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Future of Natural Gas - Alpcan Efe Gencer

Having become an integral part of national energy security plans, the development of the natural gas markets is of concern to both producers and consumers. Setting out its main pillars as accessibility, availability and acceptability, natural gas trade has shaped largely around establishing stable trade regimes between nations. Although still not as internationalized as oil when it comes to its end-users, the progress of the natural gas markets is well underway. How that development will play out is a different story. The gas markets initially developed on the concerns of long-term stability of the trade deals as it required massive investments into the physical infrastructure. Having political stability on its transit routes was another matter that nations had to figure out. Building on this, the initial contracts in the industry were long-term in their nature and some even went as far as becoming depletion contracts.

As transaction costs defined most of the primary constraints in the sector, the advancement of local markets into national markets created nationwide energy policies that outlined the transition for the international markets stage. Meanwhile, due to their geographies, the Asia-Pacific nations also created a parallel market for LNG demand contrasting to the widely used pipeline transport. This occurrence had much more pronouncing effects in the future. As markets and demand grew larger, the transcontinental market period had begun and it brought upon many new challenges as market participants had new needs. The growth of LNG is still continuing and interdependence between producers and consumers is increasing at a fast pace. With new pipelines being built and increased LNG vessel traffic coming online, the issue of achieving stability in transit countries has once again become a common goal.

An innovative market-based approach for the new energy system has been the involvement of all parties as shareholders in joint energy projects. This way, a single producer does not have to shoulder the burden of a large investment while giving leverage for the consumer. Transit countries on the other side also gain stakes as they now have to ensure the stability of their geography for the success of the projects. While potentially losing advantage at the bargaining table, consumers also make equity gains and achieve a common point of convergence amongst all concerned parties. Vertical integration on the other hand bring about an old business method that can potentially be exploited in the marketplace.

To understand how a dynamically priced natural gas market can behave and perform in the future, a more profound approach could be followed by focusing on the similarities of the progress in oil markets throughout time, including the many crises that has taken place. The economies of scale however should be taken into account when making this analysis. With the growth of the spot markets of LNG, the status quo of long-term projects is to be challenged. How swiftly will the markets be able to respond to the challenges of the upcoming price volatilities? Will it take the parties as long as it did for long-term contracts to align their mutual outcomes or will a more practical approach be followed having understood the benefits a cooperation-based business model has on reducing the transaction costs? Many other questions remain yet to be answered. As is with most other things, time will tell how it will play in out in the real world but speaking in general terms, accurate forecasts can be deemed to be of viable standing as of today considering the track LNG markets have followed and the spot market dynamics that followed suit.


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