FACTS forecasts two gas-price convergence trends

Dec. 14, 2006
Natural gas prices are converging upward, both in conjunction with rising oil prices and across global gas markets, according to a study of gas trends by FACTS Inc, Honolulu.

By OGJ editors
HOUSTON, Dec. 14 -- Natural gas prices are converging upward, both in conjunction with rising oil prices and across global gas markets, according to a study of gas trends by Fesharaki Associates Consulting & Technical Services Inc.(FACTS), Honolulu.

"Both trends are unique and define for us a whole new world," FACTS said. "Most buyers and sellers have not yet grasped the implications of these two trends." The study, "Globalization of Gas Prices: When Will It Become a Reality in the East?" was released during the early December Gastech meeting in Abu Dhabi.

Analysts forecast a long-term Henry Hub price of $7-9/MMbtu. Their forecasts point toward "irreversible" higher oil prices worldwide. "We will [still] have cycles, but from a higher price base," the analysts reported.

FACTS analysts expect oil prices could drop slightly during 2007 with an anticipated brief supply boost from outside the Organization of Petroleum Exporting Countries. But long-term oil prices are expected to increase to a level that curbs demand growth.

"What is that price? We feel that real prices have to rise by anywhere from 50-100% (base price of $80/bbl for Dubai crude and $85/bbl for West Texas Intermediate) on the back of moderate economic growth before demand is curbed by much more efficient use and new technologies that will reduce the dependency on oil," FACTS said.

Analysts foresee oil price equilibrium at $60/bbl for Dubai crude. Due to fuel switching, gas prices are bound to rise as well, although they are capped by competition from coal and nuclear power.

Meanwhile, LNG prices will be driven by high construction costs, the reentry of the US into the LNG market, shortfalls of contracted Indonesian LNG supplies, and Qatar's becoming the world's biggest LNG supplier.

"The Qataris know they hold most of the cards in the near term and intend to take advantage of it—asking for higher prices and diverting cargoes to the highest-paying markets—paving the way to become the price setter in the world LNG scene," FACTS said.

Price thresholds
For years, UK gas prices were the lowest, followed by US and European prices, while Asia had the highest gas prices. In 2005, US and European prices converged at higher levels, leaving Asian prices behind.

In 2006, a new trend emerged, with US and UK gas prices converging. Meanwhile, Asian prices have resumed their threshold above US and UK prices.

"With a real linkage in markets, new spot markers in the Atlantic Basin have emerged as the reference price in the East," FACTS reported. Traders rely upon US and UK gas prices as a reference price for Asian and Middle Eastern LNG spot prices.

The Asian LNG market is experiencing increased tightness. Middle East producers can send cargoes to both the Atlantic Basin and the Asia-Pacific region. New Asia-Pacific supplies can move within Asia and to the US West Coast.

Consequently, suppliers are likely to ask for prices that compete, or more likely exceed the prices they could obtain in the highest-paying market, "be it the Asia Pacific, Europe, or the US," FACTS said. "This essentially means a connection of markets despite the disparate location of the sellers. It also signals a fundamental shift in the global gas markets in both pricing and trade flows."

Asian buyers are negotiating with Qatar for long-term diversions to Asia of western volumes. FACTS questions how much volume initially targeted for western markets can be redirected to the East. South Korea and Japan, both short of supply, are negotiating for additional Middle East supplies.

Total diversions could reach 15-20 million tonnes by 2012 for Japan, South Korea, and Taiwan, but more volumes could be diverted to China and India if international prices are paid, FACTS said.

Tight supply
FACTS analysts believe gas consumers in Japan, South Korea, Taiwan, and the US will have no choice but to pay $7-9/MMbtu or higher.

"Some Asian countries are being asked to pay $8-12/MMbtu today to divert volumes from the West to the East. Can the Chinese and Indian consumers pay such prices? Can fertilizer producers pay such prices? The answer is highly uncertain," FACTS said.

Given limited supply, new buyers seeking near-term gas supply will face high prices.

"With the exception of Qatar, the Middle Eastern suppliers are all booked. In the Asia Pacific, the realistic potential suppliers by 2015 are: Russia's Sakhalin-2 (Train 3), Indonesia's Tangguh (Train 3), Australia's Northwest Shelf, Gorgon, Pluto, Scarborough, and Browse basin," FACTS said.

LNG buyers probably will resist making long-term commitments at high prices, but they will have to come to terms with that, FACTS analysts forecast.