150 Years Of Gas (And A Bright Future)
Numerous speakers at the World Gas Conference in Paris, France addressed various aspects of the global market for natural gas.
Laurent Vivier, Senior Vice President, Strategy, Markets and LNG, TOTAL, said its tough to speak about gas demand in the next 20 years, when forecasts have been consistently wrong in the last 5 years, in terms of demand and resources.
In 2009, for example, he said Total hadn't see the prospects for unconventional gas. “And now unconventional gas has nearly doubled,” he remarked. “The life expectancy of gas is now about 150 years of available production at the current rate, which allows us now to see a bright future for gas – it wasn't the case just a few years ago.”
The change in oil prices, he added, has had a dramatic effect on gas, as well as future gas demand.
Regarding North America, Europe and Asia, he showed a comparison of gas prices in those places when oil is priced at $60/barrel and $90/barrel.
Of North America, he said that Total believes there are sufficient resources to meet growing demand of around 2%/year. “We don't think this will affect, substantially, the price of Henry Hub, and I think there is enough, not only to meet domestic demand, but those coming export products,” explained Mr. Vivier.
Meanwhile, he said, demand in Asia is booming, but according to a recent Total study, the efficiency of the industry in China has a significant effect, despite appearing to be very small. He offered, “If you change your assumption by just 1% until 2030 it has as much impact on the gas demand as not starting nuclear reactors in Japan – 1%. So if you can imagine that the efficiency of the industrial sector in China will be 56% instead of 57%, it's 10 BCM of gas, so it's pretty substantial and we have to be careful with the numbers we show.”
He noted the increasing demand in Asia, around 4.4%/year until 2030, emanating from a variety of sectors. Mr. Vivier explained: “It will be met by resources of supply that we all know: domestic production, mostly in China; imports by international pipe gas, from Russia or Central Asia; and LNG.”
According to his graph, the future of LNG is still in Asia, where the demand will be because it is needed to balance gas demand in Asia in the long-run.
Europe, according to him, is “middle of the road” because of the uncertainties of gas demand there, factors like environmental regulation or CO2 prices. He observed, “We don't see a substantial increase in the LNG demand in Europe by 2020; we see that gas demand will be roughly stable and only increasing after 2020, and a decrease of domestic production, with continued supply from the traditional suppliers.
“That will require some extra LNG,” he added, “but only in the period 2020-25, so basically Europe being back on the LNG scene and being able to pull new projects only after 2020.”
Meanwhile, he said in North America the shale gas revolution will supply most of the increase in demand in the US. “In the US, everyone thinks that because of cheap gas that you have a lot of gas in power generation – it's not only because of this,” he explained, saying there are many elements contributing to the displacement of coal, for example state regulations regarding emissions from power plants.
He recalled that every year for the last 5 years, Total has been predicting a rebound in European gas, but now it may have reached a low point and could rebound. Mr. Vivier commented, “Gas demand now is sustained in Europe because of very high efficiency CHPs; because it is still in countries which don't have many alternatives for producing power don't have the opportunity to switch to coal. So the demand that you have today is pretty resilient.”
That said, he reports that Total sees a demand increase for Europe in the future, as well as an increase in the carbon price. “New regulations will kill some inefficient coal plants and we will see a rebound of gas demand in Europe, post 2020, at some point attracting some new LNG flows.”
In Asia, he said there will be an increase in LNG demand by over 50%. As to where that will come from, he displayed a chart showing those volumes already secured by oil formulas and, in red, what can be divined from Henry Hub-related formulas – those keen to secure volumes in the US, or through contracts which are Henry Hub-related.
He stated, “Even if you put all this and imagine that all Henry Hub is going to be diverted towards Asia, you still need some new projects to meet this demand, and the question becomes 'where will they come from?'”
Taking into consideration other studies Total has done worldwide, the total amounts to an LNG market of around 215 million tons/year, which is expected to double by 2030.
