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The contents of this presentation are subject to PHCL copyright.
This presentation may not be reproduced in whole or in part without the written permission of
Patrick Heather, PHCL, Lulworth, Longfield Road, Twyford, READING RG10 9AT
Tel: +44 118 934 5039 Mobile: +44 777 194 6334 Email: phcl@outlook.com
PatrickHeatherConsultancy
Patrick Heather Consultancy Limited
Global gas outlook:
Supply, demand
and gas price formation
Nitrogen and Syngas 2016 Conference Berlin, 1st March, 2016
Patrick Heather Consultancy Limited
Patrick Heather Consultancy Limited 2
• An Energy Markets consultancy, specialising in the European utility
sector, covering gas, electricity, emissions and coal and, in the
energy forwards and futures markets.
• Advising on trading, risk-management and portfolio optimisation
issues but also on providing marketing and business advice.
• Giving presentations on the utility/traded markets and related topics.
• Providing practical knowledge and experience in trading, managing
trading operations, setting up trading desks, contract negotiation
and Client representation.
• Providing Expert Opinion in gas contract litigation and other energy
trading related cases.
• Contact details:
– Telephone: +44 (0)118 934 5039
– Mobile: +44 (0)777 194 6334
– Email: phcl@outlook.com
© 2016
Oxford Institute for Energy Studies
Patrick Heather Consultancy Limited 3
Patrick Heather is a Senior Research
Fellow at the OIES, focusing on the gas
and power markets, in Britain and
Continental Europe.
His published works are available on the
Institute’s website: • "The Evolution and Functioning of the Traded Gas
Market in Britain" http://www.oxfordenergy.org/wpcms/wp-
content/uploads/2010/11/NG44-
TheEvolutionandFunctioningOfTheTradedGasMarketInBritain
-PatrickHeather-2010.pdf
• "Lessons from the February 2012 European gas 'crisis'" http://www.oxfordenergy.org/wpcms/wp-
content/uploads/2012/04/Lessons-from-the-February-2012-
gas-crisis.pdf
• "Continental European Gas Hubs: are they fit for
purpose?" http://www.oxfordenergy.org/wpcms/wp-
content/uploads/2012/06/NG-63.pdf
• “The evolution of European traded gas hubs" http://www.oxfordenergy.org/wpcms/wp-
content/uploads/2015/12/NG-104.pdf
© 2016
Contact details: Email: patrick.heather@oxfordenergy.org
Outline
Global gas supply • Current and future supply routes
• The ‘shale revolution’ and global LNG
Global gas demand
• European gas demand has been decimated
• Asian demand has continued to rise
Gas price formation • Moving from oil indexation to market pricing
• Will gas hubs provide a true reference point?
Summary and Conclusion
Patrick Heather Consultancy Limited © 2016 4
Patrick Heather Consultancy Limited © 2016
Global gas supply
Current and future supply routes
5
Natural Gas
Patrick Heather Consultancy Limited © 2016 6
Source: BP Statistical Review 2015
Where is it found and
consumed?
• ~74% reserves held in Middle
East and Europe/Eurasia
– Iran 18.2%
– Russia 17.4%
– Qatar 13.1%
• ~58% consumed in Europe/
Eurasia and North America
– US 22.7%
– Russia 12.0%
– China 5.4%
The reserves figure is remaining stable: in 2009 it was 187.49tcm!
Natural Gas Transportation
Patrick Heather Consultancy Limited © 2016 7
By gas pipeline or by LNG tanker
Source: BP Statistical Review 2015
There are three main global gas regions: North America about to export;
Europe, < demand & production; Asia/Pacific, > demand & production
Gas Supply to Europe
Patrick Heather Consultancy Limited © 2016 8
Gas imports to Europe come from four main sources:
Norway, Russia/Central Asia, North Africa and LNG
Indigenous production is falling
Europe is reliant on an ever greater import volumes
LNG will account for an ever greater share of those imports
Russia will remain main pipeline supply
Source: Honore (2010), OUP Note: 2008 volume figures
Gazprom’s contracts with European customers
Patrick Heather Consultancy Limited © 2016 9
Even at 70% ToP, Gazprom’s average annual sales
exceed 100 Bcm/year until the mid-2020s.
