By Charles Ellinas
The International Energy Agency (IEA) released last week its annual Medium-Term Gas Market Report 2016 and it makes grim reading for gas exporters.
This was followed-up by BP’s 2016 Statistical Review of World Energy. When presenting it, BP’s Chief Economist said, “This is truly an age of plenty.” He went on further to say, “On the energy demand side what we are seeing is a gradual deceleration in the growth of global energy consumption”, contributing to an age of plenty.
These developments of course have a global impact on markets and prices, but also seriously affect East Med gas developments. This is the subject of this article.
Global gas oversupply
The gas oversupply will be with us at least till 2021, due to a glut of LNG, with demand growth slowing to 1.5% per year, down from IEA’s 2.5% forecast last year. But even this is based on the assumption that Chinese gas demand growth will average over 9% per year over the next five-years, from 4% now. If this does not materialise, recovery will take longer, well into the next decade; the forecast for 2016 so far is 6-7%.
On top of this, the IEA expects the massive growth in new LNG exports to carry on growing, increasing by 45% between 2015 and 2021. This is supported by forecasts from the US that show US LNG exports growing from zero at the start of 2016 to an astonishing 180bcm per year by 2040.
And this is not the only bad news. Use of coal, which declined last year, is now increasing due to very low prices, currently about half the price of gas in Europe. The IEA stated that “in the absence of environmental regulations, particularly in Asia, people are still going for coal-fired power stations because they are cheaper”. Apparently ‘cheaper’ still trumps ‘cleaner’.
The world has entered an era of energy-plenty ushered in by technological advances, such as fracking leading to productivity gains and increasing production of unconventional oil and gas, and rapid growth in renewables, particularly wind and solar, and energy efficiency.
These, combined with very cheap coal and the return of Japanese reactors at the expense of LNG are squeezing use of gas in power generation.
For those looking for renewables to become the primary source of global energy and fossil fuel consumption to be phased-out, the BP report gives cold comfort. Fossil fuel use will be still growing over the forecast period to 2040, albeit at reduced rates, making up more than 80% of global energy consumption.
Gas markets
IEA’s head said “Developments are pointing to a period of oversupply…..The next five years will witness a reshaping of global gas trade.” He went on to say “We are at the start of a new chapter in the European gas markets, especially in terms of prices…..It would be optimistic to expect gas prices to increase.”
In Europe future increase in gas consumption is expected to be anemic, about 0.3% per year, but imports will rise due to the reduction in indigenous gas production. Europe is seen as a market of last resort for excess LNG. Due to very competitive Russian pipeline gas supplies, LNG is finding it difficult to gain a foothold into Europe’s gas trading-hubs.
Despite sanctions and calls by the EU for gas supply diversification, Russian gas imports have been increasing over the past three-years – “cheaper” matters. However, as a result of this gas and LNG oversupply, intense competition is developing among producers and exporters to retain or gain access to European gas markets, thus keeping prices low, irrespective of what happens to oil prices. This is one of the challenges East Med gas will face.
As a result, the IEA concludes that global gas prices are set to stay under pressure, especially with the huge amount of LNG export capacity coming online just as demand slows. In addition, there is an increasing trend away from oil-linked gas prices toward hub-pricing due to the oversupply of gas. The linkage with the oil price is broken, which means that even if oil prices go up, say to $60, gas prices will not follow.
In its report, the IEA concludes: “It is therefore clear that the trajectory of global gas markets – and how fast they rebalance – will depend on the scale of expansion in China and the rest of developing Asia.” Indications so far are a cause for concern. The days of high Chinese growth, led by energy-hungry industrial production, are behind us. Low gas prices are destined to be with us for a long time.
On the positive side, low prices are feeding through into longer-term adjustments in the market, which is a good sign for future stability based on lower cost energy.
The global energy outlook is bright for buyers and consumers, but not for sellers. And East Med needs to sell its gas.
Implications for the East Med
This of course has major implications for East Med gas. The expectation that Israel and Cyprus will take their gas to Egypt to be liquefied and exported to Europe, competing with Russian gas and American LNG, looks unattainable. Unless, of course, they are prepared to sell their gas at $3-3.50 per mmBTU, leaving little profit for Aphrodite and Leviathan. That may be the reason why Israel has more recently been concentrating its efforts on Turkey, where problems with Russia and high gas prices make such exports more likely. A prerequisite to a pipeline through Cyprus’ EEZ, of course, is solution of the Cyprus problem. Or, alternatively, development of Leviathan by FLNG or FCNG.
