Thursday, May 27, 2010

Low Natural Gas Prices Gives Everyone Something to Ponder

By Carola Hoyos
Published: May 25 2010 16:55 | Last updated: May 25 2010 16:55
By the end of this year, Qatar will have completed one of the most ambitious industrial revolutions of past decades and in the process helped transform the international natural gas industry.
The small Gulf state this year expects to hit a natural gas export capacity of 77m tonnes a year, enough to supply all the needs of both China and Brazil.
Qatar has become the biggest trader of liquefied natural gas (LNG) in the world and a pioneer – together with the international oil companies it employs – in improving the process whereby natural gas is super cooled and turned into liquid so it can be put on tankers and transported to distant markets.
But the achievement comes at a time when halfway round the world a second, more recent natural gas revolution has also occurred, sending prices to record lows and forcing Qatar and other suppliers to adapt.
While Qatar was busy building its huge LNG complex of miles of winding pipes at Ras Laffan in the barren desert 80km north-east of the capital Doha, independent oil and gas companies in Texas were cracking the technology that would finally give them access to the gas trapped in the solid shale rock scattered across large parts of the US.
The process of breaking up the previously impervious rock, known as “fracking” in the industry, has unleashed a flurry of multibillion-dollar deals, including last year’s $41bn agreement by ExxonMobil to purchase XTO, the shale gas specialist.
European companies, such as BP of the UK, Norway’s Statoil and Total of France have joined the rush, each buying into the shale beds and the expertise ofChesapeake Energy, one of the US’s largest gas producers.
In terms of supply, the shale gas revolution has had a significant impact. In less than five years, the US has gone from seeking new sources of gas from overseas to being self sufficient.
In fact, for the first time in nearly a decade, the US has regained the position of being the world’s largest producer of natural gas. Its reserves life has grown from 30 years to a century.
The global recession is another significant factor that has caused huge change in the industry in the past three years.
It cut sharply the need for natural gas, especially in Europe and the US, and damped demand elsewhere.
The resulting “gas glut”, as the International Energy Agency, the rich countries’ watchdog called it, has forced big suppliers such as Qatar, Algeria and Russia to adapt, as prices have fallen from a high of $13.70 per million British thermal units (mBtu) in July 2008 to lows of $2.75 per mBtu in September 2009, followed by a slight recovery to today’s price of about $4 per mBtu.
Marcela Donadio, Americas oil and gas leader for Ernst & Young, notes that the oil and gas industry is one that requires executives to respond to shifts in trends swiftly.
“You have to be aware that the landscape can change very quickly,” she says. “If there ever was an industry that requires people to be nimble, this is it.”
Each of the main suppliers has responded in its own way.
Gazprom, Russia’s gas monopoly, whose chief executive Alexei Miller predicted in 2008 that his company would be worth $1,000bn within a decade, has had to sharply curtail his ambitions.
Gazprom has had to rethink its goal of developing its own LNG programme, a central part of its long-term business plan, which would have seen cargoes of Russian Arctic gas exported to the US.
In the meantime, it has also had to accept demands from its European customers to reduce prices for long-term contracts by linking more of a contract’s gas to spot gas prices rather than to oil prices.
Spot natural gas prices are trading well below oil prices and many analysts have criticised the old link between the two as outdated and unrepresentative of the market.
Algeria has called for an even more radical solution, last month proposing that big gas suppliers form a cartel and jointly reduce their production. The pitch fell flat, largely because it was dismissed by Russia and Qatar.
Qatar has been one of the suppliers least affected by the fall in prices because it had already negotiated many of its contracts for the 77m tonnes of gas before the seismic shifts in the market.
And because much of its supply has been sold on a long-term basis, there is less flexibility in the price.
Faisal Al-Suwaidi, chairman and chief executive of Qatargas, said in an interview: “I’d be wrong if I said we saw the breakthrough of shale gas coming. It took everyone by surprise. Has it impacted our long-range plans? Maybe, but minimally,” he added.
Qatar has also had to be flexible. Much of its gas was earmarked for the US and UK, which because of lower demand and increased supply no longer need as many cargoes. As recently as this month it said it would reroute that gas to regions where growth remains more robust, such as Asia and the Middle East itself.
In fact, the shift has been so significant, that China is now expected to become Qatar’s biggest buyer.
The Middle East, which sits on large, but undeveloped gas resources, is also a quickly growing market for gas imports, from Qatar and further afield.
“We see a huge growth of demand for energy in the Middle East. This could be a good help to projects developed that had destinations, such as the US and Europe,” Mr Al-Suwaidi said.
He noted that UK demand for gas fell in the summer at precisely the time Middle East countries needed more supply because of the seasonal increase in air conditioning.
Finding such solutions is also important for the international oil companies that have piled into Qatar to help it develop its LNG industry.
Those companies include ExxonMobil, Royal Dutch Shell, Total andConocoPhillips.
For many, Qatar has been a critical way of expanding their portfolios in past years when other resource-rich nations were making it more difficult to invest, especially in oil fields.
Frank Harris, an analyst at Wood Mackenzie, says: “Gas is becoming more important to international oil companies, driven by the fact that big new oil opportunities are becoming much harder to find and, accessing discovered oil resources is becoming increasingly tough.”
He adds that the most attractive countries to do business in were those with low accessibility hurdles. These include Qatar, but also countries with “unconventional” gas resources, such as the US with its shale gas.
ExxonMobil and other companies are hoping to apply the expertise they acquire from deals they recently struck in the US shale gas sector to the shale beds of Poland, Sweden, Germany and France, which are also relatively easily accessible.
However, there is a chance that their appetite for natural gas could decline if prices do not recover for a long time.
Mr Harris says: “I think some companies’ enthusiasm may start to wane if they decide that the global outlook for gas is genuinely bearish long-term, rather than just for the next few years.
“However, others see things recovering in the medium term, as gas becomes increasingly important and valuable.”
He says that he shares the more optimistic outlook.
In Qatar, as it completes its 20-year building programme, the mood is also one of optimism and of the belief that, in the long term, gas will remain an important fuel source.

1 comment:

CLadd said...

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