Monthly overview: Price signals return
The new year has got off to a good start for producers, as the early signs are that the historic November Opec agreement to cut output with effect from January 1 is sticking. Even in December there was a drop in crude output – not so difficult perhaps after November’s record 33.13mn b/d – with signs that Saudi Arabia is prepared to lead by example and that non-Opec Russia will join it.
In a press release January 10, price reporting agency S&P Global Platts said: “The crucial question is whether Opec and non-Opec can make the compliance stick long enough to clear out the stock overhang.” Libya and Nigeria – exempt from the cuts – together could wipe out the reduction, it said, while flexible US shale oil could cap prices.
But oil prices have returned to the point where they encourage upstream work once more. More investment now would limit a price spike in coming years. The International Energy Agency is quick to warn about this: the almost inevitable consequence of a two-year worldwide upstream spending slump.
Norway’s Statoil came out with a bullish statement at the start of January, announcing that “market conditions” had enabled it to “get more wells, more acreage and more seismic data for our exploration investments in later years.” This means 30 exploration wells planned this year, including in Norway, South America and southeast Asia, compared with 23 in 2016.
And although spot gas prices are also high in Europe and Asia, demand has not been shaken off, with LNG cargoes being drawn mainly to Asia until the European price reaches a comparably attractive level. In fact, it already has exceeded it, in southern France at least (see feature). In Europe’s better connected hubs though it is likely that Russian gas will continue to grow its market share at the expense of new entrants, as it has demonstrated in microcosm in Lithuania this year (see feature).
Both Gazprom (see feature) and Gassco reported record deliveries to Europe over last year. Gazprom hit 179.3bn Russian (ie less calorific) m³, up 12.5% year on year on sales beyond the former Soviet Union; and Norway’s pipeline exports up to 108.56bn standard m³, according to Gassco. Given the average low price over the course of the year the financial results will not be so spectacular for Gazprom; although the volume trend is continuing this year and gas prices in Europe were on the way up even before the start of winter.
To deal with European demand, Nord Stream has been operating at maximum, carrying, on some days in January, the equivalent of 60bn m³/yr, while nameplate is 55bn m³/yr but assuming 90% load factor. Theoretically Russia could export even more this year than last, if the European Commission’s decision to allow it to use more of Opal is approved and there are no difficulties with Ukraine. This is the year after all that the twin disputes of take-or-pay and ship-or-pay (between Gazprom and Naftogaz Ukrainy) and the Russia-EC World Trade Organisation cases are all to be decided.
Winter has also been cold in northeast Asia, where utilities will likely be ramping up nominations under their oil-indexed, long-term, take or pay contracts at a time of high demand and typically with a captive market to absorb the cost.
Coal output has also fallen, making that commodity more expensive relative to gas. And LNG producers have not been rushing to bring their gas to market – although Gladstone Port for example reported exports for December of 1.75mn mt, equivalent to 21mn mt/year, as more coalbed methane LNG came on-stream.
These bullish events have dragged up the price of the marginal cargo; and the first cargo from the US Gulf Coast arrived this year in Japan, sold to Jera by the Sabine Pass plant operator itself from its own earmarked equity supply at a no doubt mouthwatering spread (see news).
So despite frequent references to a world awash with gas, this winter has been good for sellers, with prices back to where they were two years ago.
That said, the outlook for LNG after winter reverts to bearish, according to analysis by Bank of America Merrill Lynch. In a research paper January 6 it said coal prices are now fading again and new LNG supply is set to hit the market over the coming quarters. If the Brent price keeps rising, the LNG discount will only grow, so the price will fall relative to oil, from today’s energy parity to less than half by this summer. “Also, the recent restocking in Asia sent Asian vs. European gas prices soaring to a $3.50/mn Btu spread, and we see this reversing to around $1 in the coming months as Asian buyers are now likely better stocked than before the winter.”
Prices will continue to rise and fall, but some trends are discernible in the longer term. One is the growth of bunkering, which could well play more than a cameo role in the global gas market.
Qatar’s energy minister Mohammed Bin Saleh Al-Sada told a gas conference in New Delhi early December that gas was replacing petroleum in transport, spurred by progress in developing small-scale LNG technology. Besides road transportation, LNG as a maritime fuel has a very bright future. LNG bunkering infrastructure is developing fast along the major international sea lanes.
“What we need is a close co-operation between producers and consumers to develop a win-win situation for all, in order to not only stimulate natural gas demand worldwide, but contribute immensely to keep our planet green, ecofriendly and clean.” And a wide discount to the oil price is just what gas-fuelled fleet operators depend on.
NGW Magazine issue 10 is now available at Joomag, for Apple (iPad and iPhone) and for Android
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