Gas price slump worries major producers

Gas price slump worries major producers

Members of the Gas Exporting Countries Forum (GECF) ended their 13th ministerial meeting and their first summit last week in Doha amid concern about natural gas prices that have been falling since the global financial crisis of 2008.

World gas demand fell by 2.1 per cent from its 2008 level but recovered and rose by 7.3 per cent in 2010 mainly due increase in Japan’s LNG imports in the wake of the Fukushima nuclear crisis.

Although oil prices recovered from the lows of December 2008 when they reached $35 (Dh128) a barrel to the present level of over $100, gas prices fell from $12 per million British thermal units (mbtu) to as low as $3 and now are about $4 per mbtu.

The summit declaration reiterated “the need to reach a fair price for natural gas based on gas to oil prices indexation” and “recognise the importance of long-term gas contracts to achieve a balanced risk-sharing mechanism between producers and consumers”.

The problem is that while complaint about the level of prices is loud it is not clear how the Forum will be able to reach “fair prices” which many statements equate to parity with oil prices. In his opening speech of the summit, Shaikh Hamad Bin Khalifa Al Thani, the Emir of Qatar, said: “It is illogical that discrepancies between oil prices and gas prices increase in favour of the first”, but he added that he does not call for controlling production to influence prices.

Competition

In contrast, the Iranian minister called on the forum to develop “a comprehensive market management plan” and the Secretary General of GECF executive office said that “we prefer to find ways to minimise competition among gas-producing countries.”

These statements indicate that while member countries are intent on cooperation, staying together, exchanging views and information and possibly investing together in some projects, they do have differences as to where their organisation is headed with respect to its role in the pricing of gas.

There is no doubt that gas prices can only be raised to a desired level by looking at the supply side and doing something about it. Of course this is not easy given the state of the market and the sudden increase of supplies especially from the US with its “shale gas revolution”. This factor is so strong that the US LNG terminals are now working at low capacity due to reduced imports. LNG which was destined to the US market is now sold in the spot market, undermining prices. The GECF is also under pressure from consuming governments not to attempt to become a “gas Opec” thereby influencing gas prices. Some ministers went out of their way to alleviate such a possibility, which admittedly is difficult due to the nature of the gas market and its differences from the oil market.

But the producers and consumers do agree on the need for investment to meet future demand and the International Energy Agency recently estimated that around $10 trillion of investments would be needed in the gas industry until 2035. Today’s prices do not encourage such a level of investment and therefore there may be a shortage in the future driving gas prices up.

Members of GECF control more than 70 per cent of the world’s gas reserves and probably more than 60 per cent of exports, which are likely to rise to 70 per cent by 2020. Wood Mackenzie’s Global Gas Model forecast exports from GECF members in 2020 to be 1,038 billion cubic metres (bcm), a huge rise from 488 bcm in 2007. While total non-GECF exports are likely to rise to 430 bcm from 325 bcm in the same period. Oman just joined the Forum and there are many countries such as the UAE contemplating joining. Therefore the above figures are likely to change in directions that will enhance the Forum.

Long-term contracts

The problem of a unified pricing mechanism is that it hardly exists. In the US there is a truly spot market depending on prices at Henry’s Hub. But the spot market in Europe and Asia is a recent one and small in size. Therefore prices depend on the long-term contracts between buyers and sellers where in Europe prices are linked to a basket of oil products while those in Asia are linked to crude oil.

It will take some time before GECF countries find the ground that will allow them more control over natural gas prices. But this is no reason not to welcome cooperation among them and to hope that the newly established gas research institute will eventually find ways and means to influence gas prices positively.

 

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