This is a very interesting period for the gas industry both in the UK and overseas. The gas sector’s share of total energy consumption has generally increased over the last decade, at the expense of oil and coal.
The main reason for that has been a big expansion in gas-fired electricity generation.
That growth has slowed recently for a variety of reasons, including relatively high gas prices and increasing electricity generation from wind and other renewables.
We have just begun investigating the reasons for that slowdown as part of a new study of future gas supplies into the European Union, and some of the initial conclusions have surprised me.
The world’s proven gas reserves are currently estimated at about 185trillion cu m, with a reserves:production ratio of 60. In other words, we could produce gas for about another 60 years at the current level of output.
Nevertheless, the rapid growth in demand for gas has raised many concerns about future supplies and resulted in substantial investment in new capacity.
That has been very noticeable in the UK because gas production from our North Sea fields is declining at worrying rates; another 13% lower last month. Because of the unusually cold weather, some industrial consumers had to switch recently to alternative fuels.
Gas is more difficult to transport than oil and there are physical constraints on expanding pipeline networks in many parts of the world.
Thus, most of the growth in gas transport capacity has been in LNG plants, both for export (liquefaction) and import (regasification). I have lost count of the number of LNG plants recently completed, under construction and planned. In the UK, we now have four LNG import terminals at Milford Haven in Wales (two), Teesside and the Isle of Grain, on the Thames.
Gas prices have collapsed recently, however, both in the UK and elsewhere, in marked contrast to oil prices, which have been relatively stable in the $70-80 range.
There should be a close relationship between oil and gas prices, particularly in the long run, because there are substitutes to some extent, notably for electricity generation.
That relationship had undoubtedly strengthened in recent years, with many gas prices directly linked to crude oil prices, but has clearly broken down recently.
Will that breakdown continue? I believe so, at least for the next two or three years. That should be good news for gas consumers, but not producers.
Gas producers and suppliers generally prefer long-term price and contract agreements because of the massive upfront capital expenditure involved in new pipelines, LNG plants and vessels.
The prices are often linked to crude oil prices, with minimums or floors, plus the usual annual inflation escalators.
However, the gas industry is currently being forced to accept much more short-term or spot prices, which are common in the oil industry.
Oil prices often fluctuate daily, notably during 2009 when they shot up to a peak of $140 per barrel.
Such price changes are very difficult for the gas industry to handle.
The two main reasons for the recent collapse in gas prices are, in my opinion, firstly, technological breakthroughs in producing unconventional gas, notably shale gas in the US, and secondly, overcapacity in the LNG sector. The technological advances with shale gas are outwith my understanding as a simple economist, but seem to be genuine and long-term.
The effect has been to increase dramatically both domestic gas production in the US and the county’s recoverable gas reserves.
Because the US is the world’s biggest gas consumer and importer, one of the results has been a substantial fall in gas prices in North America, with knock-on effects elsewhere.
Presumably the new technology can be exported to shale-gas discoveries elsewhere in the world, with similar effects. I remain sceptical about the potential for coal-bed methane and oil from tar sands, however, although probably have no technical justification for that – just a long history as an industry observer.
The second reason is the current overcapacity in the LNG sector. That is also most noticeable in the US at the present time because the need for LNG imports has fallen dramatically.
Consequently, LNG suppliers have had to find alternative markets in Europe, including the UK, and Asia, with the inevitable downward impact on short-term or spot gas prices.
I believe also that the long-established LNG suppliers such as Qatar want to force out some of the new LNG entrants, particularly the many proposed plants still to be built, and will therefore accept and, indeed, encourage a period of low gas prices.
Gas consumers in Scotland should welcome that, but the extent of the benefit will obviously depend on the extent to which the retail suppliers reduce their prices.
I am concerned about the possible negative implications for the development of the remaining gas reserves on the UKCS. I strongly welcomed the recent announcement by the Chancellor of the Exchequer of tax concessions for the Laggan and Tormore gas fields in the West of Shetland area.
I hope these and other developments are not delayed by the current state of the world gas market.
Tony Mackay is MD of economists Mackay Consultants
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