I have been in Algeria recently working on a study assessing the potential to increase the country’s gas exports to the European Union.
Algeria is the third largest exporter of gas to the EU, with two pipelines to Spain and Italy; another pipeline (MedGaz) to Spain nearly completed, and another one to Sardinia and mainland Italy planned. There are also two existing LNG (liquefied natural gas) plants in operation and two more under construction.
My visit coincided with a meeting of the Ministerial Council of the Gas Exporting Countries Forum (GECF), which was held in Oran, Algeria, and chaired by the country’s energy minister, Chakib Khelil, who is an ex-World Bank economist.
The GECF was set up to be the gas equivalent of Opec (Organisation of Petroleum Exporting Countries). Members include some of the largest gas producers and exporters in the world, such as the Russian Federation, Qatar, Egypt and Trinidad. Norway is an official observer.
The main discussion topic at Oran was Minister Khelil’s proposals for the GECF cartel to introduce Opec-style production cuts to try to force gas prices back up. I wrote in last month’s Energy about the recent collapse in world gas prices because of the shale-gas developments in the US, a big increase in world LNG capacity and other factors.
Opec has had some success in keeping oil prices higher than they would otherwise be by a co-ordinated programme of oil production cuts. Can GECF do likewise?
I doubt it – at least during the next few years. Minister Khelil’s proposals received very little support at the Oran meeting, particularly from key industry players such as Gazprom, of Russia, and the Qatar representatives.
That did not surprise me because there are not only fundamental differences between Opec and GECF, but there also seems to me to be a widening divergence between the oil and gas industries in relation to pricing.
Spot gas prices peaked at around $14 per million Btu (British thermal units) in September 2008, then fell to a seven-year low of $2.75 in September 2009 and are currently bobbing around the $4 level. That is not good news for countries like Algeria, Qatar and Russia, who have, and are investing heavily in, new gas pipelines and LNG plants.
However, GECF has neither the power nor discipline of Opec and I can see few signs at present of that changing. For example, Saudi Arabia is clearly the dominant member of Opec, but not (yet) a member of the gas cartel, and there is virtually no representation from the Asia-Pacific region.
Some gas supply contracts – in the UK and elsewhere – are long-term, often linked to fuel-oil prices and sometimes with tough take-or-pay provisions.
Thus, it is difficult to determine how important the short-term spot prices are. Nevertheless, there are more and more examples in the industry of existing contracts being renegotiated – notably with Gazprom – and new contracts being much more short-term and flexible.
GECF continues to support the principle of oil and gas price parity. That may have been justified during most of the past decade, but not now, at least in my opinion.
Although they can be substitutes in certain uses, there is an increasing divergence or separation of markets, with oil increasingly being limited to transport and gas to power generation and domestic heating and cooking.
The economic implication is that the link between oil and gas prices – in the UK and elsewhere – will continue to weaken. The two sets of prices will be increasingly determined by their own demand/supply balances.
Finally, I return briefly to one of my favourite topics in my Energy columns – the demise of the Scottish oil fabrication industry.
Total is currently developing its West Franklin discovery on the UKCS and, earlier in the year, invited bids for a 2,800-tonne jacket plus 1,600-tonne piles. Industry reports suggest that the contract is likely to go to Saipem’s yard in Sicily, in Italy, having beaten off competition from Heerema, Rosetti Marino and Dragados.
Did any of the fabrication yards in Scotland bid for the contract? Nigg? Methil? Ardersier? Clydebank? Of course not.
Last week, there was yet another ludicrously unrealistic report predicting that the offshore renewables industry could create 145,000 new jobs in the UK (by the Boston Consulting Group for the Offshore Valuation Group). How will that happen if we do not now have even the capability to build small jackets for our own North Sea fields?
The UKCS market is undoubtedly declining, but still not dead – as shown by the recent development proposals for Clair Ridge, Laggan, Tormore, West Franklin, and so forth. If the oil fabrication industry in Scotland is virtually dead, how is it going to be resurrected in this new apparition?
Tony Mackay is managing director of economists Mackay Consultants
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