“In order to face the incremental demand, and the natural decline of the fields, you need new projects to be sanctioned,” explained Mr. Vivier, who showed a world map of existing projects, those under construction, under study, existing regas terminals and those under construction.
“You need all the rest, what we call potential projects, to be built and launched, reaching final investment decision (FID) by 2013 if you want to meet 2030 demand,” he stated.
According to him, at $12-14 or above, at current costs from contractors, some projects may not be developed. “Given the impact of low crude prices, they will not be launched at current levels – it does not make sense.”
This means, said Mr. Vivier, that a new contractual framework is needed between buyers and sellers - more reasonable fiscal terms, more reasonable costs – to find a way to launch those projects which are needed to meet future demand.
Indeed, Europe may not see a lot of growth going forward, observes Shankari Srinivasan, Vice President, Power, Gas, Coal Renewables – EMEA, IHS, but her organization sees Europe as the fulcrum of the global gas system and will play an increasing role in being the pivot point and the global gas balancer.
Since Fukushima, she explained, the market has focused on selling to Asia, “but now we think the market focus could be moving much more westwards. With China slowing there is more emphasis turning to India and perhaps even the Middle East.”
But, she said, IHS expects the focus to increasingly be back on Europe. She commented, “Europe is ready, has substantial amounts of regas capacity – significant capacity that could swing up or down in summer versus winter, as well as an incredibly amount of pipeline capacity, and so much of it depreciated already.”
Demand weakness, she noted, persists. The global gas market will move from a tight to a loose market in the next 2-3 years, opines Ms. Srinivasan. “In many areas, production growth is expected to exceed demand growth and also including markets, therefore we believe there may be a significant amount of additional deliveries – flexible deliveries – set to grow in Europe,” she explained.
She recalled the cycles of the LNG market, like in 2011 when the pendulum swung towards tight supply in the wake of the Fukushima nuclear disaster in Japan. “Now we would say the pendulum is starting to swing back and will be really in full force in 2016 back to ample supply.”
While market growth may feel weak to many players, she said supply growth is just at the beginning. Ms. Srinivasan presented a graph of how supply is set to grow. “From 2015 to 2020 we see an additional 120 million tons of LNG capacity being added, so really a very substantial growth in the market.”
Regarding how that gas is contracted – fixed destination versus flexible destination – she observes that while a lot is contracted, not much is contracted in an “anchor market.”
What about Europe makes it a “global balancer?” Ms. Srinivasan explained Europe is still a very large gas market – over 500 BCM, very liquid traded markets, good rules for 3rd party access to gas infrastructure, a substantial amount of underutilized gas capacity, volume flexibility for pipeline contracts, and a large degree of price-responsive demand, particularly in the power sector.
“So, clearly a market that could play this balancing role on quite a flexible basis.”
According to her diagram, the EU 28's import gap to 2030 has gone down 133 BCM – equivalent to 25% - since 2010, due to a forecast of declining demand and a slight increase in supply.
She offers, “As we all know, indigenous production is in decline in Europe, although there is a potential for developing shale in terms of geological reserves, we are not too optimistic about the actual development of it – so the import gap is decreasing, despite a pretty flat picture for demand."
The competition for the market, she explained, is between Russia and LNG. “Here I think we'd like to postulate that maybe there's a change that could be coming in Russian strategy and approach to the market.”
Should Russia, then, go for price maximization or market share growth? Ms. Srinivasan said: “We've observed that over the years the choice has generally been for price maximization and, more recently, taking over the role that the Dutch have played of being an accommodating supplier to the market, so at times we see much less Russian flow when other pipeline supplies have come onstream, and then we see more when there's been some interruptions as well.”
She contended the question on gas going forward is, how will the gas market respond to shale gas?
“Is this now the new Russian supply choice? That Russia may in fact be looking at defending market share, because there may otherwise be a permanent loss of marketshare?” she asked.
