Market outlook: Global market in prospect for gas and ethane – Booz

12 April 2013 09:59  [Source: ICB]

With multiple new sources of natural gas and liquefied natural gas (LNG) likely to come on stream over the next five to 10 years, a more global market and pricing structure for natural gas and chemical feedstocks such as ethane is likely to develop, according to consultants from Booz & Company.

LNG plant Getty Images

Getty Images

Increased movement of LNG will help to globalise gas markets

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

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

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.

According to Steinhubl: "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."

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.

But it is still on the road towards gas-based pricing, according to Steinhubl: "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 five to 10 years."

According to Booz & Company vice president John Corrigan: "Fundamentals are pushing towards more gas-on-gas competition and more gas-priced LNG around the globe."

He points out that Russia has historically priced gas against crude oil but are being pressurised 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.

US SHALE IMPACT

If a lot of export projects get approved in the US, there will be a more rapid move towards global pricing normalisation with more gas-on-gas competition, said Corrigan.

Both Steinhubl and Corrigan are sceptical about the likelihood of a high proportion of the announced US LNG export facilities coming on stream. According to ICIS analysis, a total of 25 projects have been announced with startup dates between 2015-2020 and 154.9m tonnes/year of LNG export capacity.

According to Corrigan: "The market is very volatile in North America, and the chances of all these coming on stream is minimal."

Most estimates put the amount of LNG export capacity being realised at around 6 billion cubic feet/day (169.9 million cubic metres/day), which equals 5% of the current US market though some forecast as high as 12%, said Steinhubl.

According to Booz & Company analysis, US exporting of LNG will make sense mainly to regions where oil indexation of gas prices predominates. A $9-10/MMbtu landed cost in Europe compared with European gas prices at around $12 is marginally competitive. But it looks much more profitable when the gas goes to Asia where you have more like $15-16/MMbtu pricing.

Corrigan said: "It's not like the profitability of these projects is phenomenal: a lot of people see the breakeven at around $5/MMbtu Henry Hub. The long-term forecast is between $4-6, so it doesn't look like a slam dunk for people to liquefy gas in the US and then ship it around the world."

US producers will think twice about paying $8-9 to send gas to a different market if they have the choice of selling it to Henry Hub.

CHEMICALS CAMPAIGN

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. Extra demand at Henry Hub generated by exports will affect the price."

The consultants believe the current US competitive advantage does not come so much from the gas price as from the amount of liquids being produced such as ethane, propane and butane which are chemical feedstocks. Growth in production of these products has been phenomenal. When the gas price collapsed and players moved to the wet, oil-rich plays, they found a lot of natural gas liquids (NGLs). So a host of feedstocks have come to market that have overwhelmed demand and the infrastructure to move those products around. This is why there has been so much flaring in recent months.

GLOBAL MARKET FOR ETHANE

According to Booz & Company principal Jayant K. Gotpagar, 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.

"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." Ethane is cheaper to ship than LNG because extreme temperatures are not required to store it. But what is missing right now is efficient infrastructure.

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.

Steinhubl added: "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."

However, for Europeans - looking at naphtha compared with 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, according to Steinhubl.

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

Corrigan added: "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."

Gotpagar adds a note of caution. 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."

ETHANE PRICE TRENDS

Asked about future ethane pricing trends, Corrigan said that in North America, NGL pricing will be bounded by crude oil on the top and gas at the bottom and will bounce around quite a lot. As we add more ethane cracking capacity as well as on-purpose propane, we will see ethane coming back and coming off the floor of natural gas prices.

"At $5-6/MMbtu for natural gas we could see hundreds of rigs that have moved into NGL-rich fields moving back into dry fields. This will reduce NGL supply. This could be another element of chemical companies' strategies to keep the gas price low."


By: Will Beacham
+44 20 8652 3214



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