1. The US shale gas boom seems to be unstoppable. There were those that had expected a slowdown in drilling this year – however, as gas markets expand and the US economy shifts – as much as possible – from high cost oil to relatively cheap gas (which is currently priced around $25/boe), producers are expanding their footprints. Shale gas production has expanded by twelvefold since 2000 to a quarter of US production – and expected to rise to 50% by 2035. Foreign buyers seem quite happy to pay premium prices for companies playing in these basins even though the economics of the acquisitions seem suspect since long-term gas prices are likely to stay flat as new production comes online.
  2. The possibility of US LNG exports is now very real and would be a game changer. The economics are compelling – delivered LNG to Asia from US Gulf Coast can be priced at $9/MMBtu or even lower. I would expect that LNG exported from Canada may not be as cheap since much more investment would be required in terms of pipelines, tanks and other infrastructure. However, any high cost project (ie: all the Australian projects that rely on coal-seam methane as their feedstock) should be worried. If they had expected LNG prices to be higher than $10/MMBtu, and forecasted these prices to increase over time, they may want to study the trend of US gas prices over the past few years! If the US begins exporting LNG, at effectively unlimited quantities at Henry-Hub linked prices independent of relatively high oil prices, the global LNG market will have to adapt accordingly. Atlantic producers will have to compete with low cost US LNG in the only remaining market in the basin, Western Europe. Pacific exporters will have to accept that some Asian LNG buyers may demand the shift away from oil-based prices to US Henry-Hub prices. The cozy relationships that have dominated the industry over the past few decades will be disrupted maverick companies from the US.
  3. European customers now have an alternative supply to Russian gas in the form of LNG displaced from the U.S. market. Imports of LNG to Europe have increased substantially – a much needed market for some of the giant Qatar projects that were originally built to supply the US market. This trend will reduce Russia’s influence over the European natural gas market and will ultimately force them to de-link gas prices from oil prices – something they (and other gas exporters to Europe, such as Norway) have been reluctant to do. Expensive gas pipelines from Russia may not provide the energy security that Western Europe had expected – importing LNG may be a better form of security.
  4. As world economies falter, the emerging markets in Asia (especially China and India) will become more important. I recall a discussion with a senior Woodside officer in 2006 when he claimed that Woodside will never want or need to sell LNG to India – I wonder if this attitude has now changed. These buyers are increasing active, and willing to bargain hard to reduce price. Any imported LNG has to be competitive with their other gas supplies, they can afford to be more aggressive as they are not dependent on LNG supply. Their influence on markets cannot be ignored – and either way, any North Asian buyer that has signed a high-slope oil price-linked contract over the past few years may be wondering if they are going to be stuck with a high-price deal that may be undercut by spot sales to India & China or cheaper US LNG.
  5. A few trends to watch in the near future that could further disrupt markets…floating regas terminals; LNG as a substitute for bunker fuel; rising local gas prices in Indonesia, India and other emerging markets; increased use of natural gas as transport fuel, especially in large markets such as US and China; growth of unconventionals outside of North America and Australia; and emerging LNG export projects in Mozambique and Alaska

Till next time..