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Current US and international natural gas prices, struggling to beat the $ 4 to $ 5 per mln BTU ‘glass ceiling’, can be seen as a historical anomaly or throwback to another time. This is when the onrush of new global LNG supplies, shale-based gas production in the US and Europe, and large new ‘stranded’ gas finds in former or part-depleted oil regions, such as Venezuela, Nigeria, Iran are not figured into the reasoning.

World ‘stranded’ gas finds have radically increased in the last 2 years. Speaking at the Buenos Aires World Gas Conference in early October, BP’s CEO Hayward claimed the current trend of global gas finds could satisfy up to 60 years of current global gas demand, and said: “Using technology available today, greater use of natural gas can provide the quickest, most realistic path to achieving the largest emissions reductions at the lowest cost.”

As ever, capital cost, gas deliverability, resource ownership, rent issues and demand growth outlooks are major keys to pricing.

World LNG is experiencing a form of boom-bust cycle at this time, with uncertain and unpredictable impacts at the level of long-run prices. This investor and project uncertainty is generated by the uncertain feasibility of high cost, long lead time LNG project proposals in difficult regions, with inevitable cost overruns. Cost overruns, for example to find and produce Chinese and Australian deep offshore gas reserves, can often result in quadrupled initial cost estimates and forecasts.

Supply uncertainty for LNG is price-related, and intensified by the high capital spending needed for upstream and downstream infrastructures, such as LNG trains, cryogenic shipping, and regasification terminals.

Pipeline gas supply in Eurasia, East Asia and South Asia is also affected by high capital costs through the infrastrcuture chain including new pipeline needs, as well as geopolitical tensions regarding resource ownership and rent. North American pipeline gas supply faces probable or possible declines in Canadian exports despite recent large British Columbia finds, and increasing Mexican import demand.

Natural gas price tensions are reinforced in many cases (for example Qatar) by the present large disparity between oil prices, and gas prices. Russia also shares this concern. Other major LNG and pipeline gas exporters, to different degrees, share this concern, tending to set a floor for gas pricing, probably very close to present US market prices (near $ 5 per mln BTU).

The price outlook for gas, as for oil, is very responsive to demand trends. The increasing role of demand, rather than supply in price setting, itself reflects changing supply and demand fundamentals. This mirrors the same shift from supply issues, to demand issues, as powerful in price setting for oil.

World gas demand is much less affected by recession than oil or coal, in part due to rapid regional growth of gas-fired power plant capacity (notably US, Europe, increasingly Asia).

The gas demand context, as underlined by BP CEO Hayward, will be additionally driven by climate change mitigation effort.

When or if the forecast boom in electric cars and light goods vehicles takes place, power generating capacity needs will radically increase – with gas very well positioned to supply the basic energy to new urban regional electric power plants for EV charging.

At 3kW each EV for 8-hour charging to enable about 125 kms range for typical larger-sized EV saloon cars, each 1 million all-electric or majority electric PHEVs (plug-in hybrids) will need about 3000 MW additional power plant capacity. The US car and light goods fleet is estimated at around 215 million units.

Increase of global gas demand at anything above 5% per year, sustained more than 18 months, will test the deliverability of new pipeline and LNG gas supplies.

This takes place in a context where in situ use of non-energy gas as a petrochemical base is growing at around 10% or more, per year, and may grow by very large increments in the Mid East, shaving net gas export surplus capacity growth from this key region. In the Saudi case, oil and gas hydrocarbons used as chemical bases (and not available for energy export) are forecast to increase by 12 million tons in 2010.

Very large upside potential for world and regional gas demand makes it unlikely that the “cheap gas window” will last beyond 2015. The next 5 years will however feature increasing gas supplies at prices that may fluctuate very fast, with low bottoms before each rebound, and will very likely show high segmentation by market and region.

Increasing and changing CO2 emissions trading will surely add complexity to natural gas trading environments. Depending on outcomes from the December COP-15 ‘climate summit’, gas demand growth may be further strengthened by increased use of gas to substitute coal-fired electric power plants. In some countries (eg. Australia) this trend is already under way.

The gas demand context may receive large new increments not only in electric power and as a petrochemical base, but also possibly in transport – where the T Boone Pickens “CNG transport plan” is a rational, quite rapid, and lower cost route to significant cuts in US CO2 emissions.

Substituting even a small part of current US truck and automobile gasoline and diesel fuel demand, by gas, will exert a powerful impact on the gas pricing outlook. If the electric car route is preferred, this also will tend to bolster gas prices, through gas demand growth increments for power generation.

In the very short term, probably by Dec 2009, natural gas prices will tend to be dragged up by rising oil prices, but with high price volatility. Prices could attain $ 7 per mln BTU by end November, after breaking resistance levels around $ 5.50 - $6.

This gas price recovery trend will tend to be accelerated by several of the above cited factors and trends. Among these, climate change mitigation through CO2 emissions shaving in thermal electric power production, and natural gas producer country and energy company capex effort for developing large increments in world gas supply, may exert a lead role.

Natural gas demand can only be driven higher by demand outlooks for cleaner, lower carbon electric power generating fuels. Gas-based electric power is advantaged by low capital cost and rapidly built gas power plants from small capacity thresholds for economic operations, and by expectations that current bargain basement gas prices, equivalent to oil at around $ 27.50 to $ 30 a barrel, may not significantly rise.

As noted above, the demand picture for natural gas is growing rapidly, and could grow radically, for example vast stepwise growths in overnight and peak electric power demand wherever EV fleets grow fastest. This reinforces the positive gas pricing outlook for the midterm, beyond 2012.

In summary, gas prices could show impressive upward change through 2010-2011, but with ‘structural’ volatility.

Back channel or negative feedback from gas prices, to oil prices, can be suggested as in play at this time, raising volatility and lowering visibility for oil prices, which seem over-high with gas so cheap (see eg. http://www.bloomberg.com/apps/news?pid=20602099&sid=afX7BfDP3WGs) . In fact, oil pirce fundamentals are too strong to permit a large fall in oil prices, reinforcing the rationale for near-term levering up of gas prices, due to high oil prices.

In this volatile context, geopolitical and weather factors, rather than more fundamental factors like stock change, capex news, production data and demand by country or economic sector, can powerfully swing prices.

Andrew McKillop is an energy economist and consultant. He has held posts in national, international and supranational (Euro Commission) energy, and energy policy divisions and agencies. He is the editor of 'The Final Energy Crisis', Pluto Books; and co author with Salah al-Shaikhly of 'Oil Crisis and Economic Adjustment', Pinter Publishing. He is a frequent contributor to Petroleumworld and several other energy related sites and groups.Petroleumworld does not necessarily share these views.

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Petroleumworld News 11/07/09

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