Global gas developments impacting on Ireland

The Oxford Institute for Energy Studies’ Howard V Rogers discusses global gas developments and the Irish market.

There are six big uncertainties facing global gas development, according to Howard V Rogers, the Oxford Institute’s Director of Natural Gas.

He cites these as Russia’s response to the ‘overspill’ of excess LNG into the European market in the 2018-2013 period; demand for natural gas and LNG in Asia; new markets; European demand recovery; the scale and pace of US LNG export approvals and construction; and the scale of LNG supply ramp up from non-US suppliers.

How Russia is going to behave seems to loom over all of these, though. “Russia has built up too much productive capacity by accident because they thought European demand would be higher,” Rogers explains. Companies such as Rosnett and Novitech have all developed gas and have “stolen some of Gazprom’s domestic market in Russia.”

He adds: “So there’s a gas bubble in Russia. What they haven’t figured out is how they want to play in the European market. Do they want high prices and a low volume? Or do they want to increase their volume, reduce prices and put off competing supplies.

“At the moment, I think they have a MrMicawber strategy from Dickens: ‘Something will turn up and don’t tell the person at the top because they don’t want to hear bad news.’ Eventually I think something will happen and there will be a kneejerk response.”

The next move

What Russia could do if it was really smart, he suggests, is to move its contract delivery points to the hubs in Europe and to satisfy customer nominations by a mixture of physical gas in from West Siberia and gas bought off the hubs and redelivered.

“That would allow it to basically control European hub prices,” Rogers comments. “It hasn’t shown much willingness to do that at the moment – but you could look to the future as a playing field.”

The demand growth of natural gas and LNG in Asia, particularly China, in the new normal era of slower economic growth is another issue: “China is very difficult to read. Paradoxically the most high growth markets are always the ones we have the least transparent data on.” Factored into this is the speed of Japanese nuclear coming back onstream. “But I think that’s going to be a pretty slow process,” admits Rogers.

In relation to the new LNG markets in the 2020s: “I think marine bunker fuel could be a key market, although it’s difficult to quantify at the moment.”

There is also the question of the recovery of European demand which Rogers describes as “absolutely critical because Europe is the nexus in this system.”

He comments: “If European gas demand doesn’t recover that leaves less space for a smaller playing field for Russia and LNG to compete for with significant consequences.”

Causing concern on the supply side is the scale and timing of new US LNG export approvals and construction. In terms of non-US suppliers, the scale of supply of LNG is being ramped up in Canada, East Africa and Australia, where even more brownfield projects are underway. This could also include Russia post-EU sanctions and Qatar if a moratorium on its North Field is lifted.

A “fascinating period” for gas prices has just come to an end. From 2011 to early 2014 it “seemed fairly stable”. However, an abnormally warm 2014 gave way to a price collapse.

Rogers elaborates: “The growing elephant in the room was a slowdown in Asian LNG demand. That was overtaken from October by a collapse in the price of crude which of course took down the Japanese LNG contract prices and Russian contract prices as well.”

The period covering the height of the Japanese LNG price, the spread between Henry hub and the Asian and European prices Rogers refers to “as the space which launched 1,000 ships if not 1,000 LNG vessels” due to the acceleration in the creation of new projects.

The Irish question

The wider implication for the Irish gas market is that it is not a huge one. Despite the Corrib field coming on, and some older gasfields that are in long-term decline, there is still a requirement for an import of gas from the UK via the two interconnectors.

It is wise to be aware that the UK is not self-sufficient any longer, Rogers highlights. “The gas that you are getting could have come from Qatar. It could have come Norway,” he notes. “Individual molecules could have come from the Netherlands and in future, it might come from Russia.

“So that is something to bear in mind. If the UK’s links to Norway or to the continent break down due to technical faults, the UK doesn’t have that much gas storage. If the linkage between the UK and Ireland broke down, Ireland doesn’t have much gas storage.”

There is partially a case for looking at Ireland having its own LNG import facilities, Rogers admits, but when you work out the probabilities it’s actually very difficult to make a firm financial case.

“These are very disruptive scenarios but the likelihood of them actually happening is quite low. And so, that makes a risk-weighted investment case difficult to make unless you have a situation where the unlikely actually happens and the Government then says ‘Oh, we can’t have that happening again. In the interests of security, we are going to build a regas terminal and socialise the cost.’

“The question there is: Is it more effective to build more underground storage of gas to achieve the same thing?”

Looking at the overall picture, Rogers notes: “I think if all these LNG projects come onstream, if Chinese demand doesn’t resume at high growth rates and European demand remains pretty stagnant, then that will result in a lot of LNG entering Europe which has a 200 bcma of regas capacity.

“We can take these surges but it will be a huge disappointment for Russia, which will see all this competing supply, which it could have discouraged before investment decisions were made had it acted proactively earlier. But by leaving it too late, you see all these competitors and by that time, you really have to push prices down low to shut in American LNG exports.”

To conclude, Rogers says that a higher renewables build will be expected in Ireland and the UK. Meanwhile, for gas, Russian geo-politics will always be a wildcard to discourage commitment from policy-makers, but never overtly expressed.

He says: “So the next 15 years will be a very changeable picture in the gas markets with international events impacting on Ireland.”