Based on case studies of four countries (UAE, Russia, Argentina and Pakistan), this new report by CEDIGAZ analyses the influence of subsidies on gas supply and demand dynamics.
EXECUTIVE SUMMARY
Gas price subsidies have a significant effect on the gas consumption. Simply put they embody the inexorable link between the price of a good and its demand. By artificially lowering the price of gas, it can become more competitive as a fuel, potentially even crowding out other fuels or technologies, as well as encouraging excessive consumption that would not have occurred in the absence of subsidies. The extent to which either of these situations are the case is dependent on the subsidies of a given country with two particular factors; price/level of discount and how much of the population it is available to. The cheaper the gas the more widespread and heavy its use (or the use of a byproduct of gas such as electricity, heat or water) will be. Additionally if subsidies are extended to larger parts of the population then not only does that increase the amount of users whose consumption may be wasteful but it also extends cheaper gas to richer households who are typically higher consumption users and therefore capable of wasting more. It therefore follows that any countries wishing to reduce or cut their subsidies will likely see their gas demand fall.
NBP: Weather conditions and coal are weighing on prices
Winter is near, but the NBP is not going up. On the contrary, it is continuing a steady decline that began back in March 2015, when it stood at €22.3/MWh ($7.1/MBtu). It remained in the neighborhood of €18.4/MWh ($6.1/MBtu) in October and averaged €17.3/MWh ($5.6/MBtu) in early November. These prices are respectively 15% and 27% lower than the previous year. Very mild weather is one reason why prices are so low.
The trend in the coal price has also played a key role. It stands at €49/t ($53/t) for November, down 18% in one year. This is on the same order of magnitude as the price reported in 2009. Back then, the NBP price was about €10/MWh ($4/MBtu) and had even sunk as far as €7.7/MWh ($3.3/MBtu) in September. If the coal price remains at its current level, should the NBP be expected to fall that low? The business environment is different, especially in the United Kingdom, where a carbon tax (Carbon Price Support) of €25/MWh (£18/t) helps support the NBP price by making natural gas more competitive with coal. However, on the Continent, the CO2 price is €8/t and the equilibrium price compared with coal is lower, estimated at only €12/MWh($4/MBtu). This may give rise to downward pressure, especially if the winter is mild, hence to a low inventory draw. This being said, the markets are not anticipating such a pronounced downtrend, but prices of €18.5/MWh for winter 2016 and €17/MWh for next summer.
Indexed European price: the trend is down
The indicative European price (LT77%) stood at €19.5/MWh($6.4/MBtu) in October,down by 3.6%for the month and 20% for the year. The current trends shown by the NBP (below €18/MWh) and the Brent ($52/b) would yield LT prices of between €17.5and19/MWh ($5.5-6/MBtu) for next year.
The U.S. market (Henry Hub):below $2/MBtu
The Henry Hub price averaged $2.3/MBtu in October, down 11% in one month. It dropped below the $2 mark ($1.92/MBtu) at the end of the month and, in early November, has been hovering around $2/MBtu. This level, exceptionally low, has only been reached twice in the last ten years: on September 3, 2009 ($2.09/MBtu) and April 18, 2012 ($1.89/MBtu). Such low points have usually been followed by fairly sharp rises, which explains why the annual averages are higher ($2.8 to 4.6/MBtu since 2010). The markets are expecting a similar scenario, with prices rising to about $3/MBtu at year-end 2016, which would yield an average price for 2016 of only $2.7/MBtu. Of course, these trends will be influenced by how harsh this winter will be.
Eastern Asian LNG imports dropped by 4.2% year-on-year in Q3 2015
In Q3 2015, LNG gross imports dropped by 4.2 % year-on-year in Eastern Asia. In Japan, South Korea, China and Taiwan, LNG imports declined by 1.6 million tons from 38.1 million tons in Q3 2014 to 36.5 million tons in Q3 2015. In Japan, LNG imports were cut by 5.6% down to 20.9 million tons, as inventories were high and demand from the power sector weaker than a year ago. The latter was explained by lower than average temperatures in July and September, reducing the need for air-conditioning, and the restart of Sendai’s first reactor, even though it accounted for only 0.5% of the electricity generated by the 10 major producers.
