The potential implications of recent North American natural gas production increases stretch across the globe, with knock-on impacts for gas trading patterns, regional supply-demand balances and even geopolitics.
These were all topics of discussion at a recent plenary session held during the 31st US Association for Energy Economics North American Conference in Austin, Texas, where analysts, economists, students and government officials from the US and other countries gathered this week.
“There will always be [natural gas] price uncertainty, but we still need to develop price forecasts,” Robert Stibolt, Managing Director at investment banking and advisory firm Galway Group told the audience during his presentation.
He discussed various ways of analyzing natural gas market movements and pointed out there is no single proven method for predicting future prices or commodity flow patterns.
This uncertainty stems partly from technology and questions of “what will the next big technology be,” he asked and admitted to being surprised by the rapid proliferation of hydraulic fracturing and horizontal drilling that revolutionized the industry.
“Using historical information as a predictive tool is dangerous and does not work very well – some on Wall Street tried this,” But most forecasts are anchored in the past, said Stibolt. Uncertainty is probably wider than real market data indicate, so a scenario approach makes more sense.
One trend that appears to be unfolding is the disintegration of oil price linkage, with natural gas prices increasingly being set more by traded indexes like the Henry Hub in the US or the UK’s National Balancing Point for Europe.
US Production Creates Potential Challenges for Russia
Looking further east toward Russia and Eastern Europe, Ariel Cohen, Senior Research Fellow for Russian and Eurasian Studies and International Policy at the Davis Institute for International Studies pointed out that while significant volumes of shale gas have been discovered in Western and Eastern Europe, Russia’s conventional reserves are still greater.
The interplay between Europe, as Russia’s dominant legacy gas customer and Asia as an enormous potential new market, represents a confluence of economics, politics, and cultural variables.
The Russian government’s budget is much more dependent on oil and gas revenue today than it was 10 or 20 years ago, which means that lower natural gas prices could impact the country more severely than in the past. And increased shale gas output from European sources could lower prices and demand for Russian gas, which the country’s leadership views as a threat.
The discussion pivoted further east toward Asia when Hi-chun Park, Professor at Inha University in South Korea reminded the audience that many Southeast Asian countries lack international pipeline access and heavily rely on LNG.
The LNG supply picture in the Southeast Asia region is changing drastically as traditional exporters Indonesia and Malaysia begin to decrease exports and require LNG imports instead as their domestic reserves deplete and domestic consumption increases, said Park.
Potential sources of incremental LNG supply include Australia, Russia, the US, Canada and East Africa – particularly Mozambique.
There is also the possibility for South Korea to receive piped gas from Russia which would significantly alter the supply picture. This scheme has been discussed for years, but Russia was unwilling to construct an expensive pipeline while it had other high-value markets in which to sell its gas. However, the prospect of US LNG exports has brought Russia back to the negotiating table, Park said.
