It’s a gas, gas, gas

The prospects for the world gas market may look better long term, but near-term forecasts keep getting gloomier.

To wit, Deutsche Bank analyst Elaine Dunphy, in assessing the outlook for Statoil in a Dec. 7th research note, sees problems ahead for Norway’s state-owned company, which is Europe’s second-largest gas producer, after Gazprom, with a market share of about 15% (total 2008 sales 45.2 billion cubic meters).

The basic problem, according to Ms Dunphy, is that while Statoil has seen rising gas sales and profits through the third quarter of this year, “reality may be about to bite”. By reality she means that some of its big European gas buyers – industry, power generators, etc., which are concentrated in western Europe – are expected to require about the same volume of gas next year at a time when supply is increasing, leading to pressure for a change in their contracts to reflect a weaker gas market.

About two-thirds of Statoil’s gas sales are covered by long-term contracts (mostly to German and French buyers,  see here for link to Statoil’s interactive pipeline map), according to which prices are set with reference to oil prices. While oil prices have rebounded strongly this year, those contract prices have been slow to respond to gas market fundamentals. Another third of Statoil’s gas is sold into the UK with reference to spot gas prices, where the weakness is reflected clearly in futures prices; for example, the March 2010 UK natural gas futures contract listed on I.C.E. has collapsed from about 56p per therm in May to about 30p/therm in early December. This means that Statoil customers whose contracts are oil price-based are demanding a change in the contract terms or else they’ll exercise their options to take minimum amounts of gas and cover the rest of their needs on spot markets.

In common with most analysts, Deutsche Bank sees European gas markets oversupplied through 2012 at least. While long-term demand for gas is growing worldwide – especially in terms of long-term contracts for liquefied natural gas (LNG) – that demand is struggling to keep pace with rising supply. (See the EIU’s December gas outlook).

In Europe, in particular, rising supply from the Norwegian Continental Shelf will contribute to the glut, while the addition of re-gasification infrastructure to handle LNG imports has increased buyers’ options. This is a situation that is not expected to be fully alleviated until about the middle of the next decade. (See graph below).

A dilemma for Statoil is whether it will give into the market pressures and change long-term contract terms in order to hold onto European market share, or decide to leave gas in the ground and lose market share in order to maintain margins.

Ms Dunphy at Deutsche Bank says there are “too may moving parts” to determine how it will pan out for Statoil, but she expects that the company will decide to sell less gas – she figures a volume decline of about 7% from 2010 through 2012.

Gazprom, on the other hand, has eased contract terms for Ukraine some and is negotiating with Turkey and others. Statoil has less flexibility in terms of the markets it serves and if it holds out on easing its contract terms and goes for lower volumes that, in turn, might help the market overall but allow Gazprom and others to capture some of its market. So, it depends on which bullet Statoil decides to bite.

Copenhagen fatigue

Chinese smog (NASA)

Put it down to “Copenhagen fatigue” as the hype levels reach mind-numbing proportions ahead of next month’s big climate summit, but some of the headlines of the last two days might give the impression that the US and China have finally put in place firm carbon emissions-cutting commitments that will allow the world to reach a deal in Denmark.

On Friday, it was the turn of the Chinese to capture front pages. In the US, the New York Times had “China joins US in pledge of hard targets on emissions“, while the Los Angeles Times went with “China vows to cut greenhouse gas emissions 40% by 2020“.

China’s commitment is neither a hard target nor has it agreed to cut emissions. Rather, the Chinese pledge is an aim to cut energy intensity by between 40% and 45% by 2020 compared to the 2005 level, where energy intensity is measured as the unit of energy required to produce a unit of GDP. That announcement is not just a diplomatic sop aimed at appeasing doubters over China’s commitment to act on climate change, as the South China Morning Post argues (subscription required). Nonetheless, it is best described as an aspiration, and not even a new one; also, it is something which is a fruit of development rather than specifically aimed at cutting emissions. Countries get less energy-intense naturally as heavy industry becomes a smaller proportion of economic growth.

