Global gas market decades away say industry leaders
The Gastech conference heard that a gas market similar to the oil market is years away
A truly global gas market – similar to that of traded oil – is years, if not decades, away and may never fully take shape even as a slew of new liquefied natural gas (LNG) projects are built around the world over the next decade, industry leaders said at the Gastech conference in London.
“If you want a fully liquid market, you must have many sources of supply and you must have very many destinations. And you must disaggregate the chain, like we have in the oil industry today,” Frank Chapman, the head of Britain's BG Group, one of the world's largest LNG players, said.
“You have to have a producer who is prepared to build a merchant plant. You then have to have a transporter who is willing to take the risk on shipping this product all over the world. You also have to have a merchant consumer who will re-gasify the LNG. And you have to have, very importantly, access to an end-customer. I don't see that we are anywhere close to that today, and I think that will take many decades.”
That analysis of the gas market was widely shared by others. “The gas market is more global than it was, but it is not global... I think it will be many, many years, perhaps decades, before you see a truly global market, if it ever happens,” Helge Lund, Statoil's chief executive, said.
As new LNG supplies have increased liquidity in the market and wide price differentials have persisted between Asia, North America and Europe, many have argued that those markets could start to converge in the coming years – creating a global gas trade more akin to the global oil market.
Leaders from some of the world’s largest LNG providers, though, said that they expect the regional markets to remain distinct, with prices in each determined by local supply and demand fundamentals.
Asia is expected to remain the most important driver of global gas demand, and Asian buyers will continue to pay the highest prices. Europe is also expected to be an important source of global gas demand as new LNG import terminals are built – but the continent won’t be as significant as Asia. North America could switch to becoming a net gas exporter in the coming years, although few expect the region to become a major supplier to global markets.
Although the basic structure of the market is likely to remain the same, big changes are in store for the industry. First of all, there will simply be far greater supplies of LNG available around the world. Global liquefaction capacity will rise by more than half from around 240 million tonnes a year (t/y) this year to around 370m t/y by 2020, France’s GDF Suez estimates.
Nearly 100 new LNG tankers will need to be built by 2020 to ship those supplies around the world, the director of Mitsui OSK Shipping’s LNG Division, Mike Rowley said. A further 100 new LNG tankers will be needed to meet expected demand in 2030, he added.
Most of that new supply will be aimed at meeting rapidly rising Asian demand. Japan will continue to be the largest importer, though the outlook is clouded by unsettled questions over what, if any, role nuclear will play in the country's energy mix. China and India will also emerge as important buyers while historical exporters Malaysia and Indonesia are forecast to become importers in coming years.
As supplies grow, buyers will continue to seek out market and contract diversification, which will drive more changes in the global gas trade. “Diversification is the key word,” says Kunio Nohata, a senior manager at Tokyo Gas.
After major new gas discoveries, North America, East Africa and the eastern Mediterranean could all emerge as new LNG suppliers over the coming decade. Russia, too, hopes to become a major LNG supplier to both Europe and Asia.
The US, in particular, is attracting significant interest from Asian buyers, which are keen on securing supplies linked to the Henry Hub benchmark price. Henry Hub is trading at around $3.20 per million cubic feet (cf), compared to oil-linked prices of around $17/m cf that many Japanese and Korean buyers are paying.
Indeed, oil-linked gas pricing is expected to remain one of the mostly hotly debated issues in the industry. With oil prices remaining around $100 a barrel, buyers are paying far more for supplies than they envisioned when the oil-linked pricing model was developed many years ago.
“Tokyo Gas wants to introduce hub prices such as Henry Hub and [UK gas benchmark] NBP to its contracts,” Nohata said.
Some sellers argue, however, that the oil-linked model has been successful at providing the economic incentive needed for investors to commit to capital-intensive export projects.
They also caution that introducing hub prices from far away markets because prices are low now is short-sighted, and could backfire by introducing new sources of volatility into gas markets. “Henry Hub prices, for example, are determined by local supply and demand factors that don’t have anything to do with Asia,” argues Elizabeth Spomer, a senior executive at BG.