We are Entering a Period of More Gas-on-Gas Competition

Angelina LaRose from the EIA moderated the main session on the global natural gas outlook at the recent 2013 EIA Energy Conference. Attending the session were three experts: Jason Bordoff, director of the Columbia University Center on Global Energy Policy; Ira Joseph, executive director of the PIRA energy group; and Wolfgang Moehler, associate director of IHS CERA. The three discussed the potential of shale gas to reshape the global natural gas market, with a particular emphasis on thes weaknesses and threats of the conventional gas market.

Wolfgang Moehler started his speech with an overview of the LNG business in the global market, locating the competition between the liquefaction and pipeline markets. His remarks on Europe’s LNG demands focused on how the EU’s LNG demand became squeezed because of economic problems and the growing role nuclear plays in energy production capacities. Moehler did not mention any expectation for new LNG demand growth in the post-Fukushima era for Europe. While he did not mention any important new expectations for European demand, he drew attention to non-OECD Asian countries to India, MENA, China, Korea, and Japan’s energy demand growth.  Moehler expects Japan’s demand for natural gas shows an important increasing trend, due to the shutdown of two nuclear power plants after the Fukushima disaster. He stressed also that there is no outlook of incremental demand for LNG resources from Asian member states of the OECD.

From the supply side, the production growth momentum of the US and Canada is causing new preparations due to an anticipated reshaping of the market, as shown by developing liquefaction terminals in the US and pipelines in Canada. Qatar, Australia, Russia, and East Africa all offer a growing and diversifying potential for LNG supply.  Moehler does not expect Japan’s investment in shale gas to reach export levels, however, because of a high vulnerability in supply-demand balance.  Meanwhile, the North African LNG output that has dominated the market over the last 10 years might lose its impact if actors in that region don’t anticipate new construction. 

Ira Joseph from PIRA Energy Group delivered a speech on Europe's unique role in the emerging global gas market. Joseph noted key characteristics of the European market include it being highly weather-sensitive and having very limited storage capacity. This seasonal gas production gives immense market power to gas producers.  As soon as North American gas export towards Europe begins, a price change will occur in Europe, and the price gap between the EU and the US will be markedly reduced. He also recommended Europe to prepare for this change, by improving its gas storage and internal pipeline facilities. Under this trend, the southern gas corridor projects might also lose their strategic importance for Europe over the coming years. 

Jason Bordoff from the Columbia University Center on Global Energy Policy complemented Joseph and Bordoff’s expectations for a US shale gas boom.  His focused with on the Pacific Rim impact in regards to pricing mechanisms for Europe and Asia. The traditional oil indexation trend is today facing a change as gas-to-gas competition between conventional gas and unconventional gas (mainly shale gas) takes a larger part of the market.

Among his price indexation fluctuation examples the most flagrant was a tremendous change in Asia. The pipeline’s place in the market compared to LNG was 95% in 2005. Five years later, the LNG trade jumped 10 points and the pipelines’ share in Asian natural gas market became only 85%.  Even though today the oil linkage conventional gas market still dominates the global gas market, the penetration of gas-to-gas competition that could in coming years dominate the market would ultimately redefine price settling. In this frame, the US shale boom would drastically affect the Russian pipeline market.

Bordoff also noted a economic, geostrategic, and environmental forecast in regards to the short-term impact of the US shale boom.  The economical effect would be a rise in LNG export’s global trend, which could displace the axes and reduce coal exports. The geostrategic effect would be reducing Russian gas pipelines’ strategic role and decreasing Qatar and Australia’s control in the LNG market.  Considering the impact of lower gas prices, Bordoff also raised the question of a possible substitution of gas for coal, for renewable and nuclear.  Even though gas tends to lower GHG emissions, there is still a need for climate policy. “Gas makes policies cheaper, but it doesn’t solve the climate issue,” concluded Bordoff.

Finally, experts made short remarks on threats to the LNG market. Prices still remain high and legal uncertainties exist, though these trends are expected to diminish in the near future.   

Olgu Okumuş is an affiliated lecturer in energy diplomacy at Sciences Po, Paris and director of strategy development at LEO Advisors. She is also a PhD candidate at Sciences Po, Paris, where her research focuses on Turkey’s energy transit policy.

She can be reached at olgu.okumus@leoadvisors.com