Oxford Institute for Energy Studies - Patrick Heather

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: [email protected]

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 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: [email protected]

© 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: [email protected]

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


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


By gas pipeline or by LNG tanker


There are three main global gas regions: North America about to export;

Europe, < demand & production; Asia/Pacific, > demand & production

Gas Supply to Europe


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


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


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


Global gas supply

The ‘shale revolution’ and global LNG

11


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


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


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.


‘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


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?


• 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


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


Global gas demand

19

Primary energy consumption 1989 – 2014



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


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


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


• 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


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


Gas price formation

Moving from oil indexation to market pricing

25


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


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


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!


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



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


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



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


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!



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: [email protected]


Oxford Institute for Energy Studies - Patrick Heather

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