Gas industry faces unprecedented challenges

  By John Roper/Dubai  The gas energy sector has been facing unprecedented and significant market change in the last two years.Crude oil prices have been going through a roller coaster ride over the past few years. We saw a significant oil demand rise last year and whilst oil demand growth is expected to slow this year, with the rolling-back of stimulus measures as the global economy recovers, it is still likely to be one of the largest growth years on record, estimated at about 1.8mn barrels of oil per day.  Apart from these fundamental issues, the crude oil price is now being affected by the recent political upheaval in the Middle East and we now see the Brent price in the range of $110-$120 per barrel, as a geo-political risk premium enters the market. We at E.ON are - as the whole world is - shocked about the recent tragic events in Japan.  Particularly the dramatic accident at the Fukushima nuclear power station, has touched us very deeply and gives us cause for grave concern.I strongly believe that we will learn from the situation in Japan and that there is some rethinking to be done. As of today, it is clearly too early to have answers ready and consequences assessed. But I would not exclude, that the future energy mix might be impacted from the knowledge that we will gain from these events.We need to reorganise our energy systems. The decarbonisation of the European economy will lead to a sustainable energy system for the 21st century. The reorganisation of energy infrastructure that we are all striving for in Europe is not a short-term project; it is a marathon. The gas industry needs to develop answers for natural gas to be a part of the future energy mix.Like crude oil prices, benchmark natural gas prices in the west, notably at NBP in the UK and Henry Hub (HH) in the US, have fluctuated significantly over the last few years. Prices plunged more than 50% in 2009 to $4.75 per million British Thermal Units and to $3.95 per million British Thermal Units respectively.  In the US the surge in shale gas production, which more than doubled between 2008 and 2010, reinforced a further slide in natural gas prices. In Europe we have seen a dramatic decoupling of oil-indexed prices and TTF-indexed gas prices, as a result of recovering oil prices and surplus gas in the market. This effect is so significant that “old” oil-indexed supply contracts are actively being renegotiated towards gas indexation in order to bring back some sustainability into the market place.  Looking forward in 2011 NBP prices in the UK are expected to slightly strengthen and, importantly for LNG suppliers, will hold a significant premium over US Henry Hub prices of about $4 per million British Thermal Units. Although the recovery of natural gas demand is expected, it is premature to talk about a turnaround in this trend, which remains lacklustre.  The development of new LNG importers from the Americas and the Middle East, which will have an effect on supply availability, is a topic of interest in the gas market. This region, although blessed with large natural gas reserves, has in recent years faced a substantial gas deficit, as a function of regional infrastructure developments which have significant power generation requirements. Kuwait and Dubai are already reliant on LNG imports to supplement domestic gas supply and the region is expected to import significantly more LNG in the coming years with the potential introduction of Bahrain, the Northern Emirates and Saudi Arabia. In Asia the story is not very different from a year ago. The gas market seems to be tilted towards a surplus situation, resulting in shorter-term prices coming down from the levels we saw in 2009. What is perceivably different in this “buyer’s market” is the varying slopes being offered by LNG sellers under long-term contracts. These prices tend to reflect the source of supply, such as conventional versus unconventional, and contract negotiations are additionally beginning to focus on non-price factors.  Looking ahead, trade flows between the Atlantic Basin, Middle East and Asia will become more international. There is the possibility that the Middle East will likely form its own LNG ”price marker” with implications for price developments in Europe and Asia. After all, these are the two most natural alternative markets for Middle Eastern gas supplies!But there are two other subjects that will become crucial to the energy industry and I think need attention. Firstly, the role of Asia and the shift of economic gravity from the Atlantic to the Pacific will focus our thoughts for the next decade. These future relationships, whether commercial or political, will define the use of energy in our industry.  And secondly, although a “softer” issue, which I believe is of paramount importance, is the message that we as an energy industry give to the world. We must highlight the benefits, both in terms of cost and the environment and the superlatives of this fantastic industry and redefine our role and perception in the public eye to ensure a sustainable future and acceptance of our industry by governments and peoples alike.    John Roper is a senior oil executive with 27 years experience, the last 19 years in regional company management in the international upstream and LNG businesses in the Middle East, North Africa and Caspian regions. He is currently serving as head of Middle East, vice president and general manager for E.ON Ruhrgas AG where he is responsible for the development of the E.ON Group and the Upstream and LNG businesses of E.ON Ruhrgas in the Middle East. Roper has also worked for major international companies such as PetroCanada, EnCana, Cairn Energy and Neste Oy.