market is currently experiencing more fluctuations and stagnation than
the oil market. This stagnation is likely to continue in the mid-term.
Unlike oil market where stagnation or prosperity conditions could prove
effective in the short term (as oil prices were cut by more than a half
in 18 months), due to structural differences in trade and transactions
gas market developments are slow but long-term. Therefore, for
whatsoever reason the gas market plunges into stagnation getting out of
such conditions will be difficult and this issue is related to the
nature of gas trade.
all stages of production, trade and consumption of gas, the trend of
changes is slow but based on long-term equations. Gas transaction
contracts are long-term and formulas designed for gas pricing are to be
used at long-term periods. Gas transmission projects through pipeline or
liquefied natural gas (LNG) are also for long-term because of the big
volume of investments and economic and financial planning by exporters,
buyers and even the countries whose territory is used as transit land.
conditions are at times some sort of guarantee for both sellers and
buyers of gas in the face of fluctuations and loss-producing for buyers
when prices fall and for sellers when prices increase. However, it can
be said that the trading of any commodity has its own balance mechanism
which is worked out based on variables.
impact of oil price fall on gas market can now be analyzed. Clearly,
the decline in oil prices does not affect the price of gas cargoes which
are currently transferred through pipeline or in the form of LNG. The
reason is that the gas price is oil-indexed and is set based on
long-term formulas and mechanisms; therefore other developments are not
effective as long as the deal is in force. This issue has been taken
into consideration in the new gas deals, and sellers and buyers
incorporate some sort of flexibility in the deals mainly based on oil
price fluctuations. However, these methods apply to one-year or two-year
contracts. In this method, the average gas price is set based on a
criterion like the oil price. It goes without saying that the price of
the day is not the only factor and a group of variables and parameters
like investment costs, duration of the contract and even political and
security factors and changes in regional and global affairs and
bilateral relations are taken into consideration. When the gas price is
set for one year the oil prices during that 12-month period are taken
into account as a decisive parameter.
oil price fluctuations could not remain ineffective on the gas market
and gas price. This impact may not be immediate and does not show any
sign in the short term, but it will come to bold relief in three to five
of all, the oil price as the energy index price in the world affects
oil investment projects as much as it affects the quantity and quality
of projects under study for gas transmission. In fact, when oil prices
are low motivation for investment in gas transmission projects is
decline in investment on the one hand, and mid-term growing demand on
the other, affect gas prices in the future. The price envisaged in the
current gas transmission contracts are set low psychologically due to
low oil prices for contracts that will take effect in the future.
Therefore, one may conclude that under the present circumstances in
which oil prices are low, studying and implementing gas transmission
projects are slowed down and investments in this sector are likely to
plunge into stagnation. In the contracts signed for gas delivery under
conditions of low oil prices, the gas price is set low. Under such
circumstances, some countries like Iran may not be willing to sign any
contracts for gas exports to some regions like Europe; therefore such
contracts are unlikely to be signed under the present conditions.
contracts become effective normally under conditions of balanced prices
that would satisfy both sellers and buyers and would be considered as
economical (due to high investment costs in gas transmission projects).
By Ali-Reza Soltani, senior energy expert
Courtesy of Iran Petroleum Monthly