Global Natural Gas: Ample Supply with Regional Imbalances
This week I am focusing on energy trends in global natural gas (NG) supply and demand; or as the Russians prefer to call NG, “the blue fuel,” due to its blue burning properties.
Unlike our more popular hydrocarbon — crude oil — there is no talk of “peak gas”—at least for now. Global NG production has increased at an annual compound rate of 5.3% since 2000, while crude oil’s comparable growth rate has been 1.0%—so we are not running out of NG, and the world is amply supplied or in balance overall. However, there are supply/demand imbalances across regional NG markets.
The major reason for the regional imbalances is that while crude oil is highly fungible or easily transportable, NG is not, which makes NG globally a highly segmented market. While NG can trade under $3.00 per thousand cubic feet (Mcf) in North America, it commands prices north of $15 Mcf in Asia.
Until the last few years, NG global supply and demand had always been tightly balanced. But recently, overall global production has begun to slightly outpace demand; primarily because of significant NG production from unconventional shale basins in North America, particularly in the U.S. But the additional supply of NG has been limited to, or held captive within, the U.S. due to a lack of liquefaction plants, regulatory hurdles and export terminals. (Related: Why Are Permits Needed for LNG Export Terminals?) The end result is oversupply and low NG prices in North America, and undersupply and high prices outside North America. However, since 2009 even in the U.S. the gap between natural gas consumption and production has narrowed.
In the global Liquefied Natural Gas (LNG) markets, the Majors (ExxonMobil, Chevron, BP, Royal Dutch/Shell, Conoco, Total and ENI) are the primary “big” players due to their deep pockets, strong balance sheets and technical skills. In recent years, however, their global NG production has been on the decline, though not as drastically as their global crude oil production. Indeed, the Majors’ global NG production over the last few years on a year-over-year basis peaked in the 3Q and 4Q 2010 and turned negative in 4Q 2011.
From a different perspective, the Majors’ NG production from 1Q 2010 to 4Q 2012 has been essentially flat to negative or declining at an annual compound rate of -0.1%. Interestingly, the abundance of NG shale production in North America has not made up for their overall global decline.
The ‘Blue Fuel’
Today, global NG supply remains squarely in control of nationalized oil companies (NOCs). Roughly 60% of global NG proven reserves are in Russia and the Mid-East, which together account for 35% of global NG production; the western Majors account for about 15% of global NG production. The U.S. is nearly in balance, with 4% of global “proven” reserves, 20% of global production and 22% of global consumption.
The U.S. NG “proven” reserves will most likely be revised upward once we develop these unconventional resources further. But, for now the majority of U.S. NG unconventional supplies remain in the undeveloped probable and possible resource category.
Russia is oversupplied, with 21.4% of global proven reserves, 19% of global production and 13% of global consumption.
North America is in balance with a significant supply of “captive, as in high storage levels” of NG, which equates to low prices—good for end-consumers, but bad for producers and E&P investors. As for the rest of the world, Europe is essentially a hostage of Russian gas while Japan, China, and India remain primarily reliant on LNG from the Mid-East and Australia—and that means high prices for Europe and Asia, and “captive” markets for Russia and the Mid-East.
However, the majority of the Majors’ profits remain tied to crude oil production, which is declining, as I have pointed out over the last few weeks. While NG and LNG production is a growing percentage of the Majors’ production profile, over the long-term they will be challenged to counter the depth of NG resources of Russian, Mid-Eastern or other NOCs’ ability to penetrate and supply regional dispersed markets.