Doris Leblond
OGJ Correspondent
PARIS, Feb. 19 -- In its 2008 energy Panorama review of energy market trends, Institut Francais du Petrole said a "deep mutation" is occurring in the energy industry as energy diversification and increasing climate change awareness opens new patterns of supply and demand.
Examining tight oil supply and increasing demand trends elevating prices to all-time highs, IFP sees an "apparent disconnection" between crude prices and their fundamentals. IFP Pres. Olivier Appert said the usual arguments and mechanisms explaining crude price increases no longer apply because "the market is following a new rationale."
The reference oil price level to be considered, he explained, is the one that maintains a demand that is growing too fast while supply is increasing too slowly. The apparent insensitivity of demand to high oil prices in the transport sector could be caused by crude prices being buffered by taxes, subsidies, and currency rates by the time gasoline reaches the pump.
IFP said a nominal 100% price hike in a barrel of oil on average causes a 35% rise in gasoline prices, corresponding to an actual price hike of 20%, causing a consumption drop of about 3.5% worldwide. "It takes a stronger price increase to produce a quick effect on demand," noted IFP. A regional approach is needed for a more precise explanation of the magnitude of the increase.
Oil demand for transportation should grow to 70% by 2030 from the current 60%, reported IFP, which sees substitute motor fuels—gas-to-liquids (GTL), coal-to-liquids, and biofuels— accounting for 1.5 million b/d within the next 10 years. "These substitutes are welcome complements to a tight oil market, but they are not replacements," insists IFP.
IFP said demand growth will be limited by supply constraints, and oil supply should grow by 1.64 million b/d/year during 2007-12, when world production capacity will reach 93.6 million b/d. This is based on projects announced at yearend 2007 and does not consider production development delays.
OPEC is expected to account for 90% of the supply increase, with production rising in all countries except Algeria and Indonesia. Non-OPEC capacity should increase by 800,000 b/d (1.7%) over the same period, IFP said.
If the dollar stops eroding, crude prices should increase at a slower pace in the short term, but IFP sees prices rising and exceeding a sustainable $100/bbl after 2011 because of the limited increase in oil production. The only way to change this trend, it said, would be a massive development of substitutes, large energy efficiency gains, or a major world economic slowdown.
Gas industry trends
Sometimes contradictory trends are emerging in the natural gas market, potentially impacting its development. Although gas is still preferred for electricity generation, Cedigaz head Marie-Francoise Chabrelie told OGJ, gas will soon face growing competition from renewables, nuclear power, and even coal. Demand for these is expanding for electricity, motor fuels through GTL, hydrogen production, and the possibilities of polygeneration and the coprocessing of coal and biomass.
Cedigaz's tentative estimates indicate worldwide gas consumption increased by 1.4-1.8% in 2007, up from 2,888 billion cu m in 2006. The American market picked up strongly, although mild weather in the EU-27 market caused a drop for the second consecutive year.
Although supply volumes were lower than in recent years, they increased in the Middle East, Asia (fastest in China), Latin America, and Africa. LNG tanker trade was also up 10% in 2007, and world liquefaction capacity is expected to increase almost 50% by 2012 to about 383 billion cu m/year.
Nearly half this capacity is due to new plants built and planned in Qatar. The boom is occurring despite costs increases to $700-900 million/tonne for the new projects, up from $380-400 million/tonne in 2004.
LNG tanker fleet growth is accelerating, with more than 120 new LNG tankers on order for delivery by yearend 2011. Transport overcapacity should become recurrent and favor spot transactions.
Similar dynamics are noted for receiving terminals. Over the next 5 years, global regasification capacity could jump to about 700 billion cu m/year in 2012 from almost 500 billion cu m/year in 2007. Floating terminals offer flexibility and faster construction times, arousing LNG interest in emerging countries.
Cedigaz says residential sector sales will continue to exercise pressure on the LNG market's development.
High LNG prices and competition on gas demand from other energy sources will shift the balance of gas consumption. Any lag between start-up date for plants and commercial production will generate pressures on world supplies and favor price arbitrage between basins.
Producing country trend
Producing countries intent on preserving resources for local markets and future generations will further strain gas exports and access to gas supplies. After Qatar, since 2005, Indonesia and Nigeria have decided on the same policy; other countries could follow that trend. Producer countries encouraging local strong demand for gas-based projects through low domestic gas prices are promoting economic development.
However, Egypt, Russia, and China are considering raising gas prices sharply or have already decided to do so, which would slow consumption.
Another trend is the linking of spot gas prices to oil, as in long-term gas contracts, causing prices to follow oil fluctuations but with several months' lag. Algerian LNG purchased under long-term contracts, unloaded at Montoir-de-Bretagne in France or Zeebrugge in Belgium, saw prices of $9-$12 million btu.
In Asia, importers benefitted from the "S-curve" indexing formula that shelters them from very high oil price increases. But this advantage may soon end, as producing countries seek to obtain gas payments tied to oil in the future.
World gas demand, set to increase at an annual average of 2-2.2% to some 3,290 billion cu m by 2012, could well be impacted by rising coal demand. But although the price differential is narrowing, Cedigaz thinks it unlikely that other energy sources—coal in particular, will have a very unfavorable impact on gas demand growth.
Rather will it be renewables, even in partnership with gas, that could emerge as major competitors to gas in industrialized countries.