Global Gas: Beyond Regulation and the Financial Crisis

Within the context of a session entitled “Understanding how developments in the global natural gas market will impact Europe” at the European Gas Conference in Vienna, Austria, Jesco von Kistowski, Managing Director at EconGas, a European natural gas supplier to distributors and business customers, said he saw developments beyond regulation and the financial crisis.

“Some of the key issues are: ‘Is the US going to become an LNG exporter?’ which could have a huge impact on international gas flows and possibly on us in Europe because gas in the US is between $3-4/mm btu and when you look at TTF that is roughly the equivalent of $10-11/mm BTU, so you see a $6-8 spread,” he explained.

He said that could have an impact as well as shale gas got closer to home.

Von Kistowski said, “There has just recently been a huge shale gas find here in Austria, so that has an impact on the global play,” he said, even on Russia, about which he pondered would export to China.

Or what about Qatar?

He commented: “They used to have this strategy, 50% to the West, 50% to the East. Now, when you look at the prices in the West, you see $10 mm BTU and $15-17 mm BTU in the East, so there are signs that the Qataris are changing strategy.”

Nigeria and Angola, he said, could also emerge as natural gas producers, potentially exporting into Europe and into Asia. Meanwhile, there was also Brazil, and Argentina, which was turning into an import terminal. He added, ”Now they have the money to pay for that.”

A few things had changed and were about to change quite dramatically concerning global supply and demand flows for natural gas.

“When you look at what is going on ‘across the pond,’ Henry Hub is trading at $3-4/mm BTU and allegedly it costs something like 30 cents to go down from Henry Hub, south to Louisiana, the Texas panhandle, where there are several LNG terminals which were originally built to import gas and that are now looking to start exporting gas from the US and apparently the cost to do so – to turn an import terminal into an export terminal – is basically half of what it would normally cost to build an export terminal, because you’ve already got a lot of the infrastructure, like port facilities and the tanks.”

He reported the Cheniere Energy Inc. was the furthest along in such reconfiguration plans, planning four huge outlets to export LNG into Europe. The round-trip shipping to Europe, he surmised, cost roughly around $3/mm BTU.

“So you’re talking around $8/mm BTU and we’ve seen that exchange traded funds (ETF) is trading at $10-11, so there could really be decent money there and some companies are really jumping at that.”

He considered the situation for Russian gas into Europe as well.

“They expect to grow their sales from 150-160 BCM/year. We’re talking short term. In the medium term, it becomes a little bit more difficult, because what happens if there is indeed capped gas coming out of the US; if we find significant unconventional gas in Europe; what about slow demand growth as there are countries where demand is actually going down? Demand is going down in Western Europe with all of the energy efficiency measures,” he opined, saying that these were the factors that questioned growth of Russian gas exports.

In terms of pipeline routes, he mentioned eastern and western routes, noting that Gazprom very clearly wanted to penetrate Asian markets, as China’s consumption would jump from 13 BCM consumption per year and within about eight years that would jump to 125 BCM/year. “Growth by 10-fold - staggering,” he said.

LNG, he said, was the last factor that would change global natural gas trade flows.

Huge projects were set to come on stream in Australia whose shipments would go to the Pacific Southeast which would be a major market, according to von Kistowski.

He recalled that hydraulic fracturing or “fracking” had been going on for 20 years in Germany, before public opposition stopped it in recent years after the negative rap it got from unconventional gas E&P. “That wasn’t an issue but now it is,” he said.

Of the prospect for shale gas potential in Europe he said the strongest locations were the UK and Poland.

“This is partly a function of geology, partly a function of regulation – there’s a general acceptance in the population. Poland really wants to become independent form natural gas imports and there’s generally a will to exploit as much local gas as  possible, so the political means is there as well as the geology.

“In the UK they’ve found a huge field in Lancashire, apparently bigger than all of the offshore production, past and present, but when they started drilling they had some walls crumbling in Blackpool, and people didn’t really like minor earthquakes, so there’s some reluctance in the population.

Von Kistowski noted shale gas potential in Ukraine and in Romania, Austria, France and Germany.

“We believe as a company that shale gas has potential to supplement for falling domestic European supply and production, but that will not fill the supply gap. UK production is going down dramatically – 10 years ago it was at 110 BCM and in a few years it will be at 10 BCM and I don’t think shale gas is going to compensate for that. We really need to watch how that turns out.”

In terms of the geology, he said: “One needs to really look at the depths of some of these gas finds. In the US where shale gas is so cheap, we’ve seen the $3.60-3.80 as the cap in the US, some of these shale gas fields are incredibly shallow, less than 200 meters down. On average, big fields that make all this money are between 1500-2500 meters deep. That, in geological terms, and for producing companies is peanuts. 

“Whereas here in Europe, some of the shale gas is 4-5-6,000 meters deep, so that should give you an indication about the economics; and the acceptance from the population really isn’t the same as in the US,” he said.

“This gives indications of the economics and the political aspects,” he continued. “Shale gas is going to help here in Europe but it’s not going to revolutionize the world.”

Mr. Von Kistowski said he believed in the huge impact of LNG, which would have more of an impact on pricing, particular in the UK and in the Netherlands.