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Global gas price changes

By Charles Ellinas

Globally gas prices and formation of gas pricing mechanisms have been undergoing major upheavals over the past 10-year period, 2005 to 2016.

Global gas demand increased from about 2,700 bn m3/yr to around 3,400 bn m3/yr, but more importantly as the share of LNG increased from about 195 bn m3/yr to about 335 bn m3/yr.

BP predicts that global gas demand will grow to about 5000 bn m3/yr by 2035, with LNG demand rising to about 830 bn m3/yr.

The International Gas Union (IGU) released its 2017 annual ‘Wholesale Gas Price Survey’ in July.

It is the ninth such survey and it presented findings from a 10-year global review of price formation mechanisms, identifying significant changes over this period of key developments and upheaval in the global gas market.

IGU’s survey report is a vital reference for the natural gas industry globally, as it is based on inputs from countries that cover 90% of total world gas consumption.

These developments are shaping future gas markets and prices. In its Gas 2017 report, released in July, the International Energy Agency (IEA) forecasts that the evolution of the role of natural gas in the global energy mix will have far-reaching consequences on energy trade, air quality and carbon emissions, as well as the security of global energy supplies and prices.

In particular, the global LNG market, including supplies, contract terms and prices, is undergoing a major transformation driven by new supplies coming from the US to meet growing demand in developing economies.

As gas exploration in the East Med progresses and with drilling in Cyprus’ Block 11 expected to come to its climax later this month, the region is preoccupied with finding more gas and where it will be exported. But awareness of the challenges posed by global markets and prices to the future profitable exploitation of East Med gas is increasing.

Key findings by the IGU

The key findings of the IGU survey are as follows:

Average wholesale global prices in 2016 were $3.35/mmBTU. This is the lowest level recorded in all the nine surveys.

In 2016, there was increased price convergence globally, more so than in previous years, as ‘free-market’ prices continued to decline, while ‘regulated’ prices predominantly rose.

Globally gas-on-gas (GOG) pricing had the largest share, with 45% of all gas trades. This was driven by North America, Europe, countries of the Former Soviet Union and Latin America.

Oil-indexed, or oil price escalation (OPE) share stood at 20%, predominantly in Asia-Pacific, Asia and Europe.

The shale factor

According to the IEA, the US as the world’s largest gas consumer and producer, will account for 40% of the world’s extra gas production by 2022 thanks to the remarkable growth in its domestic shale industry. By that time, its production will be 890 bn m3/yr, or more than a fifth of global gas output.

Even though US domestic demand for gas is growing, it is not at a rate to absorb this remarkable growth in production.

The IEA estimates that more than half of the production increase will be used for LNG for export. By 2022, the US could be challenging Australia and Qatar as the world’s top LNG exporter.

IEA’s Chief Executive, Fatih Birol, said: “The US shale revolution shows no sign of running out of steam and its effects are now amplified by a second revolution of rising LNG supplies.”

He added that the environmental advantages of natural gas, particularly when replacing coal, also deserve more attention from policy makers.

But the strongest impact of US LNG is expected to be on contracts and prices. As US LNG exports, indexed to Henry Hub, ramp-up, they are acting as a catalyst for change in the international gas market, diversifying supply, challenging traditional business models and suppliers, and transforming global gas security.

They are also helping increase connectivity between markets and smooth out price disparities. Increasingly, US LNG has the potential to have a similar effect on global gas supplies and prices as US shale is doing to oil.

With new plants coming on stream, liquefaction capacity is increasing rapidly and at high levels at a time when the LNG market is already well supplied. There is already an LNG glut and it is affecting contracts, business models and prices.

These low LNG prices are also creating increased competition with pipeline gas supplies, loosening traditional pricing and contractual norms.

These changes are being accelerated by US LNG exports, which, as a result of not being tied to any particular destination, are increasing the liquidity and flexibility of LNG trade.

Gas market challenges

A key challenge is that European hub prices, Asian LNG spot prices and typical Asian oil-indexed contract prices remain below levels required to take FID on new LNG projects.

But the conundrum being faced by the LNG industry is that if these prices increase to levels required to achieve new FIDs, $8-9/mmBTU, they might make gas even less competitive against renewables and thus accelerate the penetration of renewables in the global energy mix.

In some parts of the world, the continued decline in the cost of generating electricity from solar technology and other renewables is already bringing them into close competition with natural gas combined cycle plants.

With the cost of batteries coming down fast, intermittency main soon become a problem of the past, further accelerating use of renewables.

A permanent energy transition is under way – technological improvements and environmental concerns are changing global primary energy mix towards low carbon, cleaner, energy.

In Europe, with Russia having at least 100bcm/yr of spare productive capacity, which can be supplied to Europe at short notice and at break-even prices less than $4/mmBTU, serious LNG penetration is challenging. But the threat of US LNG is helping keep prices down.

The global energy industry is undergoing a major upheaval and with so much change, and increasingly plentiful and cheap energy resources, it is difficult to say how it will evolve in the future. But what is becoming increasingly clear is that energy prices are likely to stay low for the longer term.

The relentless advance of renewables is creating a permanent glut of supplies, with prices expected to remain low forever.

Impact on long-term gas prices

This upheaval in the global gas market is contributing to major changes in gas price formation mechanisms globally and, as IGU observed, a convergence in global prices.

The abundance of global energy supplies is expected to keep oil and gas prices low in the longer term. As a result, the average price forecasts over the next 20 years average at$5.50/mmBTU in Europe and $7.00/mmBTU in Asia-Pacific.

These prices include the cost of shipping and regasification. Once allowance is made for these, the challenge to East Med gas exports becomes evident.

East Med gas-field development and production, transport by pipeline to a liquefaction plant, liquefaction and profits, will have to be recovered within these prices.

Impossible for exports to Europe and challenging for exports to Asia.

Dr Charles Ellinas is a non-resident Senior Fellow, Eurasian Energy Futures Initiative, Atlantic Council

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