The Last Barrel

 Vol. 233 No. 11

During mid-October, a significant natural gas conference and exhibition, Gastech, was held in London. In discussing all natural gas sectors, Gastech had several undercurrents running through it.

The first theme was that Western European companies and government could not hide their enthusiasm about tapping new gas supplies in places other than Russia. Thus, the second theme, not surprisingly, is that the Russians came into this conference, feeling that Western Europe doesn’t fully appreciate them. The third theme, is that there was not a lot of enthusiasm about the U.S. becoming a natural gas exporter, even in the longer term.

Western Europe looks toward diversification. Natural gas will be an increasingly important long-term item for Western European, but one wouldn’t know it by short-term demand. “European gas demand is flat-to-declining and will likely remain that way without government regulations to support gas-fired power generation,” said Norbert Kint, head of trading for Austria-based EconGas. The reasons, he said, vary by country. In the UK, gas demand will fall 7% this year. “This is due to cheap U.S. coal exports,” said Kint. “It’s mostly landing in the power production sector of the UK.” In Germany, he added, the biggest driver in lower gas demand is governmental incentives for renewables production. Over in Italy, the problem is an unstable economy.

Yet, in the longer term, 2020 and beyond, many observers see natural gas driving the European economy, particularly LNG supplies. “We are facing an exciting gas future,” said Statoil President and CEO Helge Lund. “Going forward, we see natural gas as more of a global commodity. There are estimates that Europe will rely even more on imports after 2015.”

Western Europe hopes that an increasing share of LNG imports will come from new supplies in other regions, so that they can diversify away from dependence on Russian gas. Australia is one area, where there are three LNG projects operating and another seven under construction.

Southeast Asia is another area from which Europe hopes to draw gas from both conventional and coalbed methane (CBM) projects.  ExxonMobil’s senior exploration manager in Indonesia, Steve Buck, described an extensive CBM program that his firm is pursuing in that country. Having drilled just six wells with “two million acres to go,” Buck said that his firm is encouraged at the area’s potential.

Russian bear comes loaded. All this talk about Western Europe diversifying gas supplies has the Russians upset and concerned about long-term market share. In an effort to show that they are not happy, while also emphasizing who still holds the greatest gas resources, Russia convinced Gastech officials to stage a “Day of Russia,” a day-long subset of the conference. One might summarize the proceedings as this message: “We are still the world’s largest gas supplier, we have the largest gas reserves, we have a long-term track record of dependability, and we can compete on price—so why do you want to mess with it?

Indeed, Russian Energy Minister Alexander Novak told attendees that Russia is “more than willing to be a long-term supplier,” but he wants to see a more equitable situation, a more level playing field between the European Union and non-EU countries. Natalia Komarova, governor of Khanty-Mansi Autonomous Region, said that her government is cooperating with Gazprom to explore a large potential for even greater development of gas resources beyond existing production. Gazprom’s head of Gas, Gas Condensate and Oil Production, Vsevolod Cherepanov, described the firm’s first LNG plant at Sakhalin, as well as the Yamal megaproject, which will produce between 75 Bcm/year and 115 Bcm/year by 2015.

We would be remiss not to mention that another chapter in the ongoing tug-of-war between Gazprom and Rosneft (see World Oil, October 2012, page 25) occurred during Gastech. While Gazprom was presenting its gas market outlook to conference attendees, ever-shadowy Rosneft Chairman Igor Sechin lurked around Gastech, quietly letting people know that his firm is expanding its influence within the Putin regime. No wonder people on the street refer to Sechin as “Darth Vader.”

U.S. gas not necessarily popular. Although American firms salivate at the thought of exporting gas to Europe or Asia, that same enthusiasm was not shared in London. Some of that attitude can be traced to the significant difference in gas prices between North America and elsewhere. Many European firms have been investing in higher-cost gas supply and infrastructure in other regions, and they don’t want cheaper U.S. gas to undercut those investments. Furthermore, Asian buyers are not eager to embrace Henry Hub pricing for new, long-term LNG contracts. “Security of energy is more important than price,” said H. K. Kim, senior vice president at Korea’s KOGAS.

Gas from the U.S. may not be as cheap as some people think, said Anne-Sophie Corbeau, senior analyst at the International Energy Agency (IEA). “In the case of Henry Hub indexing, transport costs are currently quite high,” she said. “Gas exported from the U.S. is not going to be cheap, but it is cheap when compared to oil-linked formulas, such as Australian gas prices, when sent to Asia.” Corbeau said that many European and Asian buyers are reluctant to embrace U.S. gas, because they don’t know what to expect in terms of availability. Depending on the presidential election outcome, the U.S. attitude toward gas exports could vary greatly.

Waiting on the election. As most readers know, the U.S. was set to hold its presidential election on Nov. 6. This issue of World Oil, however, had to go to press before that date, so we will provide election results, analysis and commentary in our December issue, some of it in this column.