Sailing Into Unknown Waters: A New World Order For Natural Gas?

It only seems like a short time ago that oil prices were over $100 a barrel, natural gas prices in the U.S. and UK were high, spot LNG cargoes into the Far East were priced at over $20 per MMBtu, the world economy was growing rapidly, especially in China, and experts in the energy industry were mainly concerned about whether the world could afford the high prices and where the hydrocarbon resources required would come from.

All this was brought to a shuddering halt by the global financial crisis which tipped the world into the deepest recession since the 1930s. Oil prices collapsed, although they have subsequently bounced back, while spot gas prices at Henry Hub and national balancing point (NBP) also fell sharply with no sign of recovery, as gas demand declined.

Will we see a slow recovery or return to rapid growth? A key preoccupation of experts now, however, is the speed with which the world economy, energy demand and natural gas demand will recover and the impact this will have on prices, projects and trade. In their new study – Sailing into Unknown Waters – Nexant’s Global Gas team have developed three scenarios – Reference, Surplus and Constrained – to look at the possible impact that different developments in the world economy, and the energy markets, might have on the natural gas market and global gas trade, and prices in particular.

Outside the natural gas market, the key assumptions in each scenario concern world economic growth and the level of oil prices. In respect of oil prices, a long-run level of $70 per barrel for the Brent marker price at real 2007 prices has been assumed in all three scenarios. In the Reference and Surplus Scenarios, a moderate economic recovery has been assumed with a return to positive growth in 2010, but with a slow recovery of world GDP of 2% per year through to 2015 before rising to just over 3% per year from 2015-2030. In the Constrained Scenario, a more rapid economic recovery has been assumed, with world growth averaging almost 4.5% per year between 2010-2015 before moderating to just over 3.5% per year from 2015-2030.

The impact on gas demand and consumption of differing world economic growth rates is significant. In the Reference and Surplus Scenarios, world gas consumption grows from 3,158 billion cubic meters (Bcm) in 2008 to over 3,820 Bcm by 2030 – an increase of just over 20% or less than 1% per year. In the Constrained Scenario, world gas consumption rises to 4,070 Bcm by 2030 an increase of almost 30% or 1.2% year.

There is no shortage of gas but what about infrastructure? It is a widely held view that there is no shortage of gas reserves in the world and the key question is whether there will be sufficient infrastructure to transport the developed reserves to market. This involves pipeline infrastructure, and LNG liquefaction, shipping and regasification capacity.

In the Surplus Scenario, largely everything planned and proposed gets built. Major new pipelines include the Central Asia Gas Pipeline (Turkmenistan to China), South Stream, Nabucco, Nordstream (both phases), Alaska Gas Pipeline (from 2020) and the Iran-Pakistan-India Pipeline (also from 2020). The only major announced pipelines that are assumed not to be developed are the Turkmenistan-Afghanistan-Pakistan-India and Trans-Saharan Gas Pipeline. In respect of total liquefaction capacity, the Surplus Scenario includes an additional 481 Bcm – compared to end 2008 capacity of some 267 Bcm.