The effects of the North American shale revolution, increased Asian demand and the European economic slowdown in global gas markets are likely to persist in the medium term. According to McKinsey, four factors will be the major drivers of future market dynamics and prices:
The pace and volume of North American LNG exports
McKinsey explains that North American gas developers are ken to export their plentiful supply of cheap LNG to higher priced markets. By the end of 2013, they have applied for export permits for more than 380 billion m3/y – equivalent to all of the world’s current liquefaction capacity.
If even one third of this capacity were built, it would have a significant impact on global LNG prices, threatening the viability of higher cost capacity additions in countries such as Australia and Russia. North American exports could be highly profitable at recent LNG prices of US$ 18/million Btu, but would also profit if prices fell as low as US$ 12/million Btu.
Demand growth for LNG in Asia
Asia’s fast growing economies will be the main drivers of growth in global gas demand in the next decade, according to McKinsey. Forecasts from the US Energy Information Administration (EIA) suggest that demand in Asian countries that are not part of the OECD will grow 4.5% between 2010 and 2035. This implies that this group of 11 countries, which includes China, India and Indonesia, would see demand rise from 350 billion m3/y in 2012 to 870 billion m3/y in 2030, accounting for more than a third of gas demand in that period.
The percentage of oil and gas demand that will be met by LNG imports is uncertain, highly dependent on the extent to which China becomes able to meet its own needs through development of its shale gas reserves. Development is still at an early stage, and production is China is unlikely to grow as rapidly as in the US as China has less subsurface data available. The Chinese government has set a target for shale gas production of between 60 billion m3/y and 100 billion m3/y by 2020.
LNG supply from Australia, East Africa, Middle East and Russia
McKinsey highlights that Australia, East Africa, the Middle East and Russia have some of the largest gas resources available for supply after North America. The firm’s projections suggest they could potentially supply almost 280 billion m3/y by 2030.
However, actual supply and the extent to which would affect global markets is uncertain. Future Australian and Russian LNG projects face high costs and therefore depend on Asian LNG prices remaining high in order to be commercially viable.
Gas resource holders in East Africa are seeking long term contracts linked to the current high price of oil before committing to new LNG facilities. However, few buyers are willing to commit to these terms today.
According to McKinsey, there is also longer term uncertainty in regards to the behaviour of lower cost producers in the Middle East, which have the potential to supply large amounts of gas to China, India and Southeast Asia. To date, Qatar’s suspension on further gas exports, strong domestic demand growth in Saudi Arabia, and Iran’s political isolation have meant that these opportunities have gone unexploited.
The price of oil
More than 75% of all Asian gas imports are price at levels contractually linked to oil prices. Future oil prices are inherently uncertain. If oil prices fall, Asian gas prices could drop toward the cost of North American gas deliveries to Asia. Lower oil prices would also reduce the cost of gas production and liquefaction as the market to supply goods and services to oil and gas producers would also loosen.
Adapted from a report by Emma McAleavey.
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