Eni’s Egypt Gas Find Further Scrambles LNG Market’s Future
Allen Brooks, 10 September 2015, OilPro
Last week we were treated to a headline that Italian oil company Eni SpA has made a huge natural gas find off the coast of Egypt and will move quickly to delineate and develop the field. The field, located in the Mediterranean Sea at the company’s Zohr prospect about 120 miles off the Egyptian coast in the Shorouk block, is estimated to contain potentially 30 trillion cubic feet of natural gas, or 5.5 billion barrels of oil equivalent. Eni called the field a “supergiant” gas field and claimed that it “could become one of the world’s largest natural-gas finds.” Eni expects to make a final investment decision about developing the field later this year, setting up development drilling in 2016 and 2017 with initial production on stream by 2018. This fast track is helped by the field’s location allowing it to access neighboring production infrastructure.
Claudio Descalzi, chief executive of Eni, discussed the results of the drilling with Egyptian president Abel Fattah Al-Sisi on Cairo a little over a week ago. Following the meeting, Mr. Descalzi said, “It’s an exciting moment for us and also for Egypt. This historic discovery will be able to transform the energy scenario of Egypt.” How might that be?
The Zohr discovery in located in a block that covers an area of 100 square kilometers (38.6 square miles) and is in 1,450 meters (4,800 feet) of water depth. Mr. Descalzi told the Financial Times that he believes the field could contain as much as 40 Tcf of gas and oil that could be found with additional exploration. Since Eni controls the block 100%, it is likely that further exploration will be conducted given this recent discovery. He told the Financial Times that “Egypt can rely on this discovery for the next decade. They have found a very important supply for the future.”
Egypt’s gas output has been declining since 2011 as the revolution that ended Hosni Mubarak’s regime curtailed investments in exploration and production. With electricity demand, mostly generated by natural gas, growing by more than 7% a year, the most populous Arab country with 87 million people began buying liquefied natural gas (LNG) to meet domestic needs.
Before the revolution, Egypt shipped natural gas to Jordan and Israel by pipeline and processed LNG at plants in Idku and Damietta for sale overseas. According to the Energy Information Administration (EIA), Egypt is the second largest natural gas producer in Africa after Algeria.
In response to the declining natural gas output and growing gas demand, Egypt had been considering building a pipeline to a field off Cyprus as well as securing supplies from the giant Leviathan field offshore Israel. Both of these potential deals are suddenly being reviewed in light of the Zohr discovery, which will change energy development in this region of the Mediterranean Sea. The Egyptian government suggests the discovery will not upend those private company deals.
The Leviathan field is estimated to contain 22 Tcf of natural gas, putting it in the giant category, but the plan to use idled Egyptian LNG facilities owned by BG Group (BG-NYSE) to export LNG will need to be reassessed. The investors in the Leviathan field recently agreed to supply gas to Jordan, but that was expected to use the existing pipeline from Egypt. That deal may be subject to review given the potential for Egypt to be able to continue to supply Jordan from this new field. The Zohr discovery announcement came at the same time the Israeli Knesset was scheduled to debate the cabinet’s decision to allow the Leviathan development to move forward. Members of the opposition party in the Knesset believe that the Leviathan deal is too lucrative for the investors and results in gas prices that are too high for Israeli consumers. A rejection of the Leviathan deal could force the owners of the field to reconsider its development, which has been delayed since its discovery in 2010, and pressure the Israeli government to strive for an agreement with more favorable prices for consumers.
The interesting scenario to consider is what the Zohr discovery, coupled with the Cyprus and Israeli discoveries and the possibility that Egypt’s economy might recover to the point that it can support more domestic exploration and development means for future gas discoveries? Could this corner of the world become a new source of global natural gas supply? If so, what might that mean down the road for the LNG market, which has been going through its own recalibration? These questions sent us to re-examine the current state of the LNG market.
In our review, we went back and re-read some reports about the LNG market and its expectations from earlier periods, along with looking at the state of the current market. A 2006 report on LNG by the Oil & Gas Journal was focused on the amount of LNG that would be flowing into the U.S. and where that supply would come from. However, a report we found most relevant for contrasting today’s situation was produced in November 2011 by Neil Beveridge of Bernstein Research. His report contained a chart on Japanese LNG prices compared to Henry Hub natural gas prices from late summer 1999 to 2011.
