Questions are answered by the CEO of National Energy Institute Sergey Pravosudov
- Sergey Aleksandrovich, recently we observe improbable things: gas at the European exchanges is several times more expensive in summer than in winter. How did it happen?
- Generally the negative spread «winter-summer» is not something extraordinary for the European market of natural gas. Similar anomaly was observed for the last decade more than once. The prices grow in summer waiting for cold winter, and winter does not meet expectations — and storages are full. In 2020 and 2021 return to norm, positive spread between the winter and summer prices was observed. And in 2022 after the third quarter with its increased demand for gas because of hot weather and a drought the warm fourth quarter with sharply fallen demand followed.
- Concerning very high prices of gas there is an opinion that financial investors who needed to attach the huge volumes of new money which are let out for elimination of consequences of crisis of 2008 somewhere inflated this bubble.
- Yes, it happens. After all the market of gas after the oil was included in system of global financial capital where volumes «on paper» of various derivative tools many times exceed volumes of trade in physical goods. It does not matter to investment in what tool to invest money. They pump over the capitals from one market to another, inflate bubbles and profit on it. It is pure speculation.
A lot of new money was given to the population to endure falling of income in pandemic conditions. This rating of economy led to growth of inflation which reached two-digit values in the majority of EU countries. And it led to an increase in prices for exchange goods, after all the market of gas after oil was included in system of global exchange trade long ago.
- But the market of gas has restriction in the form of demand of end users. If an old lady does not have enough money to pay for heating because of an increase in prices for gas, she will freeze and die.
- Poor citizens of the EU states are paid donations, increasing a public debt and shifting problems to the future. But it must be kept in mind that many end users in the past were protected from an increase in prices by annual contracts with the fixed prices which were established on the basis of 2021. There will be no more such protection in 2023.

Price ceiling

- Large financial players cash in, inflating price bubbles. However the governments are compelled to answer to end users. There is an example of Serbia which kept oil binding in the gas contracts and during exchange madness received gas at the lowest prices in Europe. Why didn’t that example become mass? Why did the authorities of the EU prefer to enter a ceiling of gas prices at the level of about $2 thousand for 1 thousand CBM?
- When the price ceiling is entered, it is the end of market economy in this sector. My colleague Sergey Komlev said that the lower level of prices for gas for many years was at the level of the coal price more than once, and top — fuel oil and gasoil. That is about the competition of interchangeable goods, taking into account their consumer and ecological characteristics. But as soon as the market unbalanced – first towards oversupply (in 2019–2020), and then, starting from 2021, towards an acute shortage – as the price of gas first broke through the “coal floor” and then the “oil ceiling”. But it does not mean that the inter-fuel competition disappeared. As soon as the market is balanced that is expected after 2026, the above mentioned price envelopes will start working again. It is important to note that oil indexation resulted not from introduction of oil binding to a formula of gas price and became reflection of existence of the competition between alternative types of fuels. While they play an important role in an energy balance of the European countries, the economic sense in oil price indexation also remains.
Thus it is necessary to understand that the direct competition of these goods in Europe decreases. The European consumers gradually refused fuel oil and coal. Gas was much more convenient for them. When gas sharply rose in price, Europeans began to grab any options of replacement up to firewood. However very little power plants capable to use fuel oil remained in Europe. As a result the oil-product binding of gas prices as the replacing energy resource began to lose relevance. Thus the fulfilled technologies and formulas of the prices with oil binding remained. It is worth a lot, after all a habit is big business. It is obvious that combination of spot gas prices with the contracts focused on quotations of oil products gives a positive effect both for suppliers and for buyers. It is possible to argue on proportions in the ratio of such contracts, but it unambiguously increases confidence of players.
It is necessary to remember also that the European gas exchanges on a trading volume «paper» contracts strongly lag behind the largest oil. Therefore, it is easier for certain players to influence gas quotations. Great Britain the first relied on the gas exchange (NBP). Previously British legislatively demanded from the companies extracting oil on the shelf to utilize completely associated gas, delivering it on the market. Thus there were provided excess of gas in the market of Great Britain and low exchange prices of it. When the market became scarce, prices
shot up.
- What does Europe need to make?
- Europe refused long-term contracts for delivery of natural gas and it appeared in this sense in the extremely vulnerable state. Gas business is huge long-term investments which financial speculators cannot make; after all they are focused on short-term transactions. Business needs predictability and understanding of tendencies, modern European political elite shows inability to correct the situation. Interests of American colleagues are too important for them. Perhaps, the European business will be able to create clear request for change of policy. Let’s look.

