Royal Dutch Shell Plc  .com Rotating Header Image

Financial Times: Cleaner fuel is now a global commodity

By Ed Crooks
Published: March 7 2008 17:09 | Last updated: March 7 2008 17:09

You could tell that something had changed in the world’s natural gas markets when British consumers were told their bills were rising because of an earthquake in Japan.

In a recent round of price rises by most of the main domestic energy suppliers in the UK, one of the factors cited was that expected imports of liquefied natural gas had been diverted to Japan instead.

The earthquake in July that forced a shutdown in a nuclear power plant meant that gas-fired power stations were running for longer, pushing up the price of gas in Japan. If suppliers could obtain about 80p a therm in the Japanese market, why would they settle for 55p or so in the UK?

That was not the only, or even the main, reason why UK gas prices rose over the winter.

A more important factor stems from the fact that the decline in Britain’s domestic production has tied its market more closely to continental Europe, where the price of gas is typically linked to oil, because of the traditional trade-off between gas and oil for heating and power generation.

That meant oil reaching $100 a barrel had a more powerful influence on UK gas prices than it might have done in the past. But this, too, is evidence of how the gas market is becoming global.

As Mike Dickman, Morgan Stanley’s co-head of global energy, puts it: “Gas is moving from being a regional commodity to a global one. This shift means that prices will be determined by global energy supply and demand characteristics.”

On the demand side, the use of gas has been growing significantly faster than the use of oil – although not as fast as the use of coal – and that pace is likely to continue.

Gas has been the fuel of choice for investment in power generation over the past two decades, in the developed world and in many emerging economies too. Modern combined-cycle gas turbine plants are cheap and quick to build, and create much less pollution than coal-fired electricity.

When carbon dioxide emissions are constrained and priced, as they are already in Europe and are likely to be soon in the US and elsewhere, the fact that gas-fired power stations emit less than half the CO2 per kilowatt hour of coal-fired stations makes the appeal of gas even greater.

It is, as Fulvio Conti, the chief executive of Enel, the Italian electricity company, puts it, “like burning Champagne”.

Colette Lewiner of Capgemini, the consultancy, says 80 per cent of the new power generation capacity planned in the EU will use fossil fuels, and most of that will be gas. “Renewables are expensive, and while nuclear is a good long-term option, building one plant is much more difficult than building two or three gas-fired plants,” she says. As a result, Europe’s dependence on gas imports is set to rise.

On the supply side, Mr Conti’s analogy with Champagne also holds good. Gas is a high-quality product with limited production.

The output from traditional producing areas such as the North Sea is in decline. New sources of supply are being opened up, from Trinidad to Australia, but many have been plagued with the common problems of delays and cost over-runs. Sakhalin 2, for example, the LNG project off the east coast of Russia that was controlled by Royal Dutch Shell and is now majority-owned by Gazprom, will only be stepping up deliveries next year, when they had originally been planned for November 2007.

Some projects have been cancelled altogether, such as Gazprom’s proposed $3.5bn Baltic LNG plant.

Although there is enormous interest in building new pipelines to import gas into Europe, much of the Russian investment, such as Gazprom’s proposed North Stream and South Stream routes, seems aimed at finding new ways to deliver the same volumes of gas direct to the European Union, bypassing transit countries, rather than adding additional supplies.

There is scepticism among some analysts about whether Russia will be able to develop its vast reserves fast enough to meet both export and domestic demand, in part because Gazprom has been distracted by its international ambitions.

Reserves being opened up – such as the Shtokman field off the north coast, which is being evaluated by Gazprom, Total and StatoilHydro – present formidable challenges to development.

In many gas-producing countries, particularly in the Middle East, there is a problem of regulated domestic prices being set far below world market levels, encouraging excessive domestic consumption and restricting the volumes available for export.

Questions have also been raised about Qatar, where after a spectacular wave of investment in facilities to produce and ship LNG and to convert gas into liquid fuels, there has been a moratorium imposed on new projects.

Saad Al Kaabi, Qatar Petroleum’s director of oil and gas, rejects vigorously the idea that this suggests the country is concerned about its future production potential, saying that Qatar’s priority is “to ensure the sustainable development of these reserves for the future”.

He adds: “Everything is going fine; we have not seen anything that scared us from any of the developments.”

However, he explains: “We have been on a very fast track, and we need first to cool down a little bit, to get more information and decide what we want to do next …”

“It is only prudent to hold on to this moratorium for a little while, and then review it.”

That review will not come until some time in the next decade. So, although there is a huge expansion of gas output from Qatar under way, there will not be any further addition to supply for the foreseeable future.

The result is that, like oil, gas is likely to come under pressures that will drive the price higher. There will, of course, be fluctuations, but the trend is likely to be upward.

As Mr Dickman of Morgan Stanley puts it: “Global gas is an interesting area for people to look at because it may be under-priced relative to where it is going to be in the future.”

Mr Al Kaabi says that Qatar believes gas prices need to rise. “We have a belief at Qatar Petroleum that gas has traditionally been undervalued relative to oil prices.

“Oil is north of $100 a barrel, while gas is nothing like that level,” he points out.

“This lack of parity is disturbing to us, given how development costs are increasing. I am talking about in the industry as a whole, not only in Qatar Petroleum.

“Every gas supplier is facing increased costs of development. I think gas is being unfairly treated with respect to the benefits it can bring.”

From time to time, fears have arisen about the prospect of a “gas Opec”: a producers’ cartel that could co-operate to force prices higher. The idea will be discussed at a meeting of the Gas Exporting Countries Forum in Moscow in June, but seems unlikely to make much headway.

It may well turn out that there is no need for such a cartel, because the balance of supply and demand will achieve the same result without artificial assistance.

Copyright The Financial Times Limited 2008 and its also non-profit sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

0 Comments on “Financial Times: Cleaner fuel is now a global commodity”

Leave a Comment

%d bloggers like this: