Doris Leblond
OGJ Correspondent
PARIS, Nov. 1 -- Soaring prices of natural gas are changing traditional market patterns by breaking up the gas-electricity link and increasing price volatility in LNG trade, speakers said at the 10th Annual International Gas Summit here.
Gas prices have traditionally been linked to oil prices in Europe and have soared accordingly, even for long-term, take-or-pay supply contracts in which price changes are not as abrupt as they are in spot trades. The consensus at the summit was that this link would last.
The major changes in the global market will result from US prices, which have jumped at times recently to more than $15/MMbtu and are influencing oil markets through the fast-developing international LNG trade.
Statoil Executive Vice-Pres. Rune Bjornson raised questions typical at the meeting: How will high gas prices affect demand? Will they cause gas to lose market share in power generation to coal and nuclear energy?
Dominique Venet, Electricité de France (EdF) executive vice-president for gas, reported a debate in his group on whether to switch from gas to coal for new power generation. He wondered whether the current high gas price trend might not "kill some of the gas-fired power projects currently under discussion."
Pointing out that electrical generation is expected to account for 70% of total gas demand growth between 2005 and 2030 in the European Union, he said EdF had calculated that if neither gas nor coal were subject to CO2 trading they would compete about equally in the power generation market.
"CO2 prices have been very volatile in 2005," he said. "Future prices will depend on numerous factors including government policies and international agreements on quotas."
The reasons coal appears more attractive, he said, are that sensitivity to feedstock prices is much higher for gas-fired than for coal-fired power generation, coal reserves are huge and well distributed in the world, and future coal prices are currently seen to be more stable than gas prices.
The choice between gas and coal looms large for Edf, the world's largest power utility, and its German EnBW and Italian Edison subsidiaries, whose countries have rejected nuclear energy.
The nuclear option was raised by a number of summit participants, many of whom—including Jean-François Cirelli, Gaz de France chairman and CEO, and Gerald Doucet, World Energy Council secretary general—cautioned that nuclear power was for base-load generation and should be restricted to developed countries.
Doucet said concern about the greenhouse gas emissions of coal combustion can be addressed through coal-to-liquids processes, which, he said, "may dominate the market." But the price of coal having doubled and with emission rights at $20/ton adding to the cost, a level playing field seems to be developing as "all energies will be needed for power generation."
LNG challenges
With LNG, the greatest change to gas market dynamics is expected to come from high prices in the US. Charif Souki, chairman and CEO of Cheniere Energy, voiced the consensus that the US represents "the magnet for LNG."
Nearly all participants in an LNG session besides Charif Souki—Gordon Shearer, chairman and CEO of Hess LNG; Stuart Fysh, BG executive vice-president; and Stuart Bradford, Shell general manager—believed that Henry Hub or the New York Mercantile Exchange futures price would be the benchmark price for world LNG sales.
LNG will go to markets that maximize its value, said Francisco Fernandez Santamaria, deputy CEO of Repsol-Gas Natural LNG. This should lead to increasing flexibility of supply contracts.
The trend will be driven by the "plethora of new projects being built," said Claude Mandil, executive director of the International Energy Agency, who predicted: "By 2030 the Atlantic Basin market will account for two thirds of global energy trade and be predominant."
By then, added Shell's Bradford, "LNG supplies will be crisscrossing the world".
Arbitrage will no longer be confined to Europe and North America but will become trans-Pacific, with the Middle East an essential player on the world market and Asia, set to become "a fantastic market," he said.
Conference organizers were Petrostratégies, Institut Français du Pétrole, the consultants SPEC, and Poten & Partners Inc.
