A couple of years ago, gas
producers were sitting pretty. Burgeoning demand had tightening supply had
producers dictating price and politics to consumer states. That was
then. Fast forward to 2010 and the narrative could not be more different.
Demand has taken a 3% hit thanks
to the global recession, while supply has seen a swath of new gas come on
stream at exactly the wrong time. The main breakthrough has been in ‘unconventional'
gas production in the US. And the prospect that 921tcm of unconventional could gas
one day be brought online globally, has got gas producers on the rack.
Some of the effects are already be
felt. The US market is saturated; Henry Hub prices have plummeted to $4per
MMBtu, and even if producers could sell LNG into America, they wouldn't like
the price. A key export pillar has crumbled before their eyes. Next stop in the
‘Atlantic Basin' is Europe.
Again, too many producers are now
chasing too little demand. Russia, MENA,
Scandinavia, West Africa and Central Asia all clambering to maintain market
share; excess European supplies are likely to top 100bcm as a result. The snag
for producers is that this has started to make the oil-index link to wholesale
gas prices look shaky. Just ask Gazprom now hanging on the mercy of European
utilities.
If anything, Moscow is being
squeezed at both ends. Russia had assumed that the Pacific Basin would give it
credible ‘arbitrage' prospects, but they also have ample supply. Shale gas is
yet to really take off beyond Australia, but the key growth markets of the
future, India and China are rapidly working out which way prices will be set:
Russia, MENA, Central Asia, African and Australian supplies will not only have
to compete with each other for market share, but to do so against a prospective
upturn in unconventional output. China, India and Indonesia will be the key
markets to watch.
Geopolitical dividend
Consumers have thus been dealt a
strong geopolitical hand from subterranean shifts. The US can boast greater
energy independence over troublesome producer states. China will able to keep
suppliers on their toes by tempering Beijing's ‘blind chase' for resources, and
it should also help the CCP avoid any excessive tussles with India over the
‘Chindia' energy race.
Europe has got lucky; greater elasticity of supply to redress Russian import
dependency matters, as does time to get domestic energy policies in order.
This
is not to say that Russia, Iran, Venezuela and Algeria are a bust flush yet,
but they clearly have major cause for political concern - as do Gulf States - which
only have lower production costs to help keep their heads above water.
The catch...
So
where is the catch? If we believe the hype, gas is so plentiful that we are
about to enter a new world of ‘oil on gas' competition as transportation ‘goes
gasified'. Alas, the reality is somewhat different.
Firstly,
the world is still going to need gas, and lots of it. Europe needs it for
environmental imperatives, Asia to drive growth, the US to reduce ‘energy
dependence', and perhaps more importantly in MENA, West African and Latin
American markets to meet domestic demand and support economic diversification.
Subsidies will remain strong and price signals weak in such markets.
And
although it remains a long shot for producers, should consumer states continue
to use low spot prices to drive through contractual revisions on bread and
butter ‘oil indexed' pipelines, some form of supply side price collusion can't
be totally dismissed either. Russia has had a taste of arbitrage on long term
contracts. It didn't like it. Algeria shares these same concerns.
Unsurprisingly
upstream investment is already being cut in Russia MENA and African markets,
which nudges us towards the second key point here: unconventional gas remains
grounded in potential reserves, not actual output. Ecological concerns are
gathering pace in America over the dirty processes of fracing. Similar issues
will play out in Europe. Variable costs are a problem: ‘shale gas is not shale
gas is not shale gas': the terrain - and therefore the costs - remains very
patchy at this stage.
Thus the blunt truth is the no one knows how unconventional gas will pan out. If it comes off, producers are in deep trouble, but this is a risky proposition. If consumers have squeezed producers too hard in the interim towards some kind of supply side response, they better hope that unconventional gas can truly deliver the goods. If it can't, supply will be tight and conventional demand high. Take a bet on unconventional gas? Yes. Make it a one way bet? No. Not unless you can live with the prospect that producers could be back on top one day, and back with a vengeance.
Matthew Hulbert, Senior Fellow,
Center for Security Studies, ETH Zurich
This opinion piece is based on a report published by the European Energy Review here.
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