In a presentation today at Gastech 2009, Wood Mackenzie has said a global gas glut has driven down spot prices for gas everywhere and the situation will only get worse for sellers over the next few years, as the market increasingly favours buyers.
“The combination of the global slide into economic recession, the dramatic growth in gas availability from unconventional sources in North America and the largest wave of new LNG supply ever to hit the global market have contributed to a global gas glut,” explained Noel Tomnay, head of global gas, gas & power research for Wood Mackenzie.
Wood Mackenzie believes that withdrawal of supply from the global market is required to prevent a collapse of spot prices: a collapse which could materialise as early as this summer.
The supply-demand outlook in the Atlantic, including North America, is largely dependent on the actions of European piped-gas suppliers, such as Norway and Russia, as it is within their power to decide how much LNG will enter the European market. Tomnay explained; “Wood Mackenzie estimates that 140 billion cubic metres (bcm) per annum of discretionary pipe gas and flexible LNG will compete for an average of around 70 bcm (per annum) of contestable market over the period from 2010 to 2012 in Europe.”
“It is clear the availability of piped gas and LNG in the Atlantic will remain higher than demand for some years. But it is not clear whether major piped exporters to Europe, including Russia and Norway, will be prepared to back out discretionary gas to accommodate new LNG into the European market and sustain reasonable price levels in Europe. Or, alternatively, whether these same suppliers will seek to maintain market share and be prepared to drive down prices to shut-out new LNG.”
If the new LNG doesn’t find a home in Europe, Wood Mackenzie warned, North America will become the global safety valve to release the gas over-burden; “Effectively higher LNG imports will result in lower priced gas in North America, therefore the actions of European piped gas suppliers will have a significant impact on prices in North America,” Tomnay said.
“LNG is therefore likely to displace indigenous gas in North America requiring further reductions in drilling rigs in the near term as the market seeks a new clearing price that will encourage development of sufficient gas to balance the market.”
The Pacific offers a last bright spot for sellers of long term gas as Wood Mackenzie forecasts China demand growth to retain a tight market in the 2013 to 2015 period which is currently propping up long term contracts. But the balance is a delicate one which may shift in just the next 18 months; “Our analysis suggests that the Pacific market requires only a further 36bcm, or 28 mmpta, of new LNG in 2015 while the combined potential output capacity of PNG LNG, Gorgon, Queensland Curtis, GLNG, Ichthys and Donggi – all projects chasing Final Investment Decision (FID) in the next 18 months – is more than 57bcm, or 44mmpta, when fully operational.”
“As the likelihood of FIDs of new volume crystallises, so the strength of sellers in subsequent negotiations deteriorates,” concluded Tomnay.
