This month's cold snap may have provided a fillip for the UK's energy utilities, but it came too late for the gas producers themselves - at least those operating across the Atlantic. The northern winter, which hitherto had been positively balmy, gave way to a more familiar Arctic blast, although it proved insufficient to alleviate a slump in US wholesale gas prices.
This constricted fourth-quarter earnings for operators with US interests, such as Royal Dutch Shell, and it may have prompted some to question whether the huge sums that have been pumped into gas infrastructure assets actually constitutes money well spent, particularly if the current glut in US supply becomes a recurrent feature of the market.
And that's the thing with gas: unlike oil, pricing is remarkably local, with no global benchmarks. The principal seaborne export hubs are located in Qatar and Australia, where prices are increasingly determined by Asian demand, whereas prices for much of Europe are linked (somewhat spuriously) to crude oil prices, reflecting Moscow's influence.
But that could all be set to change. A dramatic rise in US output – much of it from shale – means that country could become a net exporter. And new pipelines through the 'Stans' could challenge Gazprom's grip on European supplies as well as opening up China and India.
Gas expands
Although Shell's fourth-quarter earnings were eroded by gas price volatility, the group still made great store of the fact that it has ploughed billions into cutting-edge, gas-conversion technologies through projects such as Pearl GTL and Qatargas 4 LNG. Shell, in common with other industry players such as Exxon, Santos and Woodside Petroleum, has made large-scale capital outlays in expectation that natural gas usage is set to increase significantly, both in absolute terms and as a proportion of the global energy mix.
This also helps to explain why UK utility Centrica recently forked out £142m to up its stake in the Statfjord gas field. Centrica is obviously committed to expanding its reserve base, but it would be rather reluctant to add any assets to its balance sheet if it anticipated that they were likely to depreciate significantly in value over the long term.
The last World Energy Outlook report published by the International Energy Agency (IEA) supports the view that natural gas is the world's fastest-growing energy source; only the rapidity and scale of the increase remains open to conjecture. The IEA estimates that primary demand could increase by 55 per cent through to 2035. Most of this new demand will be concentrated in non-OECD countries, where demand is expected to rise at a much faster rate than OECD countries. An increase in global production equivalent to treble that of Russia's (the world's biggest producer) will be required to meet the increase.
Chinese gas guzzler
Unsurprisingly, China provides the principal catalyst; its government has made the expansion of gas-fired power plants a strategic priority. Less than 2 per cent of China's electricity is now generated in this manner, but Beijing intends to raise this to 10 per cent by the end of the decade. Some UK operators, such as Green Dragon Gas, moved quickly to exploit China's growing appetite for gas by utilising their experience of the unconventional drilling industry in North America. Nevertheless, China's increasing proportional reliance on gas, allied to the exponential growth in its generating capacity, means that the country will invariably place greater demands on global export markets, and thereby bolster prices.
Given its proximity to both India and China, the former Soviet region comprising the Commonwealth of Independent States (CIS) is set to become one of the world's principal gas export hubs.
Much will depend on how rapidly existing infrastructure in the region can be utilised to exploit the growth in Asian demand, while the conduit into Europe's markets is still dominated by Gazprom, although its effective monopoly is no longer quite so secure.
A free-hand in distribution would present tremendous opportunities for UK oil and gas companies with a foothold in the region. The business model of one such operator, Tethys Petroleum, could be transformed overnight if, or when, new pipeline routes to Asia and Europe come onstream.
The latter could be more problematic. The chief executive of Tethys, Dr David Robson, is confident that "the enormous gas potential of Tethys' acreage in Tajikistan could be exploited either by export to China, or via the trans-Afghan pipeline system to the Indian sub-continent", but he warns that Europe needs to "get together and work with the Central Asian nations" if it wants to secure an independent route for gas supply.
IC VIEW:
While growth rates and impending energy deficits ensure that the big manufacturing economies of Asia will increasingly turn to natural gas to fuel their economic growth, environmental issues are also providing an impetus for demand, as evidenced by Beijing's new focus on clean air policies, and the upsurge in Japanese gas demand post Fukushima. Australian and Qatari exports will ramp up rapidly, but Central Asian production will be required to meet burgeoning demand in China. The unconventional gas segment of the US economy has developed so rapidly that the structural implications for the US economy are currently difficult to assess, although they're likely to be profound.
| FAVOURITES: |
| We've been singing the praises of Green Dragon Gas for some time. Flexibility and specialisation are both key to Green Dragon's business, but its chairman Randeep Grewal clearly appreciates the value of applying a stakeholder model to its operations in China. This means that, unusually for a relatively small player, it is now firmly established at a regional level. The company is currently building its distribution and sales capability, which should enhance an already promising growth profile. |
| OUTSIDERS: |
It's probably a tad premature to ring the death knell for one of the world's biggest energy companies, but Gazprom is now faced with a growing number of alternatives to Russian supply, including the increased size and number of LNG super tankers, together with the rapid expansion of North American shale gas production. Unfortunately, the corporate health of Gazprom is inextricably linked to Russia's political stability, which only adds to the uncertainty. |