Realistically, Russian volumes look fairly secure for at least 10 years
Source: ERI RAS in Henderson and Pirani (OIES 2014)
Long term take or pay contracts to 2030
Global gas trade 2015-2040
Patrick Heather Consultancy Limited © 2016 10
Pipeline gas will reduce from 63% to 56%; LNG will increase from 37% to 44%;
Traded gas will increase from 12% to 37%
Sources: GECF Presentation Dec 2015; BP Statistical Report; ExxonMobil 2040 Outlook; GIIGNL 2015
Patrick Heather Consultancy Limited © 2016
Global gas supply
The ‘shale revolution’ and global LNG
11
Patrick Heather Consultancy Limited © 2016 12
Global ‘Top Ten’: China 1,115; Argentina 802; Algeria 707 US 665; Europe 624; Canada 573; Mexico 545;
Australia 437; South Africa 390; Russia 285 Trillion cubic feet (Tcf). Source: EIA Technically Recoverable Shale Oil and Shale Gas Resources: June 2013
Worldwide shale gas: the geology
Source: EIA, Sept 2015
Shale gas activity outside North America
Patrick Heather Consultancy Limited © 2016 13
There is currently little hope of a shale revolution elsewhere in the world!
Poland: Despite still having the highest TRR in Europe, the ‘promise’ is fast becoming a ‘disappointment’
UK: Promising discovery in NW England by Cuadrilla but subsequent earth tremor has prompted renewed opposition; politicians ‘blow hot and cold’
France: Hollande continued the legal ban on fracking
Germany: existing ban on fracking extended following the new CDU/SPD coalition government
Ukraine: Local demand is insufficient to create and sustain an unconventional gas boom
China: CNPC have drilled in Sichuan province and government hopes to identify 1tcm resources by 2020 but big questions over availability of water
India: Shale gas acreage auctions delayed, awaiting approval of policy document
Argentina: Much IOC/NOC interest and substantial reserves but very low domestic wholesale price prevents development
Conclusions Shale
Patrick Heather Consultancy Limited © 2016 14
Biggest factor: US shale production will greatly impact global LNG availability
• Shale has been a game changer for US production
and has already impacted other regional markets
by re-directing LNG.
• Shale development possible in Europe, South
America, India and China – but early days.
• Polarised views as to the sustainability of US shale
growth; impacts confidence in US LNG exports.
• Future trajectory of shale production in US will have
dramatic impact on Europe.
• Shale development outside US also, but probably
in 2020+ timeframe if successful.
Patrick Heather Consultancy Limited © 2016 15
‘Top Five’ exporters: Qatar 102; Malaysia 34; Australia 32 Nigeria 25;
Indonesia 22. ‘Top Five’ importers: Japan 121; Sth Korea 51;
China 27; India 19; Taiwan 18 Billion cubic metres (Bcm). Source: BP Statistical Review 2015
Worldwide LNG: Trade movements 2014
Source: IGU World LNG Report 2015
Global LNG supply
Patrick Heather Consultancy Limited © 2016 16
LNG supply will have nearly doubled in the 12 years from 2005 to 2017 and
could nearly double again from 2017 to 2030.
Biggest factors today: Asian demand growth and US liquefaction
Un-risked
Probability - Weighted
Firm Projects Only
Potential for further Qatari
trains ?
Sources: Ledesma and Rogers, OIES
LNG global gas market/global gas price?
Patrick Heather Consultancy Limited © 2016 17
• Long Term LNG contracts are being renegotiated – To reduce oil indexation
– To include market pricing
– high LNG import capacity does allow for more destination flexibility
– supply will largely depend on price!
• New more flexible contracts being signed:
– Shorter duration
– Some with flexible/multiple destinations
• Short term and spot trading is increasing:
– 29% in 2014 (25% in 2012)
• Reloaded quantities increased 51% in 2014:
– From 14 to 19 cargoes
• LNG tanks are being used as pseudo-storage
Through LNG, the physical markets for gas are globalising!
