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Natural Gas Markets Twisting to New Shapes

By Andrew MacKillopCommoditiesJan 01, 2012 03:08AM ET
Natural Gas Markets Twisting to New Shapes
By Andrew MacKillop   |  Jan 01, 2012 03:08AM ET
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Cynics say European gas markets are not even worth talking about - better to ask Gazprom and the operators of ETS (European emissions trading) markets what they think is the right price. The answer is any high price they want ! As long as ETS holds together, and climate-conscious governments of countries like France have their leading energy corporations sign up gas supply contracts at $12 - $15 per million BTU, and ban the development of shale and coalseam gas resources, these prices can hold. We can add: could or might hold.

In the USA however the end of the road for ultra cheap gas supply at prices just above $3 per million BTU, driven by and due to shale gas, could be coming quite fast. In theory, but only in theory, the USA should be exporting LNG to Europe, but like we said that is only theory and one reason is stark: the supply isnt sufficient, and this also signals US gas prices could be moving up soon.

One thing makes for a similar opaque market context with heavily twisted information feeding it, in the US and Europe, despite the wildly different prices. We now have articles stating the EIA has heavily revised down estimates for US shale gas reserve potential. Upstream of that, we have the USGS (US Geological Survey) saying that the Marcellus, Eagle Ford, Barnett, and other major shale formations were "80% over-estimated" and hold only 20% of the previous accepted reserve amounts. If its true, we should expect a 50-percent hike in day traded gas prices starting soon. Maybe not.

Both the USGS and EIA, and outside the US the IEA, national governments, world energy majors, private researchers, analysts and others have always wrestled with the resource-versus-reserve question on oil, gas, coal and uranium. What we know is that geological resources are always bigger than economic reserves which can be produced, but how much bigger ? And when do the first shift to becoming extractable or producible ? In "pure geological terms" the quantity of natural gas on this planet is simply fanastic, if maybe a lot less than on Saturn's giant moon called Titan, a planet-sized LNG tanker nicely chilled to minus 180 degC.

On this planet Earth, the real numbers on what are resources, and how much can become gas reserves and produced are now as dark and thick as Titan's atmosphere. Current US estimates have only and slightly changed the resource estimates, but now suggest that no more than 20% of known shale gas reserves are "extractable", even if consensus opinion was 4 times or 5 times that number only weeks ago. Outside the US, estimates by the EIA and IEA for some countries can range through reserve estimates, for the same country, from 8-to-1. What happens is that technology and financing assumptions changed, a lot, and this brings straight to the heart of the matter, and why it is a bet that US gas prices should lever up soon - but a bet with plenty of risk attached.

The big picture is as big as the three-way global gas puzzle of USA-Europe-Asia, and the present total de-indexation or de-linkage of gas prices from oil prices in the US, but nowhere else. In fact we have a rising potential for "global gas wars". One or two straws in that wind include almost ritual winter-time gas transport and price problems between Russia and Ukraine, and downstream consumer countries, the ongoing tension over the Nabucco line and allowing Iran to pipe gas across Afghanistan and Pakistan to India, the critical overcapacity of world LNG fleets and terminals - and others.

Simple question do not have easy answers, but current known global reserves of shale gas are probably more than 6.75 quadrillion cubic feet, about 15% of which might be finally produced, in a total of 685 major known plays in 160 basins worldwide - but in fact no more than two-fifths of world potentially productive regions have even received early and very estimatory drilling for shale gas.

For some countries already, shale gas is already the Promised Land, or rather the possible end to heavy dependence on not-so-friendly suppliers: Poland and Ukraine are two fast movers in Europe, taking a very different pro-shale stance compared to France, because Gazprom is their upstream supplier. Adding a sharp extra level to the financial jiggling, the rapid rise in LNG trade outside the US, originally thought to allow the rise of a more balanced and price-contained gas market, now threatens to explode it. LNG is expensive, but shale gas is cheap. LNG is oversupplied. Quick development of shale reserves will further raise supply.

The largest pipeline suppliers worldwide cling on to long-term contracts with take-or-pay provisions and price references set and contained by a basket of crudes and refined products. This was fine as long as it continued, but all the biggest suppliers, including Gazprom, Algeria's Sonatrach, Qatar, Norway, Australia, Egypt, Trinidad and other gas exporters, are all invested in LNG, and in a rapid-growing set of gas marketing and pricing systems and references. Where they operate both in the US, and in Europe-plus-Asia they have plenty of interest in seeing US gas prices rise when European and Asian prices start falling.

Spot market pricing will surely grow in importance, but this comes with a lot of question marks - due to national government concerns on energy security the market is a lot less than transparent. The real near term impact of spot markets will be to add even more volatility to a global gas market context that can only get more volatile.

The bottom line we have is that gas prices can go sideways or down in Europe, especially if the winter stays one of the warmest-ever, but in the US they should go sideways or up, with the upside possibly large and able to happen soon.

Natural Gas Markets Twisting to New Shapes

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Natural Gas Markets Twisting to New Shapes

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