INSIGHT: More global natural gas and ethane markets in 5-10 years

03 April 2013 15:49  [Source: ICIS news]

By Will Beacham

LNG terminalLONDON (ICIS)--A more global market and pricing structure for natural gas and chemical feedstocks such as ethane is likely to develop over the next 5-10 years as multiple new sources of natural gas and liquefied natural gas (LNG) come on-stream, consultants from Booz and Company say.

On top of the US shale gas revolution, large discoveries of conventional natural gas in West and East Africa as well as Australia will boost supply around the world as more gas is liquefied for transport to major consuming regions.

And as this happens, the huge regional differences in gas pricing we currently see are likely to reduce. Gas pricing will become more tied in to gas rather than oil prices, a trend that is already apparent.

“This surge in sources of supply and demand creates the basis for a global market similar to crude oil, gasoline and other finished products,” says Booz & Company vice president, Andy Steinhubl

Hubs for gas will develop similar to Amsterdam, Rotterdam, Antwerp (ARA), Houston and Singapore. National balancing points such as Henry Hub and Singapore will act as bulk hubs where cargoes can be broken down and sent out to other markets, he believes.

Europe has traditionally based gas prices on oil prices but this is already changing with gas-based benchmarks such as the UK-based National Balancing Point (NBP) being used more frequently.

“Increasingly [gas contracts] have a component of spot (10-20%) mostly linked to the NBP. In Europe we have seen increased competition between domestic gas supply, pipeline and LNG and this is leading to gas being used more as a basis for pricing rather than oil,” according to Steinhubl.

In Asia, oil indexation is still prevalent and prices are high as a result. Demand continues to increase, helped by Japan’s switch away from nuclear power following the Fukushima nuclear disaster.

“We would see Asia moving towards pricing off spot gas over time as this initial demand shock moves through the system and more sources of LNG supply such as Australia, Africa and perhaps the US become available. It won’t be next year but could happen in the next 5-10 years,” he says.

“Fundamentals are pushing towards more gas-on-gas competition and more gas-priced LNG around the globe,” according to Booz & Company vice president, John Corrigan.

He points out that Russia has historically priced gas against crude oil but is being pressured by the EU and World Trade Organisation (WTO) to adopt gas-indexed contracts. The success of this will impact Europe’s ability to move towards gas-based pricing mechanisms.

If a lot of US LNG export projects are approved there will be a more rapid move towards global pricing normalisation with more gas-on-gas competition, he says, although both he and Steinhubl are sceptical about the likelihood of a high proportion of the announced US LNG export facilities coming on-stream.

A total of 25 projects have been announced with start-up dates between 2015–2020 and 154.9m tonnes/year of LNG export capacity.

Most estimates put the amount of LNG export capacity being realised at around 6bn cu feet/day which equals 5% of the current US market though some forecast as high as 12%,  says Steinhubl.

US exporting of LNG will make sense mainly to regions where oil indexation of gas prices predominates, Booz and Company analysis suggests. A $9-10MMBtu landed cost in Europe compared with European gas prices at around $12 is marginally competitive. Gas prices in Asia in the $15-$16MMBtu range look much more profitable

Steinhubl understands why chemical industry leaders are campaigning against exports of LNG. Low-cost gas is valuable to US energy consumers.

“If I were a chemical industry leader I’d be doing exactly the same thing – advocating for limited exports," he says. "Extra demand at Henry Hub generated by exports will affect the price."

The consultants believe the current US competitive advantage doesn’t come so much from the gas price as from the amount of liquids being produced from wet shale plays.

The 15-year deal by INEOS to export ethane from the US east coast to Europe is the possible start of a global market for ethane, believes Booz and Company principal Jayant Gotpagar,

“Switching from naphtha to ethane based cracker capacity is not a big investment – most North American players have already switched. There was no incentive to do this in Europe but now INEOS has started something worth watching.”

Corrigan believes it makes sense for European chemical companies like INEOS to make long term commitments in terms of converting existing capacity to ethane along with a long term supply deals and ships to make it work. Europe does not possess a fleet of trans-Atlantic ships for NGLs but they could evolve. However that cost of shipping will give a structural advantage to anyone in the US making chemicals from US ethane.

“The only way to overcome that [structural disadvantage] for Europe and other regions is to develop indigenous supplies of wet gas. It looks like the US advantage should hold up for some time,” says Steinhubl.  

However for Europeans – looking at naphtha compared to US ethane – there is still a great deal of cost advantage to moving US ethane across to Europe to feed their crackers. INEOS will have a competitive advantage to others in Europe, he adds.

Gotpagar believes importing US ethane could be a good defence strategy for European chemicals players against the Middle East. Whilst it won’t be very competitive against either of those continents, it could move them further down the cost curve. 

“If you believe that we’ll continue to be in a world of oil scarcity with surging gas supplies then you’d certainly want to consider it as a European manufacturer – to take a bet on that spread,” says Corrigan.

Gotpagar adds a note of caution, however.

European chemicals companies will need to examine their growth strategies before making these moves: “The only wrinkle I would add is that the move from naphtha to ethane means there are less intermediates such as butadiene and propylene.

“European players are gearing more towards specialised polymers. It may not make sense to switch to ethane if you’re trying to develop your portfolio of high spec propylene-based polymers.”

Read Paul Hodges’ Chemicals and the Economy blog
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Asian Chemical Connections blog

By: Will Beacham
+44 20 8652 3214

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