China has made great strides in energy efficiency over the last couple of decades, but progress has been patchy and it gets more difficult as development progresses. The graph below comes from a blog in September by Roger Pielke, an environmental studies professor at University of Colorado, and maps recent Chinese progress. It shows that China should already have achieved half the goal it has pledged – under its 2005-2010 plan it aimed to cut energy intensity by 20%. However, it had only managed to cut by 7.4% through 2008. To achieve its new aim by 2020 will require feats that are well beyond anything that has been demonstrated hitherto.

In any case, as a Reuters story points out, how will we know? The measuring and verifying process for carbon emissions makes nuclear weapons verification look like small  beans.

The headlines are being generated, of course, to soften the fact that Copenhagen will fail to create a new convention to supplant the Kyoto protocol, something that will have to wait until next year at the earliest. (see Copenhagen countdown subscription required).

The pledge from President Obama, such as it is (cuts of “around 17%” from 2005 levels by 2020), also is only an aspiration until it can be ratified in Congress next year. As The Economist magazine points out:

“The promised target is no different than that already passed by the House of Representatives, and considerably lower than what other rich countries (especially in Europe) have promised.”

It has also been noticed that Mr Obama’s visit to Copenhagen is a somewhat half-hearted affair, timed to coincide with his trip to Oslo to collect the Noble Peace Prize and coming early on in proceedings—the opening day—”well before the crunch time near the end” (see It’s off to Denmark we go subscription required).

Andrew Mitchell, the UK’s shadow development secretary, sees the “litmus test” of success as the world’s ability to keep global warming to two degrees. Worryingly as The Independent pointed out earlier this month, scientists are already planning for worse. Mitchell added that if the “deal on the table doesn’t look like it is going to do this, then the British delegation must have the nerve to reject the usual back-slapping and face-saving statements”. With delegates already managing expectations such a stand is likely to prove fruitless.

Yvo de Boer, the UN’s climate change head, has also been managing expectations this week. On Wednesday, at a pre-summit press conference, he talked of four elements of success at Copenhagen, starting with firm emissions-cutting commitments from developed countries, especially the US. The other aims about helping the developing countries to fund their plans for curbing emissions growth are contingent on the first, which won’t happen. So, he said, look out for a deal in Copenhagen to allow the Kyoto protocol to continue after it expires in 2012; but whatever the headlines, such a small achievement shouldn’t be confused with a meaningful replacement for Kyoto that would bring in countries accounting for more than two-thirds of the world’s CO2 emissions.

The end of cheap oil

An ominous theme emerges at a key industry event in London.

At the annual Oil & Money conference in London, there was much talk about the end of cheap oil. A boon for the industry? Not exactly. The executives that took the podium, including the heads of BP, ConocoPhillips, Eni and Hess, were cautious. They were at pains to point out, even as prices briefly topped US$80 per barrel, that these were not times of feast but famine.

After all, the new reality is that a price of between US$65-70/barrel is necessary simply to sustain investment. Both Nobuo Tanaka, head of the International Energy Agency—the energy watchdog for the world’s largest oil consuming nations—and OPEC secretary-general Abdulla El-Badri stressed that US$70/barrel is the minimum required to entice new investments.

Tony Hayward, the CEO of BP

Tony Hayward, the CEO of BP

During a panel session, Mr El-Bardi said OPEC was “ready to invest” in developing its oil reserves. He also didn’t miss the opportunity to take a swipe at biofuels—”(you) can’t have food as an energy source”; nuclear power—”(just) wait for one catastrophe”; and speculators —”There is no shortage of oil supply…we have floating storage of 125m barrels”.     

Oil and gas: here to stay  

In his keynote address, Tony Hayward, the CEO of BP, said that fossil fuels will satisfy around 80% of the world’s energy needs in 2030, even as demand increases by 45% over the next 20 years. This was heartening for his fellow oil executives, until Mr Hayward added that BP forecasts it will require annual investment of US$1 trillion a year to meet demand growth.

The BP boss also warned that “the transition to a lower-carbon economy won’t happen overnight” and urged stakeholders to be “realistic” when setting alternative-energy policy goals.

