Analysis - Page 13

MEDIUM AND LONG TERM NATURAL GAS OUTLOOK

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Natural gas will play a growing contribution in both OECD and emerging markets to meet the economic, environmental and security challenges of the world energy system. However, the future expansion of natural gas should not be taken for granted. Increased competition with coal in the power sector will need to be addressed while maintaining a gas price at a level compatible with the development of large capital-intensive projects. Only by resolving this conundrum can natural gas fully live up to expectations.

Gas demand growth is expected to remain strong to 2035, under the impulsion of the Middle East and China, where natural gas is making inroads in all consuming sectors

Natural gas demand➢ Energy efficiency gains will slow down both global primary energy and gas demand growths relative to the previous decade
➢ Global primary energy demand will grow by 1.3% per year and natural gas demand by 1.8% per year to 2035. Natural gas will increase its share in the global energy mix from 21% in 2013 to near 24%
in 2035
➢ Approximately 75% of the projected growth will come from emerging markets, driven by the economic growth and the displacement of oil in every main consuming sector
➢ Natural  gas  should  also  expand  in  the  power  sector  –  and,  to  a  lesser  extent,  in  the transportation sector – in OECD countries under the incentive of environmental & climate policies
➢ Asia-Oceania and the Middle-East will drive demand, accounting respectively for 42% and 24% of global growth. Asia-Oceania will become the largest consuming area post-2020, led by China.
➢ In China, the future growth of natural gas will be driven by the implementation of an energy and environmental policy aiming to shift away from coal to cleaner fuels in the long term

From lower “oil-derived spot prices” in Europe…

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Since the 2013 RWE-Gazprom arbitrage, we estimate that less than 50% of the wholesale gas sold in Europe is under oil-indexation contracts. According to the International Gas Union, gas-to-gas competition accounted for 53% of total gas consumption in Europe in 2013.

If we look at the average yearly prices of natural gas sales realized by Gazprom in Europe (where oil-indexation predominates) and compare these to the average NBP Month Ahead price, we find that:

– Prior to the crisis, Gazprom’s oil-indexed prices in Europe were trading around the NBP with a spread that ranged from -27% to +24%; this can be explained by the time lag (3 to 9 months) used in the oil-indexation price formulae.

– In 2008, both prices were completely in line.

– In 2009, with the full impact of the economic crisis, spreads increased to a massive 70%! This also shows that, in 2009, European gas prices did not move down as fast as oil prices.

– From 2010 to Q1 14, renegotiations and arbitrations on the one hand and higher spot prices on the other have resulted in spread compression. In 2013, prices were nearly aligned (with less than a 5% spread), indicating that prices are once more closely linked. By not pushing volumes too much, Gazprom/Russia and Statoil/Norway not only avoided a price war in 2011-2013 but managed to reset spot prices to a level acceptable to them.

– In Q2 14, Russia pushed a lot of gas into Europe (to incentivise injection into storage to mitigate any potential disruption via Ukraine later in the year) while we witnessed very weak demand (-18.1% in H1 14 vs H1 13). As a result, spot prices went down, further increasing the spread with the recently disclosed Gazprom figure for its realized price in Europe.

Natural Gas Markets Show Disturbing Signs of Weakness

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The 2014 edition of CEDIGAZ’s flagship survey Natural Gas in the World highlights some disturbing signs of weakness on the demand and supply sides, indicating structural challenges that will need to be addressed before a golden age of gas can occur.

In 2013, growth in worldwide gas demand decelerated, up by only 1% versus 2.4% in 2012. This is less than the 3% growth achieved by coal and, most remarkably, less than that of oil (1.4%). Moreover, gas was the only fossil fuel to record lower growth in 2013 than in 2012. This phenomenon may be observed even in Asia – a powerhouse in terms of growth in gas demand – where demand rose 4% in 2013, down from 6% one year earlier. Gas demand had already shown its limitations in 2012, when it gained only 2.4%, compared to an average growth of 2.8% per year in the previous decade.