Natural gas price volatility is expected, both globally and regionally, for the next few years because anticipated US gas demand growth will outstrip gas supply growth—supporting prices above historic levels.
Meanwhile, LNG promises to help balance future US gas demand and supply. It's possible that LNG also could help establish long-term price equilibrium, said David Wells, senior vice-president, Shell Trading Gas & Power Co.
The long-term price equilibrium assumes that more LNG facilities will be built in the US Lower 48 along with the emergence of spot or arbitrage LNG trading, he said. LNG economics also must prove competitive with the economics of the proposed Alaska gas pipeline, he said.
Wells spoke Apr. 20 on gas price dynamics during Ziff Energy Group's North American gas strategies conference in Houston.
Meanwhile, Jim Schultz, president of Enbridge Gas Distribution Inc., Toronto, told conference participants that by 2010 overall North American gas prices are expected to be lower than 2004 gas prices because more LNG supplies are expected to be available.
"Governments, regulators, utilities, and others in industry must do more to address gas price volatility," Schultz urged. "The market must be willing and able to enter into long-term contracts with suppliers, transporters, and storage providers."
Currently, gas prices are both too high and too volatile, he said.
Shifting price fundamentals
Wells said that higher gas prices apparently are here to stay as a result of a shift in long-term price fundamentals. For instance, it's now considered to be major news in the US when natural gas prices fall to $4/Mcf on the New York Mercantile Exchange, he noted.
For the short term, the US has limited availability of spot LNG and regasification capacity, which means that high-cost North American conventional gas supplies currently are behind high NYMEX gas prices, he noted.
Another price-related element to consider regarding LNG is its demand seasonality. European and Asian peak demand for LNG coincides with North America's winter and its peak gas heating demands. Wells predicts "incredible pressure for LNG away from the US and toward Japan" at certain times of the year. Hence, LNG could be countercyclical, he said.
"You can't take it for granted that LNG will solve the problems," Wells said. "Although it's generally agreed that LNG will come, there still are considerable challenges to getting the LNG to market."
Large gas reserves are available outside Canada and the US, he said, noting that the amount of investment devoted to gas infrastructure, including LNG facilities, also will influence future gas prices.
"If you get overinvestment, then you will see prices slashed. If you get underinvestment, then you see prices go through the roof. And, LNG is not a flexible form of investment. Once the infrastructure is there and that gas is flowing, it's not going to be responsive to short-term price changes," he noted.
Many factors play a role in regional gas price dynamics, he said. "There are a lot of changes that we can foresee. There also are a lot of changes that we cannot foreseeUso take every forecast with a heavy pinch of salt."