The Golden Age of Gas Revisited
Seven years ago, the International Energy Agency (IEA) issued a report on the prospects of natural gas titled, Are We Entering the Golden Age of Gas? The answer appears to be not yet, but the growth in supply and trade, and moves to de-link the price of gas from the price of oil could propel the cleanest-burning hydrocarbon forward as the fuel to the future.
Gas supplies are plentiful and exports are surging. Most of this is due to the growth of shale in the US, which has led the country to become a major exporter of liquefied natural gas (LNG) along with Australia. Just as the US shale revolution disrupted the global oil market, it is reshaping the world’s gas trade. The US produced 71.1 Bcf/d of gas in 2017, a 1% increase over the previous year and near its all-time high. US output is now 20% of global production. Russia, the world’s second-largest gas producer, reached output of 61.5 Bcf/d last year. US gas exports, in the form of LNG and mostly to Asia, were 1.7 Bcf/d in 2017, while pipeline exports totaled 6.3 Bcf/d, mostly to Mexico.
What has hampered the international growth of gas in the past is its lack of tradability and its relation to a global price marker. Gas has long been linked to oil prices—which have shown sharp volatility the past decade—and tied to long-term contracts, both of which contain risks for both buyers and sellers. But the increase of LNG exports has opened the door to more international trade and discussion of establishing global price markers. Companies are increasingly using US Henry Hub prices as a reference point for international gas trade. And CME Group and Cheniere Energy are developing an LNG futures contract linked to physical delivery at Cheniere’s Sabine Pass, Texas terminal.
Before now, gas has been traded regionally or through long-term contracts based on the price of oil. US gas was priced off Henry Hub but trade in Europe used a regional trading hub and Asia, one of the largest importers of gas, preferred contracts linked to crude. De-linking the price of gas from oil would protect buyers and sellers from price movements in oil that do not reflect gas market fundamentals. That stability could give rise to more investment in gas production and infrastructure.
Gas proponents argue that gas should be the bridge to the future, as the world transitions from one based heavily on oil to a global energy mix that includes more alternative energy sources. China is relying more on gas as it weans itself from heavy coal use.
Major gas producing countries—including Iraq, Russia, Qatar, and Venezuela—have discussed forming a gas-type OPEC organization to create market stability. This Gas Exporting Countries Forum’s goal is to increase the share of gas in the global energy supply. These producers so far appear reluctant to embrace the free-market approach that growth in LNG is bringing about. But, as the IEA recently pointed out, half of the global consumption increase in gas in the medium term will come from emerging economies in Asia. And they stand to benefit most from market-based natural gas pricing.
The Golden Age of Gas Revisited
John Donnelly, JPT Editor
01 September 2018
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