A tale of two gas industries

The new realities of the natural gas market can be seen starkly in the current difference in natural gas pricing on either side of the Atlantic. In the United States, the benchmark Henry Hub gas price has dropped below $3.50/MMBtu. While it is close to, albeit just a shade above last year’s record low, these prices are still some of the lowest seen in North America for many years. But even more surprising is the outlook as winter approaches. Storage is over 95% full, and US gas futures have dropped 40% this year. You can now buy US gas for 2011 on the New York Mercantile Exchange for an average of $4.10/MMBtu, including winter peaks as well as the current summer low.
This contrasts starkly with the received wisdom of just a few years ago, when US gas prices were looking like staying above $10/MMBtu a few years ago. But the promised US shortage of natural gas simply didn’t materialise. LNG cargoes have been left chasing buyers all over the world. Just this week Norway had to sell a ship full of LNG to South Korea, for want of anywhere closer. There has been a recession, it’s certainly true, and demand has fallen in most major markets. But that doesn’t seem to have affected the oil price very much. Brent Crude for December delivery is trading at $82/bbl.
Meanwhile, in Europe, natural gas prices at the UK National Balancing Point, Europe’s closest equivalent to a trading nexus like the Henry Hub in the US, are around $7.50/MMBtu. The UK still has plenty of North Sea gas and receives piped gas from Norway and some LNG cargoes to make up the difference, but the situation grows more serious the further east you go, into the arms of Gazprom and its near-monopoly on supply to some countries. Under increasing economic pressure, Ukraine increased gas prices by 35% in August, to $8.20/MMBtu. The price is unlikely to come down during the forthcoming winter.
The difference between the European and North American gas markets is a startling one, and it is a gap which has opened up only in the past couple of years. People are now actively talking about taking advantage of arbitrage – the US could soon actually be exporting LNG cargoes to Europe! And the difference has been made by US unconventional gas supplies, especially shale gas. The huge Marcellus Shale stretches through Pennsylvania and into New York state; only a stone’s throw from the major cities of the US east coast. It is far easier to export gas from Pennsylvania to New York than to bring it by ship from Qatar.
At the moment it is still far from clear how this revolution in gas production will play out. Critics are keen to point to water requirements for fracturing gas-bearing rocks, and the potential for contamination of aquifers in some parts of the world which are short of potable water. But so far the ecological doomsday scenarios do not seem to have played out in the US, a country where local environmental issues can quickly stop a project in its tracks. Consequently, interest has been quickly gathering in other countries. India is now moving ahead towards shale gas production, and China, perpetually short of energy, especially clean energy, as our feature in this issue discusses, has rapidly moved to its first auction of shale gas licenses. In Europe, some countries, the UK in particular, remain very wary of shale, but Poland hopes to break its dependence on Russian gas and is actively developing its own shales – first gas is expected to be pumped next spring.
Gazprom has been doing its best to talk down shale - as well it might, because there is the clear potential for something as radical as the transformation in the US gas market to happen elsewhere. Middle Eastern LNG producers must also be considering the wisdom of their investments, and whether their abundant gas might be more profitably used in other downstream ventures. This month also marks the commissioning of Shell’s massive 140,000 bbl/day Pearl GTL project in Qatar. Cheap gas and expensive oil surely make a process that can convert one into the other look much more tempting?