The Glutted World Gas Market

LNG gas storage tanks are shown at the Woodside operated North West Shelf Gas Venture near Karratha in the north of Western Australia on June 17, 2008. Woodside is providing extra gas supply to assist Western Australia to meet its 30 percent shortfall caused by the June 3 explosion at the Apache Energy’s Varanus Island gas plant. AFP PHOTO / Greg WOOD (Photo credit should read GREG WOOD/AFP/Getty Images)

 The U.S. natural gas glut is now said to be expanding to global markets, with large amounts of supply coming on-line in the next few years even as prices remain “depressed”.  Production from a number of areas is growing, with projections that a total increase of 44% from 2015 to 2020 will exacerbate and prolong the glut.  Even if prices do not become delinked from oil prices, it seems highly likely that high-cost producers will experience significant pain. 

Natural gas is an unusual commodity, super-abundant and yet expensive.  Whereas proved reserves of natural gas are not much higher than oil reserves (relative to production), this reflects the fact that drillers usually target oil rather than natural gas which is expensive to transport.  As the figure below shows, there are a number of countries with unexploited gas reserves, essentially “stranded gas.” 

Reserves to Production Ratio


Reserves to Production Ratio

International gas markets are severely distorted by the history of contract design, specifically price clauses that tied gas prices in international trade to oil prices, based on their relative heat content.  This would be like agreeing to buy tea at the same price as coffee, based on their relative caffeine content.  Since the original customers for liquefied natural gas were Japanese utilities that were replacing crude oil burned directly in boilers, this seemed to make some sense. 

But as part of the confused environment of the 1970s, when numerous economic theories explaining why oil prices had soared were being promulgated, gas exporters like Algeria pushed to receive the same revenue for their natural gas sales as for oil, with pipeline exporters (Russia and the Netherlands) quickly following suit.  Natural gas utilities in Japan and Europe who could pass their costs did not resist, and it became all but universal practice.

via Energy News

Categories: Energy

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