Picking up on another of Mr Hayward’s themes—that western firm’s restricted access to OPEC reserves is mostly about politics instead of geology—John Hess, head of US independent Hess, warned that a “devastating oil crisis” loomed if global action is not taken. Mr Hess’s address was a rollicking tour of the challenges facing the world.

He did not mince words “The approaches of both consumers and producers are based on hope, but what we need is a sober reality,” he said. “The reality is that an oil crisis is coming that could prove devastating to future economic growth.”

Prices up, profits down

Jim Mulva, head of ConocoPhillips (which recently lowered its 2010 capital expenditure plans) said that he expected existing spare capacity, estimated at between 4-8m b/d, to erode. Mr Mulva warned that the world is “unlikely to have long production surpluses and weak oil prices” for long. He also made the case for greater access to off-limits areas, arguing that the world needed to let international oil companies “do what they do best”.

The Economist Intelligence Unit forecasts that energy demand will fall by 2.17m barrels per day in 2009, creating excess inventories and putting downward pressure on prices. This, however, is only temporary. Long-term, the time of cheap oil is over. But for oil companies this does not mean huge earnings. Instead, they will fight over an increasingly small pool of reserves that becomes ever more costly to develop. This could make for some less collegiate exchanges at future industry gatherings.

News wrap – Revolution talk in Paris

Secretary of Energy, Steven Chu

Talk in Paris again turns to revolution.

Steven Chu, the Nobel-winning boffin who is US President Barack Obama’s energy secretary, delivered the keynote address on opening day of the International Energy Agency’s (IEA) ministerial meeting, telling delegates from the OECD member states (joined by ministers from India, China and Russia), that indeed a scientific revolution is needed to meet the world’s energy challenge.

Welcomed into the fold after the new administration’s about-face in climate policy, Mr Chu emphasised the US commitment to combat greenhouse gas emissions with a reference (without irony) to his country’s previous success at splitting the atom to build the first nuke bomb – i.e., the Manhattan Project.

Nonetheless, the tone was primarily one of optimism, though Mr Chu pointed to rising emissions from transport as an example of the limitations of technology. The US, in common with most other developed countries, will place particular emphasis on energy efficiency.

On domestic policy, Mr Chu said he is hopeful that the senate would pass a climate-change bill prior to the Copenhagen meeting in December, though that recently looked very unlikely. The renewed optimism is founded on recent cross-party consensus, notably between Democratic and Republican Senators Kerry and Graham, which may prove a little misplaced.

He highlighted plans under the US economic stimulus package to invest heavily in energy—with loan guarantees for the nuclear industry among the proposals outlined. At the other end of the scale, there’ll be a somewhat sinister-sounding carrot and stick approach to encourage energy efficient households, with subsidies for initial investments but also a “naming and shaming” of “bad” households, which Mr Chu hopes will lead to some neighbourhood pressure to encourage action.

Though action has been snail-paced, the nuclear renaissance, it would appear, is in full-swing, in Mr Chu’s view. Also, investment in carbon capture and storage technology (CCS) is forging ahead after stalling.

With Copenhagen on everyone’s mind, Mr Chu closed with Martin Luther King Jr. quote, reminding those gathered that “tomorrow is today” and that there is such a thing as being too late.

Skipped the last gas tango

International Gas Union conference welcome

The 24th World Gas Conference officially began in Buenos Aires on October 5th with the kind of pomp and circumstance normally reserved for an Olympic opening ceremony.

Over the years the renowned Luna Park arena where the conference launch was held has been the venue for performances by such stars as Frank Sinatra, Tom Jones and James Brown, as well as a host of international sporting events.

On Monday evening, Oct. 6th,  industry executives from all over the world gathered to witness the opening of the triennial gas event organised by the International Gas Union (IGU), the first time the conference has been held in a Latin American country in its 78-year history.

President Cristina Fernandez de Kirchner and IGU chief Ernesto Anadon gave upbeat speeches on the future of the global gas industry and its importance to the country before some of Argentina’s top performers took to the stage for a two-hour showcase of traditional music and dance.

When the conference sessions formally begin today, the mood will likely be more sombre.

The collapse of oil prices from their peak of more than US$145 a barrel in mid-2008 to about half that today, combined with steep rises in commodity prices and contractor costs throughout much of last year, has had a knock-on effect on gas prices and the appetite for infrastructure development.