In China, LNG imports decreased by 3.5% year-on-year in Q3, from 4.8 million tons in Q3 2014 to 4.6 million tons in Q3 2015. Over the first nine months of the year, LNG imports reached 14.1 million tons compared to 14.7 million tons over the same period last year (-3.7% year-on-year), while imports by pipeline grew to 11.7 bcm (+68.3% year-on-year in the first nine months). While high wholesale gas prices reduced the competitiveness of natural gas in the first half of the year and limited the growth of demand, LNG demand in recent months was affected by uncertainties over these prices, which could be cut by the government soon. Gas distributors seem to have anticipated such a drop and held back stock building to avoid a devaluation of their inventories.
In Taiwan, LNG imports dwindled by 5.4% year-on-year in Q3 2015, to 3.9 million tons. Despite the drop, Taiwanese imports grew by 7.1% year-on-year in the first nine months of the year, from 10.3 million tons to 11 million tons.
After two quarters of decrease, LNG imports were flat in Q3 2015 in South Korea. The second largest importer in the world received 7 million tons in Q3 2015 against 6.98 million tons in Q3 2014. In August, the country imported 15.6% less LNG than in August 2014, but higher demand during this same month from the power sector caused by above average temperatures contributed to increase imports in September (+13.3% year-on-year).
The drop in LNG average import prices temporary on hold
In Eastern Asian countries, the continuous drop in LNG prices was somehow put on hold over Q3 2015 as a consequence of the slight rebound in crude oil prices which occurred in May and June. In Japan, where long-term contracts prices are typically indexed on JCC price and include a 3-month lag, average import price grew from $8.61/mmbtu in June to $9.65/mmbtu in September. Similarly, average import price in South Korea grew from $9.11/mmbtu to $9.61 over the same period. In China and Taiwan, the higher share of spot purchases and the use of different prices formula for long-term contracts explain the different trends.
On the spot market, LNG price decreased over the summer. While Japan LNG spot price averaged $7.58/mmbtu in June, it increased in July and August when it peaked at $7.97/mmbtu, its highest level since January 2015. However, low demand in Asia and the ramp-up of new facilities in Australia and Indonesia drove spot prices down to $7.21/mmbtu in September.
Market share of Pacific Basin producers above 60%
In the third quarter of the year, the share of LNG produced in the Pacific Basin region (including Asia Oceania and Russia) continued to grow and reached 60.9% against 59% in Q2 2015 and an average of 52.4% during the whole year 2014. On the opposite, the share of supply from the Middle East decreased to 32.4% in Q3 2015 against 33.8% in Q2 2015 and a 37.8% average in 2014.
Such a trend, which started in 2013, intensified in 2015 as consequence of the ramp up of new regional producers and diminished or diverted production from the Middle East. In the first nine months of 2015, Eastern Asian countries imported 19.1 million tons of LNG from Australia against 17.6 million tons over the same period in 2014 (+8.8%). Similarly, imports from Papua New Guinea reached 5.3 million tons from January to September 2015 (+199.7% year-on-year).
On the contrary, exports from the Middle East to these four Asian countries have reduced for various reasons. In Yemen, the collapse of LNG exports from 3.6 million tons in the first nine months of 2014 to 1 million tons in 2015 is due to the shut down of the Yemen LNG plant in February. As for Qatar, supply to Eastern Asia dropped by 8.4% year-on-year from January to September as a consequence of the diversion of flexible LNG to Europe and exports to new importing countries (Egypt, Pakistan, Jordan). Imports from the United Arab Emirates decreased because of maintenance work at the Adgas plant in March 2015. Last, but not least, imports from Oman dropped by 15% from 5.6 million tons in the first nine months of 2014 to 4.8 million in the first nine months of 2015 as growing domestic demand for natural gas (+5.5% or 1.55 Bcm over the period) reduced available feedgas for the Oman LNG plant.
