Editorial: A Buyer's Market [NGW Magazine]

From the gas buyer’s point of view, there has of late been a happy conjunction of circumstances conducive to LNG arriving in northwest Europe in relatively large quantities this winter. None of these conditions were within the control of any one entity; it just so happened that way. Dated Brent at about $60/barrel feeds through into an Asian term contract price of about $8/mn Btu, allowing for a generous 13% discount.

Having more sellers than buyers in Europe does the rest of the work, lowering delivered NW European LNG prices further; and they are still about twice the price needed for Gazprom’s gas to be able to make some profit in Europe while also yielding a margin to at least some LNG exporters.

It seems at first flush to be the long-awaited year of change: more production capacity upstream and more efficient price discovery and aggressive trading pare the sellers’ margins to a point where both sides of the market are happy-ish. Analysts have been predicting a glut – meaning a volume of supply too great for the market to absorb without an appreciable drop in prices – for some years; this drop always, in the event, tantalisingly retreating into the future.

Some analysts warned that much depended on major unknowns on the demand side and did not commit wholly to the glut idea. China and India in particular were unpredictable buyers. This was partly owing to doubts about the sincerity of politicians talking about the need for clean air and their ability to finance their ambitions given other social demands pressing on their time and budget. The glut might now finally be upon us, the regional arbitrages all but gone.

The steady arrivals of cargoes, combined with strong flows through pipelines from Norway and the European Union also compensate for any storage shortfall in the UK. NGW understands that the debate about whether to replace the Rough facility, and if so at whose expense, rumbles on; but for now the pressure on the UK government to act has eased. And there is much more LNG to come in the coming years: Qatar, the second waves of US and Russian LNG, and later Mozambique, allowing further scope for relaxing one’s alertness.

Some of that new gas will be needed to backfill declining production in the UK for example and as Norway passes its peak. Last year the Netherlands became a net gas importer for the first time and this trend will continue, as the government ordered permanent and steeper cuts at Groningen. And new markets will also need gas. To replace coal in power generation in Asia for example; or to meet new demand in the marine and onshore heavy transport sector.

On the other hand, and lowish oil prices notwithstanding, new gas always seems to be found to meet new markets, as Total’s Bullfrog find offshore South Africa typifies, coming hot on the heels of its Glengorm discovery. And Egypt’s rampant gas output growth and its hub ambitions promise further exploration activity and regional LNG marketing, as NGW also looks at in this issue.  

But as investment prospectuses are careful to point out, past performance is no guarantee of future returns.

And there are reasons why the UK in particular should be wary of complacency, not least the possible disengagement from the single energy market and the risk of higher energy prices for a distressed buyer, if Brexit becomes a fact and the terms of trade thereafter are as unfavourable as they might be.

Assuming such finds as Glengorm will be infrequent and the continental shelf’s output tapers off, one obvious solution is shale gas, a rich UK resource that lies under largely empty countryside. If the government decides to ease up on the traffic light system that has shackled the stop-go hydraulic fracturing, then the outlook becomes a lot rosier. There is a precedent for that: hydraulic fracturing with higher Richter scale readings is acceptable in geothermal drilling, which goes to similar depths as gas production but in this case appears to have been given the green light permanently.

Cuadrilla, Ineos and Igas are among those sitting on very encouraging UK energy resources that can be brought to market – and with a fraction of the carbon footprint of imported gas – if the technology is allowed to work. Once brought to the surface, practically grid-ready, it could be put to myriad useful economic purposes.

Nothing is perfect after all and some pragmatism is necessary. Liquefying, storing and shipping natural gas is a very carbon-intensive process. Pipelines also pose serious environmental problems: the ageing system running from Russia into and through Ukraine, for example, would benefit from an overhaul if Kiev could only secure the money. Its pipelines have also been drawn into an acrimonious, geopolitical argument making neutral discussion about their future use and value difficult.

Resolving this state of affairs has lost some of its urgency as Europe is for now enjoying an affordable supply of gas.

But a government still needs to take a long-term view of its country’s energy security, part of which job must be to consider the desirability of having as much as possible of one’s own supplies of heating fuel where one can get at them, free from transit and other kinds of risk. As all the forecasts show, an energy transition without gas is not going to work: energy supplies will either be too expensive or too interruptible to allow an advanced manufacturing economy – especially one in northwest Europe -- to prosper.