But this does not (yet) mean a global price
Conclusions LNG
Patrick Heather Consultancy Limited © 2016 18
The LNG industry is going through a period of rapid evolution
• Marked increase in number of market participants
• Significant increase in liquidity
• Fragmentation of supply chain
• Traded volumes are increasing
• Changing contracts and pricing models
• New LNG/gas traded hubs initiatives in Asia
• LNG has the ability to respond quickly to market signals
• LNG now being used in transportation
• US, Australia will add large volumes to supply total
• Other LNG projects to come on stream 2018-2025
Patrick Heather Consultancy Limited © 2016
Global gas demand
19
Primary energy consumption 1989 – 2014
Patrick Heather Consultancy Limited © 2016 20
Source: BP Statistical Review 2015
Oil still leads with 32.6% but lowest share on record; coal’s share
of 30.0% 3rd highest since 1969; gas steady at 23.7%
mtoe
Patrick Heather Consultancy Limited © 2016 21
As energy intensity lessens, the respective shares of world primary energy
are converging to ~27% each for carbon fuels and ~7% each for ‘clean’;
Gas and Hydro retain shares of power, at the expense of Oil, Coal and Nuclear
Primary energy forecast shares to 2035 and
Primary inputs to power generation
Global gas demand
Patrick Heather Consultancy Limited © 2016
As the gas price starts to fall, gas demand should accelerate: 98% of growth
is outside Europe and is largely driven by the power sector
22
Source: IEA Gas Medium Term Market Report 2015
Trend of global gas demand, 2005 - 2020
Demand by sector, 2015- 2020 Regional demand growth , 2015- 2020
Bcm
European gas demand
Patrick Heather Consultancy Limited © 2016
• European gas demand has been decimated
• Firstly by the 2008-09 crisis and recession • Then by the Eurozone crisis and cheap coal • Now by poor recovery and increased renewables
• Demand 2010: 570 bcm
• Demand 2011: -10% to 515 bcm
• Demand 2012: -2% to 505 bcm
• Demand 2013: -2.5% to 490 bcm
• Demand 2014: -9.5% to 454 bcm
• Demand 2015: est.-10% to +2% to 409-463 bcm
• Recover to pre-crisis levels by 2020?
Will European gas demand reach 600 bcm this decade?
As we see it today, this is very unlikely! Will it even reach 500 bcm?
23
Patrick Heather Consultancy Limited © 2016
Chinese gas demand is forecast to grow by 9%/yr to reach c.300bcm by 2020.
This looks very optimistic on recent trends: yr/yr growth in 2013 was 13%,
2014 6% but just 4% in 2015. Supply outstripped demand by >6bcm in 2015
24
Sources: CNPC presentation Dec 2015 and Reuters
Chinese gas demand
Patrick Heather Consultancy Limited © 2016
Gas price formation
Moving from oil indexation to market pricing
25
Patrick Heather Consultancy Limited © 2016 26
Oil indexed LT LNG contract prices have fallen and stabilised slightly;
Spot prices have fallen significantly to close to or below European hub prices;
LNG is truly an alternative to pipeline gas in 2016
Global gas and Brent prices: January 2008 – January 2015 (curve to 2016)
European Gas Price Formation: 2005-2014
27 Patrick Heather Consultancy Limited © 2016 27
OPE: Oil Price Escalation GOG: Gas-on-Gas Competition RCS: Regulated Price (Cost of Service) RSP: Regulated Price (Social and Political)
BIM: Bilateral Monopoly NP: No Price North West Europe: Belgium, Denmark, France, Germany, Ireland, Netherlands, UK.
Central Europe: Austria, Czech Rep, Hungary, Poland, Slovakia, Switzerland. Mediterranean Europe: Portugal, Spain, Italy, Greece, Turkey.
South East Europe: Bosnia, Bulgaria, Croatia, Macedonia, Romania, Serbia, Slovenia.
Europe Gas Supply
by destination and pricing: Q4-2014
Sources: IGU Wholesale Gas Price Survey - 2015 Edition; P.Heather
Across Europe as a whole the move from oil indexation to
Gas-on-Gas pricing has been decisive over the past 10 years
Europe Price Formation: 2005-2014
*Asia-Pacific: Japan, Korea, SE Asia, Australia and New Zealand
Asian Price Formation: 2005-2014
28
Gas purchase price formation in this region has changed very little over the
past decade and is still dominated by oil-indexed pricing
Source: IGU Wholesale Gas Price Survey - 2015 Edition
Patrick Heather Consultancy Limited © 2016 28
Asia-Pacific* Wholesale Gas Pricing 2005-14
European LTCs are being market priced
Patrick Heather Consultancy Limited 29 © 2016
• Britain now has 100% market pricing
• Continental Europe is now c.46% oil indexation
• Continental Europe is now c.53% market priced
• Increasing volume of spot priced gas
• Eastern and Southern Europe resisting change
Oil indexation is no longer relevant; the logic for gas-to-gas ‘market pricing’
is apparent and its share has exceeded 50% since 2013, reaching 61% in 2014
Asian gas contracts/pricing scenarios
Patrick Heather Consultancy Limited © 2016 30
This region is struggling to move away from JCC oil indexation towards market pricing concepts: Several new LNG contracts have been signed based on the US Henry Hub
– But this introduces a new risk as HH pricing does not reflect regional supply/demand fundamentals
There are three main options: Business as Usual: remains possible if sellers and buyers cannot agree to new contractual terms
Smooth gradual transition: most desirable option but unlikely, due to region’s particular circumstances
Difficult and painful transition: this results from forced change due to (usually) financial losses by buyers (or sellers), making the ‘old’ situation untenable
As in North America, then in Britain, and now in Continental Europe, the
transition is almost certain to happen but will take time and will be painful!
