The changing world of gas

By Malini Hariharan

The blog has recently written about gas availability in the Middle East and upcoming changes to pricing which have big implications for the petrochemicals business.

But the global gas market is seeing wider changes and these have been excellently summarised by The Economist.

The key development has been the rise of shale gas in the US which now meets about half of the country’s demand.

The fall in gas prices has already improved the competitiveness of US petrochemical producers. And analysts are predicting that this advantage will continue.

There is plenty of shale gas around the world. According to the Economist article, the International Energy Agency (IEA) has estimated the global total to be 921 tcf ,more than five times proven conventional reserves. But a clearer picture will emerge only after exploration and drilling starts.

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Source: The Economist

Meanwhile, rising production in the US coupled with a drop in demand, as a result of the economic slowdown, has already resulted in a global gas glut. And the situation has been exacerbated by greater availability of liquefied natural gas (LNG).

The rise of shale gas has implications for countries like Qatar that has developed its LNG industry to meet US demand.

“That now looks like a blunder. America is still taking some of this LNG, but the exporters’ bonanza is over before it ever really began,” says The Economist.

LNG prices are likely to come under downward pressure as new projects scheduled to come on stream this year would add another 80m tonnes to annual supply, almost 50% more than in 2008.

Qatar would still make money because of its low production costs but there are many others who would not as they are extracting gas from remote fields.

A question worth asking is whether Qatar turn to petrochemicals if returns on LNG diminish?

The developments in the US market also has implications for Canada. The ceo of Nova Chemicals recently said that the growth of US natural gas capacity may make natural gas production in Canada less economical, which in turn could lead to a feedstock shortage for Canadian petrochemicals producers.

“We are clearly seeing some degree of decline in the west [Canada], and as a result of that, overall ethane supply is down. There is definitely a real structural concern for producers and consumers over the short-to-medium term,” he said.

NOVA has expressed its concerns to the Alberta government authorities and is seeking additional incentives for investments in ethane extraction.

The Economist says that while an age of plenty appears to be on its way there are two factors that could reverse the picture.

The first is the uncertainty about how the success of shale gas exploration outside North America. And the second is the concerns voiced by environmentalists about spoiling landscapes and contaminating water supplies.

The US government recently announced that it would begin a two-year study to determine if hydraulic fracturing, a technique used to produce shale gas, threatens water quality and water health.

There are differing views on how long the surplus situation will continue.

Companies that have invested in LNG believe that there is room for both shale gas and LNG in the US market.

Sceptics point out that shale gas is expensive to produce. With gas futures prices stuck below $5/MMBtu – and breakeven prices anywhere from $3-6/MMBtu – they are questioning how long shale producers will run rigs.

The Economist quotes predictions by experts that the LNG glut is likely to ease by 2014 as low prices would force some projects to be abandoned. France’s Total is of the opinion that demand recovery would require more LNG projects while the Energy Information Administration (EIA) predicts decades of relatively weak prices.

A complicated picture but certainly one that needs to be unravelled.

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