Green technologies

- What role is played by the green agenda?
- Europeans count that they together with the USA will be able to impose on other world the technologies in the sphere of renewable power, production of hydrogen, electric cars, etc. The high prices of gas allow making these technologies profitable. Earlier high prices of hydrocarbons could make profitable sea production in Europe and development of slate deposits in the USA.
However China unexpectedly appeared the leader in production of solar panels and electric cars. It absolutely dominates in the world market of the rare-earth metals extremely necessary for development of green technologies. It turns out that Europeans, fighting against dependence on Russia, got to dependence on the People’s Republic of China. Whether it will be better for them from it? I doubt.
- Russia could adjust production of rare-earth metals; emit hydrogen from methane (the most effective technology for today).
- Naturally. My colleague Andrey Konoplyanik has been talking about it for a long lime. He always suggested emitting hydrogen from methane in close proximity to consumers as there is no effective technology of transportation of hydrogen through pipelines of high pressure on a long distance. It is spoen a lot about ammonia as about opportunity to transport hydrogen. It is possible to try different options and their combinations. So far everything breaks about that Americans keep Europeans in iron embraces and exploit them. «Green» press on emotion of voters, forgetting about rationality and efficiency. As for rare-earth metals, Gazprom plans to extract lithium on the Kovykta field together with Irkutsk Oil Company. This experience can be expanded.

LNG and ammonia

- Gazprom constructed powerful system of gas pipelines from Yamal to the coast of the Baltic Sea, what to do with it today? Perhaps, it makes sense to construct a power on liquefaction of gas and production of ammonia on the coast?
- It is known that last year installation on the 1.5 million tons LNG production annually already started on KS Portovaya. It is possible to expand these capacities, but here we face restrictions of the Danish straits. It is possible to arrange also production of ammonia, but whether the market is ready to accept it? It is necessary to find potential buyers before making something. LNG production needs precisely to be increased on Sakhalin as nearby there is a growing Asian market and there are no restrictions in size of methane carriers.
We need to develop territories of Siberia and the Far East. Here you cannot do without small scale LNG. In Eurasia it will be necessary to create powerful gas infrastructure which will connect fields of Russia, Iran, Turkmenistan with consumers in China, India, Pakistan, etc. Gazprom’s competencies in gas production and transportation can play a big role in this. Besides, Gazprom should pay more attention on oil and gas chemistry.
- So far Gazprom considers that gas chemistry is not its business. Gazprom completes the Amur gas-processing plant, and SIBUR builds a gas-chemical complex together with the Chinese Sinopec nearby.
- Everything changes and the exit in more advanced processing can compensate decrease in deliveries to the European market. Joint ventures in the sphere oil and gas chemistries with the Chinese, Indian, Vietnamese and other companies is very perspective way.
Though, in my opinion, Europeans will be disappointed in unstable renewable power sooner or later. The subject of hydrogen arose as an opportunity to use surplus of wind generation (when wind-driven generators develop more energy that is necessary for consumers it can be used for release of hydrogen from water). However the statistics shows that wind-driven generators develop excess energy less than 1% of time. It is impossible to construct effective economy on such an indicator.
Wind-driven generators appeared in the Middle Ages, Europeans try to return at other level at this time, but it is impossible to keep the developed industry with a support on unstable power source. It is no coincidence that interest in nuclear power has awakened again in Europe energy as a support for renewable energy. And unexpectedly it appeared that so far Europeans fought against nuclear power, the NPP Rosatom already became the world leader on safety issues.
- While the RES boom continues in the world, which included firewood, maybe it makes sense for Gazprom to start harvesting firewood, creating windmills and solar panels?
- Everyone should do what they are good at. If someone has no reserves of effective energy resources and wants to pass on inefficient, this is his/her right. What does it have to do with Gazprom? The company puts wind generators for a long time in remote areas where they give good effect. And why to put wind-driven generators where there is not enough wind, but there is cheap gas?
- If to look at the schedule of change of temperature on the Earth for hundreds of millions years, it is clear that behind warming cold snaps inevitably come. And now they began to consider that warming will infinitely proceed if not reduce carbon emissions.
- It is a policy to promote own interests. Astronomy is practically not considered here, and it is nonsense. Logic is simple: «We cannot influence space, but we can influence human activity, and we will be engaged in it». And what result will be received? There is no clear answer. Politicians demonstrate activity that supposedly can solve world problems, but they themselves think within the framework of electoral cycles. We must make it clear understand.