As old infrastructure is replaced by more efficient infrastrcture, she pondered whether flat demand for Russian gas may actually be on the decline. Meanwhile, she observed that LNG contracts continue to be signed. “The prospective outlook to 2020 is firm, that we will see an additional 50-60 million tons from North America of LNG entering the market.”
The global gas market, she concluded, is moving from an era of tightness to one of oversupply, and the response of Europe's traditional pipeline suppliers will be the major driver of gas prices in the medium term.
She added, “Watch for a change in these pipeline suppliers and the fact that perhaps this permanent loss of demand may be what changes the approach going forward.”
Charles Ebinger, Senior Fellow, Energy Security Initiative, Foreign Policy at The Brookings Institution, spoke about North American natural gas exports.
Referring to US restrictions on selling LNG to certain countries, particularly those with whom the US does not have a free trade agreement, he explained that in 2014 the Department of Energy had revised the process, which includes a “public interest determination” and, following the receiving of an environmental permit, projects are moving along fairly quickly.
Canada, he said, used to be one of the top US suppliers of natural gas. “And, of course, the discovery of so much shale gas in the US has devastated the Canadian gas industry, because it has lost a huge portion of its market share in the US.”
This, he said, has led the Canadian government to look at developing LNG projects, particularly in British Columbia, where there are 19 projects before the BC government. “Because of very strong opposition from native groups and environmental groups, none of these projects in reality is moving forward,” he reported. “We have a very negative view of how successful Canada will be exporting LNG in any reasonable time horizon.”
According to Mr. Ebinger, the US has five projects that are approved, totalling around 10.6 BCF. The first project from Cheniere will come into the market in early 2016, he said.
He explained that all existing and future projects have been predicated on: 1) spot prices and Henry Hub remaining low (but they are projected to rise gradually); 2) that prices in Europe and Asia will remain high (but spot prices have tumbled), and 3) that low prices will stimulate steady demand growth, “but actually we have found so much shale gas that we are having price pressure. And even with the change in oil prices, we still see gas production remaining fairly robust, although that of course could change if these prices remain for any length of time.”
Things that could influence how the US natural gas production fits in to the world market, he explained, are the pace of China's imports from Russia and Central Asia; the degree and price at which other countries potentially will actually develop their shale reserves; interfuel competition from other sources – coal looks to remain competitive on the Asian power market; whether Russia be able to send LNG to Asia; the speed and degree Japan will reengage its nuclear resources; and the ability to make LNG a transport fuel.
“And, finally, are we going to have a carbon price or not?” he added.
Mr. Ebinger remarked on the very recent announcement by the environmental community that gas must be phased out of the California market. “This will be the next green environmental battle in the US, and of course oftentimes what happens in California is a harbinger of what happens in the broader nation down the road,” he explained.
Brownfield projects, he said, are favorable in the US, due to relatively low level capital costs as well as Henry Hub pricing and flexible contracts that are allowing a lot of LNG not to have destination clauses. “We also have capacity costs that are unfixed and can rise or fall with labor demand; oil prices play a significant role as we have a lot of associated gas; and we also wonder about the absorptive capacity of Europe,” he offered.
If Canadian projects do go forward, Mr. Ebinger opined that they may miss the curve for demand in the Asian market. “So we think the Canadian situation remains very problematic – there's strong possibilities for enhanced trade, which is already occurring between the United States and Mexico. We already are exporting nearly 4 BCF to Mexico via pipeline,” he reported.
Though no outright ban exists, he said that US regulations are still fairly convoluted and cumbersome.
“The Cheniere project has already spent $100 million in the regulatory process,” he explained, “but on balance we only expect 2-3 LNG projects in the market by 2020 and 5-6 by 2025 – keep in mind that we have over 20 before the Federal Regulatory Authorities.”
He reiterated that Canada is not likely to have a project by the end of the decade. “And while North American LNG will diversify global supply, it will not be the cure-all that many people have argued it might be,” concluded Charles Ebinger.
-Drew Leifheit