Over the past decade, regional gas markets have become more connected, with the number of LNG or pipe routes carrying over 5 billion m3, more than doubling between 2001 and 2011. Yet, despite increased linkages, McKinsey highlights that gas prices in regional markets have diverged. Three market disruptions explain this:
The North American shale revolution
Rapid growth in shale production has led to four years of oversupply and plummeting gas prices. Between 2008 and 2012, production grew at an annual compound rate of 29%. However, demand has failed to keep pace as consumers were slow to switch from other fuels, energy efficiency measures offset demand growth, and exports have not been an option, since it can take five years to build an LNG export terminal and acquire the necessary permits. As a result, gas prices in North America fell from US$ 8.9/million Btu to US$ 2.8/million Btu over the same period.
Increasing Asian demand
Asian LNG prices have been boosted by economic growth, coupled with Japan’s decision in 2011 to shut down its nuclear capacity following the Fukushima disaster. Japanese gas demand grew by more than 20% between 2010 and 2012, from 95 bema to 117 bema. As Japan has no domestic gas, this all has to be imported as LNG.
The European recession
The economic slowdown in Europe, combined with energy efficiency improvements and the availability of cheap coal, contributed to an annual decline in gas demand of 1.6% between 2005 and 2012. This is in marked contrast to annual growth of 2.7% over the previous 15 years. At the same time, liquidity on traded gas markets rose as buyers who found they have contracted excess capacity sought to sell it on. As a result, prices in Europe have fallen, breaking the traditional link with oil prices.
Adapted from a report by Emma McAleavey.
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