Articles from 2013
UK shale and world prices
- Written by Nick Grealy
- Published: 12 September 2013
The question of the impact of shale gas on UK prices opens up another subject area of no less complexity and certainly one that long depended on popular conventional wisdom that could be distilled into a couple of sentences.
The question is not whether UK prices will depend on international wholesale prices. Doug Parr of Greenpeace and the Committee on Climate Change’s David Kennedy who shared the stage with Ed Davey on Monday at the Royal Society, are absolutely right to point that out. The question is which way international wholesale prices are moving. The trend is clear that the US shale revolution is already impacting world prices and will only continue to do so going forward.
The UK energy consultant model has been that international LNG prices, which set the margin price for gas mean an inevitable high Asian demand will compete with European demand for scarce resources. The reality is that just as the rest of the commodity cycle is maturing and becoming relatively stable lately, natural gas on world markets is on the edge of a transformation over the next couple of years. Doug and David Kennedy, who share a notoriously parochial obsession with the UK market, miss how shale changes everything everywhere.
It comes down, as it always must, to supply and demand and the story needs a knowledge of energy and geography beyond many. It’s so complex that it needs a two or even three parter. It starts like this:
- This winter, and perhaps next is the last chance for energy traders to play the volatility card. Cold winter reality (or not) and unforeseen Mid East problems underpin the fear factor that volatility is built upon. If we get excessively cold this winter, things in Europe and UK may get hairy both on price and supply. Who knows? The Atlantic Hurricane Season was meant to be busy yet the first one only developed yesterday and may not last the week, so believing weather forecasts of longer than ten days is essentially as accurate as reading the entrails of a goat but with far greater computing power. But.....
- Starting 2015, massive new conventional LNG supplies are literally over the horizon. The next big event is how Australia is going to exceed Qatar in supply from 2015 on. Recent tightness in tanker capacity will also soon evaporate, which will mean smaller suppliers will be able to find empty transport capacity. There are any number of distressed sellers on the world markets, who can read the shale writing on the wall. They want to sell gas on the market prices today. I won’t mention any names, but a good third of today’s LNG exporters are of doubtful character. The kleptocrats in charge are either going to spend anything they can get today to shore up their regimes, or equally likely simply want to park a few more tens of millions in Switzerland. (If you want to see where the richest black and brown people on the planet are, visit Lausanne and Montreux.) They won’t have this option in a few years, not only due to shale, but due to another emerging monster LNG supply source centered on Mozambique and Tanzania. The emergence of East Mediterranean LNG exports, far smaller than Australia but closer to markets will also start concentrating minds. So, even without a whisper of actual ex North American shale, prices are set for a long term boring future of stability
- Thirdly, as noted last year, the LNG consuming countries are happy to go on a buyer’s strike. Led by Japan, but starting to include India and even the EU this year’s LNG buyers conference in Tokyo this week showed a game of poker between consumers and those left holding the bill for big LNG projects. If Asian buyers aren't going to put up with high LNG prices, why should the UK worry about the alleged volatility? The reality is that the CCC and Greenpeace model depends, as it always has, on the now outdated view that gas prices would inevitably move up and thus make green alternatives either more attractive or slightly less uneconomic depending.
The tension between LNG producers and their Asian customers continues to rise, with Japan’s Economy, Trade and Industry minister, Toshimitsu Motegi, telling a conference in Tokyo today that Japan would work with other customer nations to reduce prices and announcing that Japan would work with India to form a multilateral buyers group.
Japan and India plan to ask South Korea and Singapore to join a proposed LNG ‘’study group’’ of customer nations. The producers want to maintain long-term contract-based pricing linked to the oil price because of the scale of the investment required in LNG projects, and have warned that moving towards spot pricing could undermine the energy security of Asian customers.
At the same conference, the chief executive of Freeport LNG, which is awaiting final approval from the US Energy Regulatory Commission to proceed with a two-train (and potentially three-train) export LNG facility in Texas, said contracts linked to the US Henry Hub domestic gas pricing benchmark would revolutionise the Japanese market.
It’s getting complex here in that even the recent Chinese Russian deal, which continues to agree on everything except the price, was affected by the US shale elephant in the room:
Li Jianmin, a researcher at the Chinese Academy of Social Sciences' Institute of Russian, East European and Central Asian Studies, said the signing of the agreement is strategically important for both countries.
"The framework agreement can be regarded as a breakthrough of the long-lasting negotiations over 10 years," Li said.
"With the eastern pipeline, China can get more diversified sources for gas imports, which will further support China's energy security," Li said. "Russia, on the other hand, is getting a very large energy market with great potential, which is very important for its economy."
Li said the shale gas revolution initiated by the US has greatly changed the global energy market and had an impact on traditional energy exporting countries, especially Russia.
"Russia might have made a compromise on the price since it is now more eager to guarantee its energy exports."
World energy pricing is becoming not the old board game of Monopoly that we have seen in Europe for years, with the four big players of Russia, Norway, Netherlands and Algeria but the table being overturned by a new game, much closer to my childhood favourite: Risk.
But this will be a multi polar world, not one of world domination. Which is where the next phase, of North American LNG exports come in. More on that next time.