While in 2008 some spot trades of liquefied natural gas (LNG) were being made for as much as US$20 per million BTU, gas prices have since fallen dramatically.

“The worry is US gas demand,” says Abdul Rahim Hashim, IGU vice president and president of the Malaysian Gas Association. “Prices in Asia are still about US$5-6/mBTU, but in the US they are about US$2/mBTU. LNG for the US is being diverted to Asia and Europe where there’s still demand.”

In the face of weaker prices, the development of new gas liquefaction and receiving terminals, seen as critical infrastructure for the growth of a genuine global gas market, has all but ground to a halt. The industry now faces the risk that when demand recovers there will once again be a severe lack of supply, and prices will soar once more.

“The market will probably pick up again in a couple of years’ time, but the question is whether infrastructure will keep up,” says Dr Hashim. “Now is the best time to invest in infrastructure development, but people are reluctant. Malaysia needs to use technology such as floating LNG to develop its smaller fields, but no one wants to do it when prices fall.”

The impetus for more gas exploration has been further drained by hefty government subsidies to the domestic gas market in countries such as Saudi Arabia, Egypt and Argentina, where weaning the local populations off cheap energy will be an uphill battle.

“Argentina is in serious trouble,” says Luiz Orlandi, director of Brazil’s Instituto Brasileiro de Petroleo, Gas e Biocombustiveis. “They rely on gas for 55% of their energy mix, but subsidised prices mean it’s not worth exploring for gas, so their reserves are declining rapidly.”

Alternative energy technologies such as oil shale and gas to liquids (GTL) are also on hold due to lower prices.

“Some old oil shale projects are still viable, but new oil sands and GTL projects are only really viable at US$80 a barrel,” says Pierce Riemer, director-general of the World Petroleum Council.

“The slowdown is a blessing in disguise,” says Randall Gossen, President of the World Petroleum Council in Calgary. “The reserves are in quite a remote part of Alberta and people were coming in so quickly that infrastructure such as houses, schools and hospitals couldn’t keep up. This gives us a chance to catch up.”

It is against the background of such issues that the conference intends to move the industry forward. “We appreciate that in this challenging economic climate, hard decisions have to be taken,” says Eduardo Quintana, chairman of Argentina’s National Organising Committee.

Entitled “The Global Energy Challenge: Reviewing the Strategies for Natural Gas”, it marks the culmination of a three-year work programme under Argentina’s presidency involving more than 750 industry experts. The focus will be on three key areas: a review of natural gas strategies for the period up to 2030; the contribution of the natural gas industry to security of supply, safety and environment; and regional gas market integration as a driver for sustainable economic growth.

The conference will allow delegates to “discuss and share the latest technologies and best practices and propose strategies for the continued growth and development of natural gas as the fuel of choice,” says Anadon.

Liquefied natural gas technologies, sustainable development, regulation, industry best practice, research and development, energy conservation and efficiency, and security of supply and demand will also be covered.

The event, which is begin held in conference centre La Rural, boasts more than 2,400 delegates from 270 companies in 81 countries, while more than 250 organisations are to be represented at the exhibition being held on the same site.

Keynote speakers include the heads of leading international oil companies such as Spain’s Repsol YPF, France’s Total and the UK’s BP, and senior representatives from Brazil’s state energy company Petrobras, Malaysia’s Petronas, the National Iranian Gas Company, Qatargas and Russia’s Gazprom.

Senior government officials from Algeria, Argentina, Brazil, Japan, Russia, Trinidad and Tobago, the UK and the US will also participate in a strategic panel discussion on the future of the gas industry.

“It’s a valuable opportunity to meet all the key global gas players in one place,” a senior executive at the UK’s BP told the EIU following registration for the event at La Rural on October 5th. “It’s all the more important to do so given the challenges the market is facing at the moment.”

Thursday, Aug 20 – News Wrap

newspapersThe end of oil?

