Developing the Gas Market - NGW Magazine

This article is featured in NGW Magazine Volume 2, Issue 14

While the news has not been as universally positive for the past few years as the gas industry had good reason to expect it to be, the overall picture for the cleanest fossil fuel is slowly beginning to look much brighter. Gas liquefaction and LNG transportation methods, gas to power projects (and vice-versa) and bunkering are all driving interest in gas, now benefiting from the tailwind of over-supply and the shifting of power from seller to buyer.

The EU in particular still has problems with gas, from the well head to the burner tip – and tainted too by the fact that so much comes from Russia. Motivated lobby groups have managed to tar gas with the same brush as coal and oil: dangerous and dirty. Partly as a consequence of their efforts to stress the precautionary principle, hydraulic fracturing appears to be out of bounds in Ireland, France, Germany and elsewhere, despite the resultant continuing need to export cash to Moscow. This malaise has even spread to shale gas rich Australia, tying the government up in knots as it tries to balance shrinking gas supply and rising demand. 

And since carbon dioxide, from any source, is the enemy, building power plants that will last for decades means prolonging the problem, instead of somehow finding other, zero carbon fuels to generate electricity as Europe’s environmental groups would prefer. Using renewables is fine up to a point, but if the much-vaunted rise of the electric vehicle is to occur, such as in France where they are to be the norm in just 13 years, then there will have to be adequate firm power generation, on call to recharge car batteries all the time – as well as a way for governments to continue to balance their books dependably without resorting to hiking taxes at the petrol pump. That could create demand for gas. 

Despite all the energy revolution, the term ‘renewables’ now extend credibly to biomass, with a number of companies seeking to develop carbon capture and storage projects and hydrogen injection schemes to reduce their carbon footprints. Belgian grid operator Elia is thinking ahead to 2050 and gas still features on its radar.

Despite the lower regulatory threshold in the famously litigious US that should make accidents more likely, shale gas production has been allowed to transform the country’s economy, benefiting landowners and underpinning a massive chain of investments in petrochemical and liquefaction projects, as well as power generation plants, driving out coal in the process, and forcing a major reappraisal of gas as a commodity. The tipping point has not yet been reached when a project is developed first and the output sold afterwards: that remains the oil producer’s advantage. But that point is being reached, as the BP-Coral LNG deal shows. All the LNG has gone to a marketer who will take the price and volume risk and trade it. Sellers have had to adapt to the new way of doing business, given the perception that the market is long and will remain so for a long time to come – with the caveat that sudden supply shocks are always a possibility and the present situation in the Gulf makes them more likely. 

Floating liquefaction projects have their advantages in an oversupplied market, the seller needing to pre-sell a smaller volume in order to get the scheme going, and the low cost per ton of annual capacity allowing them to compete with much bigger projects in North America that are further from Europe. The cost of feedgas is also fixed, unlike Henry Hub-based projects. 

Buyers enter negotiations knowing that they too are under fire, from politicians seeking to introduce competition and in the process strip some of the fat out of the system. A select group of producers can no longer pass on the upstream risk to the buyers, who have a captive audience; other companies with freely disposable LNG will be looking to develop downstream markets of their own, courting power plants, industrial users and utilities happy to take the market price.

And sellers have now a new force to reckon with: the Japanese antimonopoly agency JFTC has rumbled their game, meaning that their biggest single market no longer has to accept all the standard trading terms, which could drive more gas into the spot market, in turn creating a liquid index that everyone can trust as independent and representative of the market. 

These new markets for gas are slowly coming into being. A five-year LNG bunkering deal done between Total and Brittany Ferries – not due to take effect for another couple of years – has been priced off natural gas; not, as would have been normal, marine gas oil – a commodity they have been buying for decades. 

This shows that the vessel operator now has the confidence that it can hedge its gas exposure.  

As well as new pricing, there is new delivery technology. Tanks capable of transporting LNG can bypass the conventional regasification methods, in this case being loaded on to the ferry. This has other applications: smallish quantities can be shipped further distances and stored for longer: 110 days is the new target to beat. This means that LNG is no longer part of the pipeline gas network once its sea voyage is over: it remains a separate fuel, and may be trucked or shipped onwards, almost right up to the point of combustion, replacing small pipelines and bringing more of the world’s population within reach of cleaner fuel – a key objective of policy-makers everywhere. 

NGW

This article is featured in NGW Magazine Volume 2, Issue 14