Editorial: Back to the drawing-board [NGW Magazine]

About the only positive thing one can say about today’s market is that the extremely low prices globally will reawaken demand for gas. When oil bounces back, gas will still look cheap. But when that demand will arrive and how much gas it will suck up, and for how long, are all imponderables.

That has always been the case, one might argue: there has never been a predictable future when it comes to the supply and demand of a commodity and the price at which the two balance. The unforeseen often happens, especially with something whose demand is as sensitive to the political and ambient temperature as gas.

Anyone who has attended a major European or US gas conference might regret not keeping a sample copy of one or two of those presentations by international oil companies from say 2008 or 2012.

The forecasts of falling indigenous supply and rising demand over the coming five or more years were a common feature, justifying infrastructure investment to bring the two together at an affordable price. What is different this time, the argument goes, is only a matter of degree – but if that is the case, then what a degree.

One might be on surer ground arguing that this is an entirely new set of circumstances, because this is not a matter of second-guessing Saudi Arabia’s intentions, or the price Moscow needs to balance the books – often a fluid concept – or even what might Brussels’ relations with third countries be like in the future. Nor are there likely to be any new discoveries equivalent to the shale gale, such as commercially viable breakthroughs in nuclear fission, to speculate about.

This time the threat is microscopic, unpredictable, not fully understood and perhaps not the last of its kind. It is forcing governments to act to protect the health of their populations, for which there is no template. They are damned if they act both too soon and too late. This time the oil industry is having to react to a massive demand disruption while its own workforce might itself be unavailable at full strength. In that context, it seems Russia and Saudi Arabia in their oil production cut talks had lost sight of the wood for the trees.

So this is a tricky time for major pipeline gas exporters. Flexible gas normally comes at a premium in winter; now flexibility has a value in summer as well with European prices where they are. They will also have to weigh up the risk of missing out on high prices this coming winter and the cost of keeping some of the equipment running to no avail.

Russia’s pivot to Asia – its escape route from what it sees as the over-regulated, under-valued European gas market – could become vital, particularly for Gazprom, fettered by pipelines. Demand for energy of all kinds in the eastern hemisphere seems likely to revive faster and grow further than it is in the west.

There are political considerations too. European leaders are generally not interested in strengthening ties with Moscow except to make a political point at home; and besides the European Union has set its sights on renewable gas, at best. Methane, unless married with carbon capture and storage or use, is not an option in today’s carbon-conscious world, although its price means it might have a stay of execution for the time being.

Nor is it much easier for the LNG sellers either: whichever port the tanker ends up in, the margin will be thin or negative. The trade opportunities had been growing leaner over the past year or so but have now vanished. As NGW has argued, the liberal markets that trading houses wanted imply an end to the free lunches the incumbents enjoyed. But the LNG supplier with a downstream market – such as a power customer or utility – always has optionality. Why deliver LNG across the world if it can instead deliver to its customer cheap power from the grid?

And for liquefaction plant operators who have no off-taker to pay them the flat fee, they have to decide whether to shut in production and thereby make life a little easier for the competition; or keep the plant running and at least receive some cash.

North America’s position is the most interesting, as jostling amongst the majors are the hundreds of small producers who may fold in the coming months. Rig counts are down, demand for new evacuation capacity is looking bearish and only those with the deepest pockets can idle teams until better times.

Distressed acreage sales are a likely consequence, but more likely to resemble the business model of speculative builders adding to their bank on the cheap, than investors hungry to start production. The LNG terminals in the Gulf awaiting sanction look even less likely than they did last year at the start of the recession. New capacity might be committed but possibly under new ownership, with fewer operators who might possibly co-ordinate their activities more than is acceptable at present for the common good.

And what about the longer term? Will the crisis pass, leaving no trace; or will people now find that much of what seemed part and parcel of ordinary life is, in fact, discretionary and not without its risks? Daily commuting on often busy transport; crowded airports and long-haul flights to busy destinations – these now seem remote, even hazardous adventures. Collectively they pose a very big question-mark over demand, while politics will influence supply and demand more than ever.