Patrick Heather Consultancy Limited © 2016
Gas price formation
Will gas hubs provide a true reference point?
31
What constitutes a ‘good’ hub?
Source: H.Rogers
The ‘Path to Maturity’ starts with Third Party Access and, over a period of
time, develops to provide first OTC then financial products, ending with
Indices used as reference prices in physical contracts
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Patrick Heather Consultancy Limited © 2016 33
North American gas regions, markets and hubs
US was the first market to liberalise but it has a ‘complicated’ structure
Seven regions serve 33 Market Centers/Hubs
Traders ‘wheel’ gas shipments from hub to hub
Henry Hub in Louisiana is the Benchmark Hub
Sources: EIA, Gas Tran Information System, Natural Gas Market Hubs Database
European gas regions, markets and hubs
Not all hubs are developing in the same way or at the same speed
Only two ‘mature’ gas trading hubs in Europe: NBP and TTF
Patrick Heather Consultancy Limited © 2016 34
Development European hubs
Europe is not one homogenous gas market:
neither in infrastructure nor in political desire to change
• The most developed part of Europe in terms of
liberalised gas hubs is in the North-West but this is
also the one with the most disparity
• The Central European region is the one showing
most promise for further development
• Most of Eastern Europe is still heavily dependant
on Russian gas supplies, arriving through the
historic network of ‘transit’ pipelines
Patrick Heather Consultancy Limited © 2016 35
Patrick Heather Consultancy Limited © 2016 36
Asian gas regions, markets and hubs
Singapore seems best suited as regional natural gas trading hub: unbundled
gas and power infrastructure; wholesale gas pricing; open access SLNG
terminal; well placed geographically to serve all Asia-Pacific
90% of traded volume is LNG - only ~10% piped
Multiple pricing areas might develop: China, Japan/Korea, and especially Singapore stand out based on current and future market structure
Expected to be
2nd largest gas
region by 2015:
Schematic of a Liquid Asian Hub
In order to achieve liquidity:
Need to trade standardised parcels of gas (not sea-borne LNG Cargoes);
With competing sources of supply (could be just LNG sources);
With Third Party Access to infrastructure
Patrick Heather Consultancy Limited © 2016 37
Source: H.Rogers, OIES
Conclusions gas price formation
Patrick Heather Consultancy Limited 38 © 2016
US gas markets started liberalisation in the 1980’s but took nearly 20 years to become a ‘regulated competitive
market’, only truly liberalised at the wholesale level
Britain’s gas markets liberalised in the mid-1990’s and reached ‘maturity’ within 10 years, albeit at a high cost
European gas markets really started in the mid-2000’s but are far from being fully liberalised across all countries
Asian gas markets have just started in the mid-2010’s to move away from oil indexation towards market pricing
Henry Hub is the benchmark for Nth American gas and some LNG supplies
NBP is the benchmark for gas in British Isles and some LNG supplies
TTF is the benchmark for North West European gas supplies
Further down the line there will almost certainly be at least one Asian hub
However, it must be remembered how long the process of change takes!
But, yes, Gas Hubs will provide a true reference point!
Patrick Heather Consultancy Limited © 2016 39
Summary and Conclusion
Summary and Conclusion
Patrick Heather Consultancy Limited © 2016 40
Despite a significant fall in demand since 2010, an increase in renewables and
a rise in energy efficiency, gas will continue to play a role in the energy mix
Natural Gas has played a big part in the energy mix since the 1960’s, especially in North West Europe
Global demand is rising overall but it’s been decimated in Europe and in Asia, there are now questions over
Chinese growth
Realistically, and despite the geo-political tensions, Russian volumes look fairly secure for at least 10 years
Australian and US LNG exports will lead to a supply ‘bubble’ until 2020 or longer
Gas price formation is gradually changing across the world, with traded hubs providing competitive markets
There is still a case for gas in power generation, especially as a back up for wind and photo-voltaic
Through LNG, the markets for gas are globalising! But this does not (yet) mean a global price
Thank you!
PatrickHeatherConsultancy
The contents of this presentation are subject to PHCL copyright.
This presentation may not be reproduced in whole or in part without the written permission of
Patrick Heather, PHCL, Lulworth, Longfield Road, Twyford, READING RG10 9AT
Tel: +44 118 934 5039 Mobile: +44 777 194 6334 Email: phcl@outlook.com
Patrick Heather Consultancy Limited