Gas Markets Globalization Slowed Down by US Shale Revolution
Energy markets are often associated with the word ‘global’ given the international scope of IOCs, while the concept of globalized gas markets is a fresh intellectual abstraction. Until a few years ago, global gas markets would have been just vague and flimsy forecasts. But things are changing.
Globalization is a process of increasing integration due to two main factors: transportation and knowledge. Containerization and Internet have indeed been terribly intertwined with the increasing interdependence of markets and countries in the last three decades.
A similar trend in the gas markets has sparked the attention of two scholars. Manfred Hafner, Professor at the Johns Hopkins University and at SciencesPo, and Simone Tagliapetra, Researcher at the Energy Programme of the Fondazione Eni Enrico Mattei, wrote “The Globalization of Natural Gas Markets. New Challenges and Opportunities for Europe.”
What is interesting in their work is the ability to sketch significant similarities and differences between the general globalization and the globalization of gas markets.
WHAT’S SIMILAR? WHAT’S DIFFERENT?
According to Hafner and Tagliapietra, Liquefied Natural Gas is the success registered by the global gas industry that redesigned the natural gas dynamics, pushing gas markets toward a greater integration.
‘The growth in LNG trade is forging linkages between the key regional gas hotspots, paving the way for the globalization of world's gas markets. A key feature is represented by the share of gas traded internationally via LNG, which has surged from 30% in 2008 to 42% in 2012. This expansion of LNG trade has encouraged greater integration of regional gas markets, and has been accompanied by increased spot trade and by greater flexibility in the terms and conditions of long-term gas contracts. Such a trend is likely to continue over the near future, considering that 13 LNG projects are currently under construction worldwide, representing a total capacity of 138.2 bcm/yr,’ the authors say in the book.
This point is unflinching, but not terribly new to industry participants – everybody knows of the LNG's potentials in a moment of stark price differentials across the globe. More interestingly, the two scholars see a major hurdle to globalization in the industry's other main success – the shale gas revolution in North America.
‘A main obstacle to a real globalization of gas markets could be represented by the US shale gas revolution, a phenomenon that effectively de-linked the US from the rest of the world. The present divergence in price between the US, Europe and Asia Pacific has never been so marked. However, trade and arbitrage dynamics will inevitably seek to exploit such price differences and, in doing so, reduce them,’ they claim in the book.
This point is of great conceptual and theoretical importance. Their understanding of the gas markets challenges the well-established parallelism between globalization and innovation. If the rise of LNG confirms the general globalization patterns, the shale revolution did indeed create a fracture in the middle of the Atlantic and Pacific Ocean.
GENERAL GLOBAL TRENDS
On a global scale, the authors see a growth of unconventional gas production in the medium term, due to shale gas production in North America and other unconventional gas in other parts of the world.
‘Over the medium term, unconventional gas production is expected to continue to expand, again coming primarily from North America. Outside this region, tight gas and coalbed methane (CBM) will be the largest contributors to incremental production. In the Middle East, Africa and Latin America, tight gas could complement existing conventional gas, while CBM is projected to increase markedly in China and Australia. Other countries with significant shale gas potential face a number of challenges such as environmental issues, pricing and lack of infrastructure. Consequently, new shale gas production developments are projected to be somewhat limited over the short-to-medium.’
EUROPE: UNCERTAINTY OF GAS DEMAND, GAS PRICING, AND RUSSIA
Hafner and Tagliapietra warn of possible risks stemming from the EU decarbonisation targets.
‘The implementation of a climate-based energy policy is challenged by technical problems related to electricity system balancing, public acceptability of new electricity lines construction, timely and large scale availability of CCS and tight EU countries public budgets,’ wrote the two scholars, also reminding how coal is replacing nuclear in breach of green goals.
Regulation plays an important role also in the shift of gas prices towards hub-based pricing, especially in North-West Europe. Despite the additional flexibility, the long-term contracts remain central, according to the authors of the book.
‘It is important to focus on price formation not on price levels. Industry tends to look at price levels, but hub prices can be lower or higher than oil indexed gas prices.’
The renegotiations of gas contracts with Russia’s Gazprom are following this rationale and the authors warn of the risk of political interference. The market will be able to normalize relationships with Moscow, say the authors.
‘The restructuring of the Russian gas industry should be left to the market and not to DG Competition. Gazprom will have to follow Statoil's lead and adjust to new supply realities and pricing formulas. If put under additional political pressure from Brussels, however, the Russians will likely rally around the flag and adopt a position that serves neither security of supply nor security of demand in Europe.’
MORE ABOUT THE BOOK
The book analysis delves both into the demand and into the supply side, in the attempt to ‘provide a clear snapshot of all these challenged an opportunities affecting the European gas industry.’
For the demand side, the authors mainly refer to the European climate-based energy policy, arguing that it ‘challenges the role of natural gas in the long-term EU energy mix, also if in the short- to mid-term natural gas could play an important and cost effective role in the transition towards a low carbon economy.’
For the supply side, the two main elements considered are the global LNG industry and the shale gas revolution.
Sergio Matalucci