Shell sees “supply revolution” in natural gas

Chemical companies, Consumer demand, Economic growth, Futures trading, Leverage, Oil markets

WTI v natgas Oct10.pngNatural gas markets, so important in relation to chemical feedstock availability and pricing, are undergoing major change as we transition to the New Normal.

The Middle East, which had been in surplus, is now moving to a more balanced position in some countries, such as Saudi Arabia. But the USA, which had expected to need increased imports, may instead become a major exporter.

Middle East. The blog was speaking at the World Refining Association’s annual conference in Bahrain earlier this week. And it was clear from its discussions with leading players that Saudi Arabia is having to re-evaluate gas usage strategies, to take account of competing end-user demands, as well as overall energy supply balances.

The supply position has thus changed significantly since the blog first visited the region in 1996. Then, everything was in surplus, and multiple investment objectives could be achieved, such as providing good financial returns whilst also adding value to a natural resource and providing local employment.

Today, as noted by McKinsey’s Christian Gunther in Bahrain, choices will have to be made between competing priorities. Should gas replace diesel as a power station fuel, for example? Equally, should gas users pay the exploration costs for finding non-associated gas?

USA/Global. Meanwhile, over in the USA, “a supply revolution” has taken place, according to Shell CEO, Peter Voser. Voser told a London conference yesterday that a much more favourable global picture is emerging for gas reserves, due to shale gas and liquefied natural gas (LNG).

He noted that the US now has “over a century’s supply” of natural gas at current consumption levels. Yet, just a few years ago, it was thought that “domestic gas production would decline“. And including LNG supplies, the International Energy Association estimates the world has enough “gas in the ground for 250 years at current production rates“.

In turn, of course, changes of this magnitude create both problems and opportunities for the chemical industry. Shell VP, Jeremy Bentham, spelled out some of the opportunities at last week’s EPCA meeting in Budapest:

• He noted it was now economic to produce US shale gas at between $3 – $5 MMBtu, compared to the previously assumed minimum cost of $6 MMBtu.
• He also revealed that US producers were “queuing up” for export licences, based on using the terminals recently constructed for LNG imports.

Working through these issues will be a complex process. And it is made no easier by the current divorce between oil and gas prices. Oil has 6 times the energy content of natural gas and, as the chart above shows, the two normally track each other quite closely, with oil 6x gas prices.

But with financial markets currently powered by liquidity rather than fundamentals, oil prices (blue line) are now 20 times US gas prices. Does this mean gas prices (red line) might treble to $12/MMBtu? Or might oil fall back to $24/bbl? Or will current relationships continue?

The honest answer, is that nobody knows. We have simply never seen conditions like this before.


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