Oil & Gas UK Economic Report 2015

3.2 Gas Markets and Prices

US are expected towards the end of 2015 when the first train of Cheniere’s Sabine Pass liquefaction plant is commissioned. The sharp weakening of European hub prices and Asian spot LNG prices preceded the collapse in oil prices, but the decline was later reinforced by oil market over-supply and low oil prices. By the beginning of this year, the Asian spot price premium over NBP had almost disappeared entirely after more than three years of tightness in LNG markets. US gas prices, represented by Henry Hub front month futures, also weakened from a winter peak in the first quarter of 2014 and settled back below $3/m BTU in 2015. The US economy continues to enjoy a gas cost advantage over European and Asian markets, which is reflected in much lower wholesale electricity prices, but the advantage narrowed in 2014 to a level last seen in 2010.

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Regional gas price convergence Gas markets around the world are increasingly inter-connected by liquefied natural gas (LNG) flows but still remain largely regional in nature. There is therefore no single world benchmark gas price of the kind represented by North Sea Brent in oil markets. Pricing of gas and LNG outside of North America is also marked by a difference between term contract prices, many of which remain linked to oil prices, and spot or hub prices for uncontracted supply. Oil-indexation of contract prices has diminished in Europe since 2009 as contract terms have been progressively renegotiated but the link still persists in Asian gas and LNG markets. In 2014, there was a decline in traded gas and LNG prices in all major regions and a convergence of Asian and European markets, as illustrated in Figure 5. However, we did not see the complete convergence of all regional gas prices, as we did in 2009 in the depths of the worldwide recession. The difference lies in the contribution of the ‘shale gas revolution’ in lowering the cost structure of North American supply and in underpinning investment in new LNG export facilities on the US Gulf coast. The first LNG exports from the

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UK NBP Wholesale Prices Reflect European Demand Weakness

Almost all gas production from the UKCS is sold at prices explicitly related to prices at the NBP, the virtual hub based on the National Transmission System (NTS) owned and operated by National Grid. In 2014, UK gas production of 34.8 billion cubic metres (bcm) accounted

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Figure 5: Regional Gas and Liquefied Natural Gas Prices, January 2008 to August 2015

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NBP Month Ahead

Henry Hub Front Month

Far East Spot LNG

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Gas Price ($/Million BTU)

2008

2009

2010

2011

2012

2013

2014

2015

Source: ICIS Heren, NYMEX

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ECONOMIC REPORT 2015