Putin Preaches Energy Security
July 1, 2013 § 1 Comment
In a recent news report President Putin of Russia defends current pricing of natural gas. One expects self-interest to play roles in the voicing of opinion by country leaders. But really, invoking buyer energy security to support the Russian position is rather specious. Russia dominates gas supply to most of Europe, especially southern Europe. Countries such as Greece are completely dependent. Their energy security would be enhanced by alternative sources not increased reliance on Russia.
Putin was defending two different, albeit related, Russian stances. One is the need for take-or-pay long term contracts. Expensive pipelines require these to justify the investment. Not indefinitely, though; after the amortized lifetime the argument is weak.
The second issue, pegging the contract terms to the price of oil, is indefensible. Back in the days when oil and gas had pricing parity on the basis of energy content, this made sense. Today, with oil anywhere from twice to five times more expensive than gas, pegging to oil gives the gas producer an advantage. It creates absurd situations such as in India, where imported LNG, pegged to oil, is priced at over $15 per MMBTU, while domestic producers are allowed to sell gas for only $4.20. Furthermore, all current models indicate that gas price will rise modestly compared to oil prices. In Europe, gas contracts probably ought to be pegged to landed LNG prices, this being the only serious alternative to Russian gas.