Effects of falling oil prices on the gas projects

Effects of falling oil prices on the gas projects

Senior Iranian energy economics expert Dr. Alireza Soltani for Trend:

The gas market is, at the moment, more volatile than the oil market and is facing more recession. This situation may continue in the short-term and even in the mid-term. Unlike the oil market in which bust or boom could occur within a short period of time, the changes in the gas market happen with a delay, but lasts longer due to structural differences in trade and transaction.

If recession takes place in the gas sector for any reason, emerging from such a situation will be hardly possible. This issue is related to the identity of gas trade and in all stages and sections of production, trade, and consumption, the trend of changes is slow based on long-term equations. The process of formation of gas purchase and transmission contracts is long.

Formulas for setting gas price are also defined and implemented in a relatively long-term periods. Plans and projects for gas transmission both in pipeline and LNG forms are also long-term and complicated due to high volume of investment on one hand and economic and financial planning by exporters and buyers and even countries through which gas is transited on the other hand.

These conditions can guarantee countries which are involved in gas trade, continuous fluctuations and moreover can be harmful for buyers during falling prices and for sellers during rising prices. However, it can be said that trade of any kind of goods has its special balancing mechanism considering its dominant factors.

Taking this into account, the effect of falling oil prices over recent months on the gas market can be analyzed. Specifically, the falling oil price has nothing to do with prices of gas products which are carried both via pipeline and in the form of LNG, because gas price is defined based on formulas and long-term mechanisms in related contracts and not based on daily developments.

Although this issue has been changed somehow in new gas contracts, meaning that the parties take some pricing indicators, especially oil price, into consideration, but such methods are used in one-year or two-year terms.

In this method, current price of gas based on a criterion such as oil price over the 12 months ended the target year plus a forecast price based on a criterion such as oil price for the 12 months after the target year are considered and gas price is defined within a range which has been specified in the contract.

It is obvious that in setting gas price, the current price is not the only criterion, but a set of factors and variables, such as expended capital, time period of implementing the contract, and even political and security factors in regional and global relations, as well as bilateral ties between countries are also important.

However, oil price fluctuations cannot be disregarded in the gas projects. This effect, though may not be prompt and not effective in the short-term, but will show its effects in the mid-term over the course of 3-5 years.

Firstly, oil price, as the indicator for energy price in the world, affects oil investment projects and affects both quality and quantity of plans which are being studied for gas transfer, as well.

In fact, low oil price lowers incentive for investing in gas transfer plans. Low investment on one hand and high demand on the other hand affect the gas market future.

Also, prices for gas transfer projects which will come on stream in the future are considered low, taking psychological conditions regarding current oil prices. So, it can be deduced that with current low oil prices studying and implementing gas transfer projects are done slowly and even investments may be stagnated.

Gas price is considered low in contracts which are concluded based on low oil price. In such a situation, some countries like Iran may have not been inclined to seal deals for transferring gas to some regions, including Europe.

Therefore, under the current circumstances, one cannot be hopeful for concluding such contracts. Contracts of this type will be implemented with prices which satisfy both sellers and buyers and are economically justifiable (due to high costs of investment in gas transfer projects).

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