A delicate balance

Dec. 18, 2017
The new normal in global hydrocarbon markets has been oversupply. As winter and the heart of the heating season approach, however, events and policies have combined to once again highlight how quickly local manifestations of this balance can change.

The new normal in global hydrocarbon markets has been oversupply. As winter and the heart of the heating season approach, however, events and policies have combined to once again highlight how quickly local manifestations of this balance can change.

On Dec. 11 Ineos shut down operations on its Forties crude oil pipeline system following discovery of a hairline fracture in an onshore part of the system. The next morning an explosion and fire occurred at Gas Connect Austria’s (GCA) Baumgarten gas distribution hub, killing one and injuring 21 others, forcing its shutdown as well.

Italy’s energy minister declared a state of emergency, the sudden lack of supplies coming at an unseasonably cold period in the northeastern parts of the country. Prompt-delivery natural gas prices in the UK rose to a 4-year high, with Italian day-ahead wholesale prices reaching an all-time high.

OMV, 51% owner of GCA, described the Austrian gas market as secure. By 8:50 p.m. local time it had also issued a release stating that flows on the Trans Austria Gas pipeline towards Italy, the West Austria Gas pipeline to Germany, and the Hungaria-Austria Gas pipeline would be restored within hours.

But Massimo Di-Odoardo, Wood Mackenzie principal analyst, gas and LNG, noted earlier in the day that the dual events had set up a potential “perfect storm” for the European gas market. “The Forties outage will take out more than 1.2 bcfd of gas production, more than 10% of UK gas demand,” Di-Odoardo said. “The explosion at Baumgarten has halted Russian [exports] to Italy, representing more than 30% of Italian gas demand.”

Di-Odoardo went on to note that there was plenty of storage across Europe to cope with a short-term outage. “But if supply does not resume soon and the cold weather continues,” he cautioned, “prices will remain strong through the winter.”

The Baumgarten blast ended up having limited effects. But it demonstrated exactly how narrow the margin is between oversupply and shortage in any particular market.

Markets, policies

The increasing primacy of LNG trade as a market force has linked previously regional natural gas markets to a higher degree than has historically been the case. This is helpful in terms of diversity of supply and the attendant price competition, but less so when previously isolated gas markets compete for the same material.

China is suffering gas shortages following implementation of a government policy to reduce coal use. Available supplies are being diverted from petrochemical and other industrial customers to meet residential demand in the north. The overall shortfall, however, has driven Asian LNG prices to 3-year highs, reaching $10.65/MMbtu for February 2018 delivery on S&P Global Platts Japan-Korea Marker spot index as of Dec. 11.

And while new sources of supply continue to come online in Australia, the US, and the Russian arctic, demand is also growing from both large energy consumers (India) and suppliers (Saudi Arabia). India’s government plans to boost natural gas’s portion the country’s energy mix to 15% by 2030 from 6.5% now. Doing so will increase consumption to 70 billion cu m/year by 2022 and 100 bcm/year by 2030 from current levels of roughly 50 bcm/year, according to the Oxford Institute of Energy Studies.

Saudi Aramco, meanwhile, has engaged companies in the US, Russia, and elsewhere in discussions regarding natural gas imports, reversing long-standing policy. The search for gas suppliers in other regions comes against the backdrop of a trade ban with neighboring Qatar—the world’s largest LNG producer—and highlights the increased interconnectedness of gas markets in general.

Though higher oil and gas prices continue to be hoped for by the industry at large, volatility of the type generated by these two outages benefits few of its participants, save as a reminder of how delicate specific balances remain.