benefit to major exporters and investors into large-scale projects with long-term payback. This view of the experts of the Analytical Center is presented in the new issue of the energy bulletins.

All in line with the innovations in Europe, Russia has embarked on the liberalization of its own gas market. Introduction of the first ever gas index in Russia made it possible to introduce market trading and to reduce the level of prices for market contracts down to 9.8%, as compared to the traditional regulated patterns. Experts of the Analytical Center believe that this may subsequently result in long-term gas contracts being pegged to stock indices and gradual renunciation of regulated prices. ”This would have helped the gas industry to overcome the current stagnation, making Russian gas more competitive in the global market, even though compared to the level of development of other countries’ gas indices, the Russian platform is only going through an initial stage of competitive development, amid positive dynamics,” they were quoted by the bulletin.

Adoption by Russia of all possible technologies relating to energy production and creating niche-specific branches in the energy market can be facilitated by production of coalbed methane. The key prospects in this respect are associated with the development of the gas fields of Kuzbass: if that experience is found to be a success, it will become possible to combine coal production and gas production, while making both safer for miners. On the other hand, it is not to be expected that this rather narrow sector will become one of Russia’s priorities considering that vast reserves of traditional hydrocarbons are available and that the global competition is by all means tough, experts say.

Europe goes even further, gradually replacing the oil price escalation mechanisms with competitive pricing based on what “gas-gas” competition charges at gas hubs. Experts believe that the balance between the pricing mechanisms in various European regions has so far been somewhat tilted. They, however, argue that this factor can too be seen as part of the positive dynamics for it shows that free switching from one price regime to another  is quite possible, with it in place switching from the old techniques to more up-to-date ones is precisely a sign of successful, continuous competition. In the absence of price discrimination what major gas producers who previously used to be leaders in the market require to maintain their positions is to prove to consumers both the reliability of supply and their financial affordability.

Being one of the world’s major energy exporters, in its Energy Strategy until 2035 Russia places its stake on large-scale increase of gas exports to Asian markets and not to Europe. The plan is to achieve a 9-fold supply expansion, while the planned rise in exports to Europe will only amount to 10%. That said, judging from the national strategies adopted by Japan and China, energy consumption in those countries is not going to grow just as fast as Russia expects, which results in certain risks prompting further analysis of future exports from Russia to the Far East.

For more information see the bulletin “Competition Development in Gas Markets”

Other issues of energy bulletins can be found in Publications