PRICE SIGNALS RETURN
The new year has got off to a good start for producers , as the early signs are that the historic November Opec agreement to cut output with effect from January 1 is sticking . Even in December there was a drop in crude output – not so difficult perhaps after November ’ s record 33.13mn b / d – with signs that Saudi Arabia is prepared to lead by example and that non-Opec Russia will join it .
In a press release January 10 , price reporting agency S & P Global Platts said : “ The crucial question is whether Opec and non-Opec can make the compliance stick long enough to clear out the stock overhang .” Libya and Nigeria – exempt from the cuts – together could wipe out the reduction , it said , while flexible US shale oil could cap prices .
But oil prices have returned to the point where they encourage upstream work once more . More investment now would limit a price spike in coming years . The International Energy Agency is quick to warn about this : the almost inevitable consequence of a two-year worldwide upstream spending slump .
Norway ’ s Statoil came out with a bullish statement at the start of January , announcing that “ market conditions ” had enabled it to “ get more wells , more acreage and more seismic data for our exploration investments in later years .” This means 30 exploration wells planned this year , including in Norway , South America and southeast Asia , compared with 23 in 2016 .
And although spot gas prices are also high in Europe and Asia , demand has not been shaken off , with LNG cargoes being drawn mainly to Asia until the European price reaches a comparably attractive level . In fact , it already has exceeded it , in southern France at least ( see feature ). In Europe ’ s better connected hubs though it is likely that Russian gas will continue to grow its market share at the expense of new entrants , as it has demonstrated in microcosm in Lithuania this year ( see feature ). with Ukraine . This is the year after all that the twin disputes of take-or-pay and ship-or-pay ( between Gazprom and Naftogaz Ukrainy ) and the Russia-EC World Trade Organisation cases are all to be decided .
Winter has also been cold in northeast Asia , where utilities will likely be ramping up nominations under their oil-indexed , long-term , take or pay contracts at a time of high demand and typically with a captive market to absorb the cost .
Coal output has also fallen , making that commodity more expensive relative to gas . And LNG producers have not been rushing to bring their gas to market – although Gladstone Port for example reported exports for December of 1.75mn mt , equivalent to 21mn mt / year .
These bullish events have dragged up the price of the marginal cargo ; and the first cargo from the US Gulf Coast arrived this year in Japan , sold to Jera by the Sabine Pass plant operator itself from its own earmarked equity supply at a no doubt mouthwatering spread ( see news ).
So despite frequent references to a world awash with gas , this winter has been good for sellers .
That said , the outlook for LNG after winter reverts to bearish , according to analysis by Bank of America Merrill Lynch . In a research paper January 6 it said coal prices are now fading again and new LNG supply is set to hit the market over the coming quarters . If the Brent price keeps rising , the LNG discount will only grow , so the price will fall relative to oil , from today ’ s energy parity to less than half by this summer . “ Also , the recent restocking in Asia sent Asian vs . European gas prices soaring to a $ 3.50 / mn Btu spread , and we see this reversing to around $ 1 in the coming months as Asian buyers are now likely better stocked than before the winter .”
Both Gazprom ( see feature ) and Gassco reported record deliveries to Europe over last year . Gazprom hit 179.3bn Russian ( ie less calorific ) m ³, up 12.5 % year on year on sales beyond the former Soviet Union ; and Norway ’ s pipeline exports up to 108.56bn standard m ³, according to Gassco . Given the average low price over the course of the year the financial results will not be so spectacular for Gazprom ; although the volume trend is continuing this year .
To deal with European demand , Nord Stream has been operating at maximum , carrying , on some days in January , the equivalent of 60bn m ³/ yr , while nameplate is 55bn m ³/ yr but assuming 90 % load factor . Theoretically Russia could export even more this year than last , if the European Commission ’ s decision to allow it to use more of Opal is approved and there are no difficulties
Prices will continue to rise and fall , but some trends are discernible in the longer term . One is the growth of bunkering , which could well play more than a cameo role .
Qatar ’ s energy minister Mohammed Bin Saleh Al-Sada told a gas conference in New Delhi early December that gas was replacing petroleum in transport , spurred by progress in developing small-scale LNG technology . “ What we need is a close cooperation between producers and consumers to develop a win-win situation for all , in order to not only stimulate natural gas demand worldwide , but contribute immensely to keep our planet green , ecofriendly and clean .” And a wide discount to the oil price is just what gas-fuelled fleet operators depend on .
NGW