Given the shale gas revolution, a rigorous mapping of scenarios for natural gas is necessary
The “golden age of gas” is a phrase that may pass into common usage. Unlike the scorned and increasingly illegitimate recent “era of high finance” pioneered in the North Atlantic, this epithet may even have legs — considering that Shell has kicked off plans in the United States for retail distribution of compressed natural gas, or CNG, to the transport sector.
A crucial facet of this development is that cross-border gas trade is growing faster than gas production. The growth trajectory of global gas trade has surpassed the pre-2008-09 rate of over four per cent. Liquefied natural gas has doubled since 2007, to 330 billion cubic metres per annum in 2011; integration is taking place and geographic segmentation is gradually subsiding.
The reasons for the rise in the fuel’s “profile” are well known. First, gas is cleaner than coal and safer than nuclear power; it is widely accepted as a “bridge” towards competitive renewables. Moreover, the lower capital costs and greater flexibility of gas-based power plants afford obvious efficiencies in certain contexts; fertiliser plants with gas as feedstock have a significant cost advantage. Second, it has the potential to be a direct substitute for liquid transport fuels — India is familiar with this. Third, as new technologies make shale and tight gas economical to extract, the geographic spread of new finds means that strong oligopolistic structures will less likely dominate. In other words, apart from coal, natural gas holds out the prospect of a relatively competitive market structure.
While India is, at best, a middling player in terms of production, the growing size of its economy and energy intensity means that on the demand side it is an increasingly attractive geography. In an ever-more volatile and uncertain world, it is critical to make one’s commercial bets as robust as possible under diverse circumstances. Scenario-building can be useful for calibrating plausible limits on energy prices, and help test the robustness of strategies against alternative world views.
The proximate variables that will most influence gas pricing at a macro level are global growth and the supply outlook. The first variable, global growth, must capture, and respond to, the multi-paced world we live in. Estimating a growth trajectory for large emerging economies, especially India and China – a short-term dip or a new slower normal – is vital for gauging market expansion. On the other hand, if the euro zone continues in a more or less permanent structural funk – or, at best, tepid growth – then legacy markets, overall, will be a constraint on the sector’s expansion. Another major catalyst is the positive loop between a revival in US manufacturing comparative advantage and higher energy demand.
The second variable, supply potential, has multiple drivers, incorporating dynamics of both production and national public policies. For example, the extent to which the wider global economy benefits from the bonanza of shale discoveries depends on how much “shale nations” keep the spoils for themselves. The scope of resource nationalism creeping into the gas arena is an open question. The imminent disruptive feature here is the fraction of US shale gas production that could be exported. Will it be 10 per cent or 25 per cent? Will exports be 50 million tonnes per annum, or considerably higher (maybe by a multiple) in the long term, with an apposite export tax? Also, sovereign regulatory and legislative agenda will matter. For instance, will Australia “flood” the market as it seeks to more than treble its gas output over the next decade by overruling its strong environment lobby, and/or will Qatar retaliate to ensure its leadership position in Asia?
The upshot is that the lines between the two virtual gas basins – Atlantic and Pacific – have begun to blur decisively and we see the emergence of a global market. Only the pace of this is open to debate. We are, thus, looking at four possible worlds, each with significant implications for gas price evolution:
In addition, specific “black swan” events and geo-political factors could further cloud scenarios — such as the timing of Iran, with the second-largest proven gas reserves, entering the market. The base set of “visions”, however, provides a basis for deriving implications regarding future market environments and associated second-order consequences for businesses linked to the gas sector.
In 2012, we stand firmly in scenario II, with moderately “healthy” global growth – which may be short-lived – and limited additional supply coming to the market immediately. We anticipate that this tightness will continue over the next two to three years on account of infrastructure lead times. However, given the current cues and consensus on global evolution, one can plausibly imagine a south-easterly trajectory with a “landing” on Scenario III in the time frame of 2017-2020.
Though the scenarios are useful for validating current investment and business strategies, they should not be the basis for speculative price “calls”. Given the nature of contracting in the gas space, it is prudent to incorporate prospective price signals but not necessarily to bet the shop on them. Long-term contracting is certainly about understanding conceivable scenarios, and structuring terms and conditions for contracts that make gas prices as risk-agnostic as possible.
The writers are with the Boston Consulting Group’s energy practice.
These views are personal
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