No. 2, 2008

Global gas business: current trends and development prospects

Amidst gas market globalization

An active process of gas market liberalization now underway in Europe had its start in 1998 with the adoption of the first EU gas directive and continued in 2003 following the approval of the second directive. Its originally declared purpose of securing stronger competition between natural gas suppliers has already been achieved. Further on, however, the purposes were defined more precisely and came to include granting various consumer categories, domestic households in particular, the right to select suppliers. The national gas market mechanisms have become more involved given legal fragmentation of national gas companies’ long-established production and sales complexes and detachment of facilities responsible for gas recovery, transportation and sales.

In the meantime, there have appeared gas hubs, Europe’s largest of them being the National Balancing Point (NBP) in the United Kingdom. The transactions carried out there are of a market character and the prices formed as a result serve as reference ones for the other regional European hubs to go by. Owing to considerable seasonal

disbalance between supply and demand, gas prices charged by this point are highly volatile.

Progress made in operational trading the volume of which may grow only given implementation of the programs for gas “release” from long-term contracts (Austria, UK, Spain, Italy), leads to an increase in the number of such points. They are either virtual spot trading floors (the NBP in the UK, the TTF in the Netherlands), or local physical hubs (Zeebrugge in Belgium, Emden in Germany, and others).

Another trend connected with European gas market liberalization is the vertical alignment of gas production through the amalgamation of companies, the merger of gas and energy businesses. In various countries, these processes are going unevenly owing to the overall economic situation in Europe and depending on the country’s involvement in implementing the EU’s gas directives.

As to the gas markets of North America, they are closely interlinked thanks to a highly-developed transport infrastructure and the intensity of foreign trade operations which consist mainly in gas exports from Canada to the United States. Today, these markets are known for their highest liquidity and free pricing determined by the current market conditions. In the United States, gas prices are formed on the main trading floor “Henry Hub” (Louisiana) and in many other regional centers. Price differentials are substantial owing not so much to the price quotation level in the main point of sale and the carriage distance to destination as to competition between gas produced in the United States and that imported from Canada. This is particularly manifest in the West Coast states and in the country’s north-east.

In the Asia-Pacific Region, natural gas is traded in liquefied form mostly, with the bulk of trade being concentrated in Japan and South Korea. New delivery destinations – China and India – have appeared but it will be some time before they gain enough importance.

The world natural gas market should be regarded, on the one hand, as an aggregation of regional ones of which the markets of Europe, North America and the Asia-Pacific Region (APR) are the largest and, on the other, as an affinity of two isolated markets – the pipeline and the liquefied gas ones. A combination of national requirements with various degrees of self-sufficiency in these resources determines the level of international natural gas exchange between individual countries and regions.

The future of the gas market

Oil and gas trade terms are leveling off irrespective of what trade practices are used and what forms natural gas is sold in (pipeline or liquefied). Globalization of hydrocarbon trade is manifesting itself ever more distinctly. This is confirmed by the fact that the parity of oil and gas prices in terms of equal energy content has come to stay at a certain common level in all the regions and practically in all countries.

In mid-term perspective, we can rely on the opinion of one of the mightiest international oil associations – the OPEC. At its estimate, the minimum price level that would suit oil suppliers is $50 per barrel, and the maximum one, $80 per barrel. It looks as if such a vision of the situation can be taken as a basis. It goes without saying that the market is not homogeneous and that situations beyond the OPEC’s control may arise in it, but in that case going beyond the above-set limits should be regarded as force majeure circumstances the action of which is known to be unstable.

Therefore, three levels of world oil prices are the most likely: maximum ($80 per barrel), medium ($65 per barrel) and minimum ($50 per barrel).

The general trend in 1995-2006 was toward higher hydrocarbon costs; following the stage of oil and gas prices drawing closer together in the mid-1990s, in the subsequent period the links between them weakened in practically all the main European countries. In this particular region, the spot price of Brent oil serves as the reference one.

It is obvious that natural gas is gradually losing its value against fluid fuel in the European market with its system of long-term contracts for wholesale gas deliveries at contract prices indexed, to some extent or other, depending on oil price quotations. At the same time, gas prices in European countries are steadily falling below oil prices at a uniform rate.

Under the influence of two vectors

Forecasts of future European hydrocarbon market development trends can proceed from another important fact: equalization of its conditions under the influence of both liberalization and globalization of world energy as a whole.

Forecast of energy demand can be derived from population growth and world economic progress rates. It also depends on energy utilization efficiency, specifically, that of natural gas. The latter is winning ever stronger positions as it is becoming more readily available to consumers.

Over the past fifteen years, however, the process of natural gas ousting other fuels has slowed down, and the early six years of the current century even saw it coming to a halt. Whereas in 1991-2000 the share of gas in the balance of world energy consumption increased from 22.2% to 23.7% (that is, 1.5 percentage points), in 2000-2006, it stayed firmly at the 23.6-23.7% mark. Such a trend has objective causes behind it. Amid high oil and gas prices, some developing nations (China, above all) are showing a tendency toward switching over to cheaper coal and other energy resources, contrary to prognoses. Besides, gas supply infrastructures have not yet attained a high enough standard of development in many countries. So, when forecasting gas demand, more attention should be paid to regional specifics and conditions of competition between gas and other energy carriers.

On the whole, the share of natural gas in the world energy balance will hardly exceed 24-25% in the immediate future. It appears that the vigorous growth of foreign trade characteristic of the gas consumption formation and development stage in 1970-1980 will settle down to a more sedate rate in the period of 2006-2030. Considering a decline in gas production in a number of major consuming nations (the United States, the UK, the Netherlands and others), this trade will aim largely at compensating for the said negative tendencies.

In one of its latest surveys (The Outlook for Energy – a View to 2030), ExxonMobil forecasts the global energy development pattern in the period of up to 2030. Its key message is that three energy carriers – oil, natural gas and coal – will remain vital to the global economy until 2030. Their share will remain at the present level – about 80%. Demand for them in non-OECD countries – China and India, mostly – will grow at the fastest rate.

At ExxonMobil’s estimate, the global economic growth rate will average 2.2% a year in 2006-2030, while the per annum consumption of energy and gas is to grow 1.6 and 1.7%, respectively, on the average. Thus, gas consumption indicators are: for North America, 0.5%; for Europe, 1.5%; for the APR, 3.7%. As a result, global demand for gas will grow 50% by 2030 from the present level to amount to 4,275 billion m³.

At the estimate of the International Energy Agency made in 2005 (World Energy Outlook 2005 – Reference Scenario), the energy consumption growth rate expected in 2003-2030 will be 1.6% a year while global demand for natural gas in 2030 is estimated at 4,380 billion m³.

By 2030, the share of natural gas in the world balance of energy consumption is expected to dwindle to 22.6%, while global demand for natural gas is to rise to the level of 4,300 billion m³ (or 3,869 million tons of oil equivalent) by 2030.

Proceeding from the above scenario, gas-producing countries will have to build up gas production so as to catch up with the gas demand growth rate in the appropriate regions or in the world at large. The first version is fit for regions which are the main consumers of natural gas, and the second one, for the donor regions of the world’s gas supply system. Calculations show that demand for nonregional deliveries of natural gas will grow from 165 billion m³ in 2006 to 248 billion m³ in 2030, that is, 50%. South and Central America will be able to give the world market 21 billion m³; the Near and Middle East, 70 billion m³; and Africa, 157 billion m³ of gas.