Thursday, December 24, 2009

[Top 10] #8: Natural Gas Finds an International Stage

Natural gas is an important fuel in Europe and has been gaining acceptance in developing nations like China and India. But events in 2009 changed how natural gas is perceived and traded worldwide.

Probably the largest impact came from the completion of several large international gas liquefaction plants, especially in Qatar. Because natural gas is difficult to transport, until this decade it has been shipped by pipeline and treated as a regional commodity. The ownership of international pipelines has long been a source of political power and cross-border angst. This year marked the completion and opening of a large amount of liquefied natural gas (LNG) infrastructure – the ability to liquefy it, ship it, receive it, regasify it, store it and distribute it – that has made gas more of a globally traded asset.

With the global recession reducing energy consumption, there is excess LNG in the market. It is unwelcome in the U.S. because of our shale-induced oversupply, so immense quantities of gas are finding a home in various international ports, creating new spot pricing markets where they never could thrive before. Gas users are waking up to the fact that spot prices are far cheaper than their long-term oil price-indexed pipeline contracts and are starting to seek changes. Opening the gas market to greater competition should lead to a shift of pricing power towards end users that could impact geopolitics. If nothing else, it should lead to lower gas prices.

The other big story is the potential abundance of gas supply outside of traditional producing regions. Big recent conventional gas finds in Australia and Papua New Guinea along with the potential to produce gas from shale in any number of locations has the world rethinking natural gas. The success of shale plays in the U.S. has kicked off a scramble for the technology used to produce gas from shale. Chesapeake Energy has struck several rich “teaching” deals with international energy companies seeking to learn these techniques. Exco Resources signed a similar deal with BG Group this summer. Chesapeake is involved in a bid for gas properties in South Africa.

Traditional gas producing countries are trying to create a “gas OPEC” but these efforts likely will be nothing more than trying to constrain free markets that shortly will be beyond their control. It is likely that such an organization will have short-term success, but I think in the long-term the democratization of supply will overwhelm any one group’s ability to control natural gas.

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