Wood Mackenzie’s presentation at Gastech in London looks at events since the last Gastech conference, 19 months ago, and considers where global gas prices are headed. Presently the global gas market is characterised by disparate regional markets.
But events of the last two years appear likely to create a more interconnected global gas market with implications for price. The outlook to 2020 is an environment of greater competition in which the Asia contract price premium is likely to diminish but where the cost outlook will likely require spot prices in North America and Europe higher than current levels if new gas supply is to be encouraged.
Noel Tomnay, Wood Mackenzie’s Head of Global Gas Research starts:“Remote supply options have grown dramatically. Of course there is the potential for significant exports from North America, but we have also witnessed enormous reserve additions through exploration. Exploration success in East Africa and the East Med in particular – success which has dwarfed that recently seen in Australia – have meant that the last two years have been the most successful for gas exploration for a generation.”
“We are seeing more infrastructure development and greater liquidity which will enable greater connectivity within regions and between regions.”
Some examples Tomnay cites include: spare regas capacity in coastal China; FID on the first US LNG export project since Kenai, linking Lower 48 States gas to global markets; the Panama Canal expansion which could route US LNG to Asian markets less expensively; and the emergence of gas from East Africa which could link Asia and Europe better.
Tomnay argues that market liquidity is only achievable if suppliers are prepared to sell at market prices; “The reality is that some key suppliers have restricted the volume of gas they are prepared to sell at such prices. Pipe suppliers, including Russia and Norway, have limited volumes into Europe, and some LNG suppliers have restricted spot LNG volumes to Asian buyers, holding out for long term contracts instead.” But increased competition, driven by remote supply options, is changing this. Tomnay continues; “New entrants not part of the existing supply club, companies without a legacy of existing supply contracts such as those from East Africa and North America, are more likely to be willing to offer more innovative pricing arrangements to secure market.”
However, there are two factors which will contribute to upward pressure on gas prices. Firstly, local cheap gas, primarily from unconventionals, is not panning out as quickly as many had hoped: “In many cases environmental, political and regulatory factors have been the greatest obstacles. A number of European governments have gone further and imposed moratoriums on fracking. As a result, it’s possible that within the next five to ten years European gas demand could be served by more shale gas from the US than Europe.”
“The geology has also proven to be harder in many areas. So much so that in China we expect the biggest non-conventional gas growth story in the next five years will be coal-to-gas rather than shale or coal bed methane,” Tomnay continues.
Furthermore, the greater reliance on more remote supply options to meet gas demand will contribute to rising cost. “Costs are increasing, not only due to a higher cost environment, but also reflective of more challenging technical environments, more infrastructure requirements and greater transport distances.”
Wood Mackenzie has compared the cost of gas in the supply mix over the last five years against gas projects in the five years from 2016. Tomnay explains: “Costs for projects supplying gas to Europe could rise from a break even average of between US$1.50 and 7.00 per million British Thermal Unit (mmbtu), to a range around US$8-12/mmbtu. Similarly in Asia, LNG projects before 2012 had break evens of under US$5, but these are likely to ramp up to between US$11 and US$14. Even the North American market will need to start calling on more expensive gas if it is to meet the demand growth of some 150 billion cubic meters between 2015 and 2020.”
So what does this mean for regional gas prices? Tomnay concludes that spot prices in North America and Europe will need to be higher than current levels if new gas supply is to be encouraged while the prognosis for contract prices in Asia is one of price softening.
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