2011 Gas Market Trends

By Robert Sullivan – Exclusive to Gas Investing News

2011 Gas Market Trends

2011 marked one of the starkest contrasts seen yet between gas markets in North America and the rest of the world, as the ongoing ‘shale revolution’ in the US pushed prices to 2-year lows, while oil-indexed gas outside of the US spent much of the year tied to $100+ crude.

The advent of shale gas in the US has continued to change the country’s energy outlook, and in late December of 2010 the US Energy Information Administration (EIA) dramatically increased its estimate of US shale gas reserves to 827 trillion cubic feet (tcf) from 353 tcf.

There was also a 6.6 percent increase in production from 2010 to 65.9 billion cubic feet per day (Bcf/d), and according to data from the EIA, nearly all of the 4.1 Bcf/d increase in output in the US this year has come from onshore production, the bulk of it shale.

This production increase and the new EIA estimate of reserves put downwards pressure on gas prices in 2011, and with 2012 just around the corner the Henry Hub spot price is already at a 2-year low and flirting with a dip below $3 per MMBtu.

Cheap prices have made life difficult for drillers however, as some struggle to break-even on gas that has averaged roughly $4.02 per MMBtu over the course of the year.

Production costs are decreasing as technology improves and drillers refine their operations, but breakeven costs in major plays range are still routinely cited at anywhere from $3 to $7 per MMBtu.

Gas markets outside the US, on the other hand, have had an altogether different experience in 2011.

Crude oil, which has been above $100 per barrel for a better part of the year, is the basis for determining the price of gas outside of the US, in the absence of a natural gas benchmark. Long term liquefied natural gas (LNG) and piped gas contracts are oil-indexed, and consequently gas has been pricier for buyers in 2011.

Japan, the world’s largest consumer of LNG, has been importing it at an average price of $16.5 per MMBtu since late July, a jump from 2010 when it was paying roughly $11 per MMBtu.

The premium Japan has been paying this year for its imported gas, however, is also due in part to an increased demand for LNG following the major earthquake that struck Japan in March, knocking out part of the country’s nuclear power capacity and leading to the voluntary shutdown of a number of plants.

Since the disaster, Japan has sought to offset the lost nuclear capacity with imports of LNG. According to estimates from Japan Oil, Gas and Metals National Corp. (JOGMEC), imports of LNG in 2011 will be close to 82 million tonnes, a sharp rise from the nearly 70 million tonnes bought in 2010.

The additional imports have reduced liquidity in the global LNG market, and have bumped up spot prices.

A far more significant impact of the March earthquake in Japan could be the effect it has on long-term energy policy across the world.

Debates over the future of nuclear power have already resulted in Germany opting to abandon nuclear power, with the government announcing in May that all 17 of the country’s nuclear plants would be permanently shut down by 2022.

As in Japan, gas is one of the likeliest substitutes for nuclear power in Germany, which accounts for nearly 20 of the 80 gigawatts required to run the German economy, and on November 8 the 27.5 billion cubic meter (bcm) capacity Nord Stream pipeline was opened between Russia and Germany.

The line’s capacity will be doubled to 55 bcm within the next year, and with anti-nuclear sentiment riding high in the wake of the Fukushima Daichi meltdown, further shifts away from nuclear power could be a key trend to track for the gas sector looking ahead to 2012.

 

Disclosure: I, Robert Sullivan, hold no direct investment interest in any company mentioned in this article.