Energy Industry Trends Review

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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
Gas demand Key trend—Short-term gas demand continues to vary significantly by region, with significant demand still evident in Asia, notably Japan and China, but with Europe and North America still showing weaker demand due to milder weather conditions and the continuing weak economic outlook. Longer-term demand for natural gas will continue to grow (from 3.1 tcm in 2009 to 4.75 tcm in 2035) according to the IEA’s Medium Oil and Gas 2011 outlook; an increase of 55 percent. 52 In the short term, gas demand in Europe continues to be weak, with poor economic conditions continuing to affect demand as well as the impact of a significant volume of prepaid Russian and Libyan gas, which has not yet reached the market. In the United Kingdom, gas demand during this winter is expected to be lower, due to the continued shift by power producers to use coal for power generation. The UK power distribution operator National Grid has revised power plant availability down by 4 percent this winter to 61.3 gigawatts (GW), adding that power producers are expected to “strongly favor” cheaper coal instead of gas for electricity generation. 53 In Italy, gas demand fell with lower offtake from power producers and industrial customers (total Italian gas demand in the power generation sector was 2.20 billion cubic meters (bcm) this October, while it stood at 3.15 bcm in October 2008). Spanish gas demand also witnessed a drop of 10 percent in October from the same month last year due to warmer weather and power utilities switching to coal. However, there is evidence of slight increases in French gas demand, which is now forecast to increase by 2.3 percent in 2011, to 537 terrawatthour (TWh) due to five new gas-fired power plants coming online this year. Some analysts are forecasting European gas demand would be around 7.5 percent lower in 2011 than in 2010, a faster annual rate drop than at the height of the international recession in 2009, due to weak demand and mild autumn weather. 2012 might show some recovery to reach 456 bcm (from estimates of 449 bcm for 2011) if the economic situation starts to improve. 54 11 US gas demand continues to be weak, with the EIA expecting that total natural gas consumption will grow by only 1.7 percent to 67.1 billion cubic feet per day (bcf/d) in 2011. Rising use of natural gas in the industrial and electric power sector in the US accounts for most of the increase in total US consumption in 2011 (with projected growth rates of 2 percent and 1.5 percent, respectively). Projected total US natural gas consumption is expected to increase slightly by 1.1 percent to 67.9 bcf/d (higher projections of residential and commercial consumption account for much of this change in the forecast). 55 LNG demand continues to increase in Asia, due to the ongoing situation in Japan and rising demand in other nations like China and Korea. China’s LNG imports rose 27 percent to 5.2 million tons in the first half of 2011 from a year earlier and reached a record over the summer of 2011. Petro- China has now started trial operations at its Jiangsu LNG terminal and China National Offshore Oil Corporation has stated that it might increase LNG imports by 16 percent via its Guangdong facility this year. India’s LNG imports increased 26 percent in the first half; with the country forecast to double its gas to up to 2016 (to around 400 million cubic meters a day) with domestic supply only expected to supply half of this forecast demand. 56 Observation While short-term demand in Europe generally has been weak this quarter, the outlook for gas demand remains strong over the next few years. Analysts are predicting that there will be high demand for new gas turbines, particularly from the United Kingdom, Germany and France. In the United Kingdom, around 14 GW of new turbine orders are expected to be placed as roughly 11 GW of aging plants will shut down by 2017. In Germany, gas is expected to play an increasingly important role due to the government’s decision to close down nuclear power plants in favor of more renewable energy supply. Due to the short-term gap in renewable energy supplies coming on stream, Germany will require short-term gas power capacity replacements. In France, the Fukushima nuclear situation is causing a re-evaluation of that country’s dependency on nuclear power, and if a left-wing government wins the 2012 French general election, it is likely that gas use in France will increase considerably also. 57 The short-term outlook for LNG is that the market will continue to tighten largely due to the situation in Japan. It is expected that globally there will be limited LNG capacity additions over 2012-2014, including the Pluto project in Australia and Angola LNG (with the second “wave” of significant LNG capacity only coming onstream toward the end of 2014). There is also expected to be demand for LNG imports from new markets such as Thailand, Vietnam, Singapore, Indonesia and Malaysia (with the latter also being LNG exporters, but Indonesia, for example, is allowing private companies to start importing gas due to local shortages). This is expected to have an impact on Indonesia’s net exports and might lead to tightening LNG supplies in Asia generally. 58 Refining Key trend—Global refinery crude estimates for the fourth quarter of 2011 have been revised lower for most regions due to shutdowns and seasonal maintenance in Europe, disruptions to refinery operations and unscheduled stoppages in Asia as well as seasonal maintenance in the United States. Global refinery crude runs averaged around 75.5 million b/d in the third quarter of 2011 with stronger US runs only partially offsetting lower than expected throughputs in Asia. Asia saw significant refinery outages and delays in starting up new capacity, which contributed a fall in crude runs of around 30,000 b/d. As a result of refining disruption, refining margins have showed some recovery this quarter (largely due to the outage at Shell’s 500,000 b/d Pulau Bukom refinery in Singapore, which tightened the market temporarily) but, generally, refining margins continue to be under pressure with September margins having shown a steep fall from August levels. 59
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