Israel’s Prime Minister Netanyahu is not resting on this and has opened another possible route for exporting Leviathan gas. In his visit to Moscow on 7 June he said “There are no legal restrictions on Russian companies participating in gas projects in Israel.” He then went on to emphasise this further by adding “I would like … to clarify things. Once again, I encourage Russian energy companies to participate in all tenders in this area.” It remains to be seen how Russian companies, and particularly Gazprom, respond. In the meantime, Cyprus is still stuck to the same story, of selling Aphrodite gas to Egypt. Shell’s plans in Egypt are unclear, having just cut its investment there by 25% this year. Shell has also announced this month that it plans to limit future investment in gas and LNG and exit operations in up to 10 countries during the next two years.
More importantly, while not sounding too optimistic about Egypt, Shell’s CFO said “the politics surrounding the major gas reserves in the eastern Mediterranean, such as Cyprus and Israel, as well as Egypt, have to be dealt with before gas could flow into Shell’s idle Idku liquefaction plant”. Provided, of course, it is also commercially viable, which is a separate challenge. He went on to say “it is too early to say what the solution might be”,
The bottom line is that the risk of Israeli and Cypriot gas becoming stranded is increasing. Urgent and proactive planning is needed, considering all available options, including FLNG and FCNG.
Dr. Charles Ellinas is a non-resident Senior Fellow, Eurasian Energy Futures Initiative, Atlantic Council
SOURCE
In Europe future increase in gas consumption is expected to be anemic, about 0.3% per year, but imports will rise due to the reduction in indigenous gas production. Europe is seen as a market of last resort for excess LNG. Due to very competitive Russian pipeline gas supplies, LNG is finding it difficult to gain a foothold into Europe’s gas trading-hubs.
Despite sanctions and calls by the EU for gas supply diversification, Russian gas imports have been increasing over the past three-years – “cheaper” matters. However, as a result of this gas and LNG oversupply, intense competition is developing among producers and exporters to retain or gain access to European gas markets, thus keeping prices low, irrespective of what happens to oil prices. This is one of the challenges East Med gas will face.
As a result, the IEA concludes that global gas prices are set to stay under pressure, especially with the huge amount of LNG export capacity coming online just as demand slows. In addition, there is an increasing trend away from oil-linked gas prices toward hub-pricing due to the oversupply of gas. The linkage with the oil price is broken, which means that even if oil prices go up, say to $60, gas prices will not follow.
In its report, the IEA concludes: “It is therefore clear that the trajectory of global gas markets – and how fast they rebalance – will depend on the scale of expansion in China and the rest of developing Asia.” Indications so far are a cause for concern. The days of high Chinese growth, led by energy-hungry industrial production, are behind us. Low gas prices are destined to be with us for a long time.
On the positive side, low prices are feeding through into longer-term adjustments in the market, which is a good sign for future stability based on lower cost energy.
The global energy outlook is bright for buyers and consumers, but not for sellers. And East Med needs to sell its gas.
Implications for the East Med
This of course has major implications for East Med gas. The expectation that Israel and Cyprus will take their gas to Egypt to be liquefied and exported to Europe, competing with Russian gas and American LNG, looks unattainable. Unless, of course, they are prepared to sell their gas at $3-3.50 per mmBTU, leaving little profit for Aphrodite and Leviathan. That may be the reason why Israel has more recently been concentrating its efforts on Turkey, where problems with Russia and high gas prices make such exports more likely. A prerequisite to a pipeline through Cyprus’ EEZ, of course, is solution of the Cyprus problem. Or, alternatively, development of Leviathan by FLNG or FCNG.
Israel’s Prime Minister Netanyahu is not resting on this and has opened another possible route for exporting Leviathan gas. In his visit to Moscow on 7 June he said “There are no legal restrictions on Russian companies participating in gas projects in Israel.” He then went on to emphasise this further by adding “I would like … to clarify things. Once again, I encourage Russian energy companies to participate in all tenders in this area.” It remains to be seen how Russian companies, and particularly Gazprom, respond. In the meantime, Cyprus is still stuck to the same story, of selling Aphrodite gas to Egypt. Shell’s plans in Egypt are unclear, having just cut its investment there by 25% this year. Shell has also announced this month that it plans to limit future investment in gas and LNG and exit operations in up to 10 countries during the next two years.
More importantly, while not sounding too optimistic about Egypt, Shell’s CFO said “the politics surrounding the major gas reserves in the eastern Mediterranean, such as Cyprus and Israel, as well as Egypt, have to be dealt with before gas could flow into Shell’s idle Idku liquefaction plant”. Provided, of course, it is also commercially viable, which is a separate challenge. He went on to say “it is too early to say what the solution might be”,
The bottom line is that the risk of Israeli and Cypriot gas becoming stranded is increasing. Urgent and proactive planning is needed, considering all available options, including FLNG and FCNG.
Dr. Charles Ellinas is a non-resident Senior Fellow, Eurasian Energy Futures Initiative, Atlantic Council
SOURCE
