Economic Report 2016 - Oil & Gas UK

ECONOMIC REPORT 2016

3.2 Gas Markets and Prices Gas markets are still regional in nature and gas prices respond to factors unrelated to global oil markets, such as the weather-related seasonality of demand, storage capacity utilisation, the investment-led cycles in the world LNG (liquefied natural gas) market and the strategy of a few major gas exporters. Nevertheless, it was possible to discern the influence of oil prices in the behaviour of European gas prices in the last two years through the inclusion of oil price indices in both Asian LNG term contracts and in a diminishing number of European long-term pipeline contracts. If the influence of oil prices on UK NBP 9 and Dutch TTF 10 hub price-formation is gradually diminishing, the influence of US Henry Hub prices may increase following the long-anticipated start of US Gulf Coast LNG exports in February 2016. From now on, any uncontracted LNG from the US Gulf Coast will be available to European hub markets, presenting more arbitrage opportunities between Henry Hub and NBP/TTF markets.

Figure 4: Regional Gas Prices

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NBP Month Ahead Henry Hub Front Month Far East Spot LNG

0 2 4 6 8

Gas Price ($/Million BTU)

2011

2012

2013

2014

2015

2016

Sources: ICIS Heren, NYMEX

The acute oversupply of gas and associated price weakness in 2015 owed much to weaker import demand growth in Asia, the start-up of new sources of LNG exports – notably in Australia – and the fact that 2015 was the warmest year on record worldwide for the second consecutive year, exacerbated by a strong El Niño effect. Gas prices in all major regional markets reached new lows in early 2016 within weeks of the trough in oil prices. Despite the low level of new shale drilling in the US Lower 48 states and rising US gas demand, the productivity of non-conventional onshore operations has kept Henry Hub at $2-3/million British Thermal Units (m BTU). Unless there is an expected increase in the cost of US production, Henry Hub prices at this level will ensure US Gulf Coast LNG exporters are competitive in many parts of the world now capable of importing LNG. In the first four months of operation, cargoes from Cheniere’s plant at Sabine Pass in Louisiana have been delivered to South America, Europe and the Middle East (Dubai and Kuwait).

9 NBP is a virtual trading location for the sale and exchange of natural gas within the UK. 10 The TTF (Title Transfer Facility) hub market is a virtual trading point for natural gas in the Netherlands.

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