Energy Industry Trends Review

Libya is expected to restart gas exports in
late November/December 2011, and there
are fears that this additional supply in the
European market will cause a gas price
decline due to the continued mild weather.
The Libya-Sicily Greenstream pipeline is
expected to start shipping gas to Italy in
December with gas storage in Italy already
reportedly nearly full. This is likely to cause
other producers, notably Russia, Norway
and Qatar, to lower or divert their gas
production putting substantial pressure
on European gas prices.
Gazprom has posted high profits so far
this year, supported by high gas prices and
a surge in orders from customers locking
into deals to avoid later estimated price
increases. However, more recently, the
company is experiencing a fall in exports
due to some customers stockpiling gas
ahead of winter price rises. Gazprom is
reportedly in talks with customers such
as Germany’s RWE, which is looking for
cheaper gas (in light of Germany’s move
away from nuclear power and continued
low spots prices at key European hubs) and
is also continuing talks with Japan’s major
utilities that are looking for secure gas
supplies, due to power generation supply
concerns. 47
US gas prices continue to be weak, as rising
domestic production and slow demand
growth influences price movements there.
The Henry Hub spot price averaged $3.56/
million btu in October 2011, 34 cents lower
than the September 2011 average and 49
cents lower than the August 2011 average.
The EIA has lowered the 2011 forecast by
6 cents to $4.09/million btu and also the
2012 forecast by 19 cents to $4.13/million
btu. 48 Should US Gulf Coast LNG markets
become more linked to higher price markets
in Europe and Asia through LNG exports,
there are expectations that this might
eventually lead to a rise in US gas price.
On the downside, it might also cause US
oil imports to rise (as gas becomes less
competitive as a fuel for power generation)
at a time when both US oil and LNG
imports have been falling steadily.
10
Short-term LNG prices remain high, notably
in Asia, where Japan continues to struggle
with the impact of the Fukushima (and
other) nuclear plant shut-downs. Around
80 percent of the country’s nuclear capacity
remains offline (just 11 of its 54 reactors
are now operating) and there has been no
word on potential restarts. LNG demand in
Japan has risen by 31 percent in October
over September to 3.9 million tons and LNG
prices in Asian generally, have exceeded
$17/million btu in late September and are
expected to reach parity with (Brent) oil
prices soon (some analysts expecting Asian
LNG spot prices to increase to as high as
$20/million btu over the coming winter). 49
Observation
Short-term price rises in the European
market are more reflective of preparation
for the coming winter than any real change
in supply/demand fundamentals, but overall
demand in both Europe and the United
States is weak, and being exacerbated by a
mild autumn. With increasing amounts of
Libyan gas coming back into the market, it
is unlikely that European or US gas prices
will rise substantially over the coming winter.
Gazprom continues to try and market
its gas more in line with current market
realities of lower spot prices generally. In
the United States, while there might be excitement
over the potential for the gas price
rises due to LNG exports, the reality is that
natural gas prices are likely to languish for
some time. US natural inventories remain
high and if they are still robust at the end
of the 2011–2012 heating season, then
there is almost no prospect of any change
in the gas price situation there.
Longer term, the growing share of LNG
in global gas supply and increasing opportunities
for short-term trading of LNG
are expected to contribute to a degree of
convergence in regional prices, and LNG
price rises generally. Global LNG demand
grew 9 percent in the first half of 2011 and
13 percent over the past 12 months, with a
high percentage of LNG shipping capacity in
use due to the situation in Japan. Countries
such as the United Kingdom are importing
increasing amounts of LNG; UK demand
grew by 76 percent year on year in the first
half of 2011. Despite the amount of LNG
new build projects underway, the market is
likely to see some tightening of spare LNG
production capacity over the next two years
until new LNG supply projects come onstream.
According to some analysts, global
spare LNG production capacity is likely to
shrink to 26 million tonnes a year in 2011
with spare capacity flattening out by 2014,
which will translate to about 2 million
tonnes per year of spare capacity. 50
While there is likely to be significant continued
spot LNG price differentials between
the United States, Europe and Asia, reflecting
the relative isolation of these markets
from one another and the cost of transport
between regions, the rise in Asian demand
and the potential of new LNG exports
starting from the US Gulf Coast will start to
connect these three markets. This is likely
to start to change LNG market dynamics
and introduce, what many market analysts
are calling, the first truly global gas price.
Most analysts are predicting that North
American LNG could be delivered at about
$9/million btu. Such a low price could encourage
Asian utilities to seek a new pricing
regime linked to the US gas price benchmark
(Henry Hub) rather than oil prices and
would be a welcome relief for the large
Asian Utilities most of whom are expecting
to pay between $17 and $20/million btu for
their gas this winter. 51