It appears that OPEC’s determination to keep oil prices high could hasten the end of black gold. Heralding the end of oil is always a little risky but Bill Emmott makes a decent case in The Times. The themes touched upon in Emmott’s piece are also covered in an FT blog which discusses some painful home truths on the cost of oil for the Golden State. The German’s certainly appear to have taken the hint in their ambitious plans to be rid of the black stuff.

Both stories coincide nicely with a spike in crude prices on the back of a much greater than expected drop in US crude inventories. However, reality appeared to be returning to the market with crude stocks still way above 2008 levels, US production about 160,000b/d higher and imports much reduced. Despite the cacophony of noise in the market US data suggests that gasoline demand remains largely unchanged and down year on year.

As western oil companies implement cost cutting measures on the back of a glum second quarter results, Beijing’s reformed fuel price structure looks set to usher in a new era of profits for its leading refiner Sinopec. Coming on the back of a raft of Chinese deals the prospect of massive profits is likely to leave multinational oil companies quaking.

Australia: the Saudi of Gas?

Following the announcement of a record deal to buy gas from the Gorgon LNG project in Western Australia, Aussie gas developments in the country remain a hot topic. Woodside’s Pluto LNG project is lining up customers, GdF Suez the French utility has signed a deal with Santos to develop a floating LNG, while Chevron (Gorgon’s developer) announced a double gas discovery.

 Some further news comes on the political front as the Australia Senate approves laws requiring 20% of the country’s energy to come from renewable sources by 2020. Now Prime Minister Kevin Rudd has to negotiate the trickier issue of a law on emissions – an issue that could potentially force a snap election.

BG bouyed by LNG

A BG LNG cargoResilient” is how BG Group’s CEO Frank Chapman described the company’s second quarter performance. BG reported a 37% fall in profit to £507m (US$830m) the result was hit, like BG’s peers, by lower oil and gas prices but buoyed by the decline in the pound against the dollar – removing exchange rate gains BG’s profits fell 48% in the second quarter. With this in mind Mr. Chapman’s description is apt (bordering on sanguine).

BG’s made much of its success in Brazil, as it should with the Tupi field expected onstream by 2010, but the crux of the issue for BG is how its liquefied natural gas (LNG) business stands-up to falling energy demand. The answer appears, thus far, to be quite well actually.  

BG said in January that it expected operating profit from its LNG business to fall in 2009. Its LNG business reported second profits of £311m, down 15% – not bad when you consider that Henry Hub gas prices fell 66% year on year over the quarter. More impressively over the first six months of the year profits were up 17%.

BG has built a reputation as a savvy LNG operator. Last year, as demand for LNG soared, it positioned itself as the LNG supplier of last resort. By not to tying its cargoes down to fulfil long-term supply contracts BG was able to maximise its exposure to the spot LNG market, a profitable strategy with its LNG business earning £1.59bn in 2008.

The flipside is that when LNG demand (and prices) fall, profitability suffers. Ever flexible, BG moved away from this model, signing forward contracts in an effort to protect revenues.

In July, BG sent its first contracted LNG cargo to Chile and first commissioning cargo to the Dragon LNG terminal in the UK. BG has signed agreements to supply 8.3m tonnes of LNG per year (t/y) to Chile, Singapore and, notably, China a deal which underpins the development of its LNG project in Queensland, Australia.     

Mr. Chapman said that BG’s view on LNG was “unchanged” over the short term. The business unit is expected to earn a pre-tax profit of £1.4-1.5bn in 2009, easing down slightly to £1.2-1.3bn in 2010. BG remains confident that LNG demand will pick-up over the longer term.  

However, like its peers, BG faces the challenge of maintaining expenditure as revenues fall – over the first half of 2009 the company’s borrowing more than doubled to £2.06bn. A key fillip for BG has been its ability to grow production, up 7% year on year in the second quarter to 643,000 barrels of oil equivalent per day (boe/d). It expects to grow output by 6-8% a year but pushed back its end-2009 production target of 680,000boe/d to the first quarter of 2010.

BG appears will placed to ride out the storm but much will depend on its LNG business. BG’s cost-competitive Atlantic Basin portfolio provides it with a strong platform and its venture to develop US gas shale reserves with Exco Resources shows that it is not resting on it laurels. But a prolonged dip in gas prices and demand in key markets will test BG.