Japanese LNG import prices started at around $3 per million British thermal units (mmbtu) in 1999 but quickly rose to above $4/mmbtu in 2000 and stayed in the $4-$6/mmbtu range until 2005 when they began trading in the $6-$8/mmbtu range until 2008 at which point they soared, along with global crude oil prices, since LNG was priced off indices that were tied to oil prices. The Great Recession ended the rise in LNG prices near the $15/mmbtu level, sending them back into the $6-$8/mmbtu range. The low price didn’t last long as LNG prices followed global oil prices higher reaching the $17/mmbtu level by late summer 2011.
The most interesting aspect of this chart is that following the Great Recession, while Japan’s LNG import price was climbing back to new highs, U.S. natural gas prices were falling due to the shale gas revolution’s success. What this produced was a scenario that Mr. Beveridge described thusly: “Over the last 12 months, however, the divergence in global gas prices has taken the differential between US and LNG prices to levels not seen before. With Henry Hub trading at less than $4/mscf and LNG contract prices reaching over $16/mscf in Japan, we are seeing a difference in price of over $12/mscf which is equivalent to an oil equivalent price of US$7/bbl. Given it costs less than $1/mscf to ship gas from Canada to Japan and less than $3/mscf to ship gas from the US Gulf Coast to Asia, this differential is not sustainable if market forces are allowed to operate.”
Despite that view of the unsustainability of the differential between Japan’s LNG import prices and U.S. Henry Hub gas prices, this spread lasted until late in 2014. In late 2014, global oil prices collapsed under pressure from OPEC’s decision to continue pumping large oil volumes despite a growing global oil glut. These lower oil prices pulled down LNG prices linked to oil. In Exhibit 9 on the next page, we show the monthly contract and spot LNG prices for import into Japan between March 2014 and July 2015, as reported by METI. The zero monthly prices in the chart reflect months when METI did not report a price. While LNG import prices remained very high early in 2014, they slid into the summer before jumping back up but then began dropping rapidly to below $8/mmbtu by early 2015, where they remain today.
While the high LNG price in northern Asia – Japan and Korea – has fallen dramatically in recent months, landed LNG prices globally have also declined as global oil prices have fallen. These price declines, as highlighted by the chart in Exhibit 10, have erased much of the arbitrage advantage owners of new LNG terminals were hoping to capture when they filed for permits to build, or actually began construction of new LNG export terminals.
The Bernstein report contained a chart showing LNG terminals in existence, under construction and planned globally as of late 2011. The chart actually understates the number of LNG export terminals in the United States.
One area of concentration is Australia where huge offshore gas reserves and gas from coal fields are feeding into new LNG export terminals that when all are completed will position the country as the world’s largest gas exporter, surpassing Qatar. Virtually all of this gas has been targeting Asian markets, but with the slowing economies there and now the resumption of nuclear power plants in Japan, that may be smaller than previously anticipated. A report from consultant EY shows projected global LNG demand beginning in 2012 through 2030. While the demand from Japan and Korea was projected to grow, it rose very slowly. The more dramatic growth was projected to come from other Asian countries including China. Since this forecast, China and Russia have agreed to a deal to ship Siberian natural gas into the Chinese pipeline system reducing the need for China to buy as much LNG as originally planned.
Even with the projected demand growth, the EY report shows that the planned construction of LNG export terminals globally would exceed demand beginning as early as 2015 but certainly by the end of the forecast period in 2025. At that point, all the speculative liquefaction capacity as of 2011 would be surplus for meeting the world’s gas needs.
Given this picture of LNG supply and demand, one has to wonder what impact Eni’s recent natural gas discovery off the coast of Egypt may have on the market. As more natural gas supplies around the world become available and the technology to produce smaller natural gas deposits with movable liquefaction plants improves, it is difficult to see how LNG prices return to the lofty levels experienced in northern Asia in recent years. Yes, LNG prices are likely to go higher over time, especially if the oil-linked pricing contracts remain in place and crude oil prices climb higher, but the rise is more likely to be tied to customer desires to lock up new large gas supplies at what are seen as reasonably attractive long-term levels, even if they are above spot market prices. In the same vein, it is highly likely we will see further development of a global natural gas spot market, something that has been largely restricted by the nature of the capital intensity of LNG liquefaction and regasification facilities and the ships necessary to move the gas from producing to consuming locations. All of these shifts will make the future LNG market more dynamic, but less predictable than in the past.
Source: http://oilpro.com/post/18351/enis-egypt-gas-find-further-scrambles-lng-markets-future
