Can gas evolve into a globalised, fungible energy commodity the way oil is? The world oil market is based on a network of local markets, where arbitrage provides the principles and governs the market. Despite numerous local markets each with a variety of blends, the key oil marker is the BFOE, Brent,Forties, Oseberg, Ekofisk Crude. WTI,Dubai, Singapore and all the others seek direction from BFOE. The markets are liquid enough to operate efficiently. Price discovery is open, immediate and efficient.
We are a long way off in gas, but not perhaps as far off as once thought. Gas has three strong precursors already present: the very liquid North American market, world LNG flows and a strong supply and demand base. The oil gas link in European markets, although likely to be strong for many years, will gradually disappear, with the oil link a declining, specialised influence in some of the older markets in North Asia and Europe. Declining is not disappearing – but it certainly is not growing either.The gas glut this past winter has already led to adjustment of gas purchase volumes, and each October, the start of the European gas year, we are going to see more and more spot gas entering the market as old contracts expire and new fields come on line.
Liquidity is the main issue, but the physical and virtual links between world markets is only going to increase. Henry Hub will increasingly act as a world benchmark with varying uplifts in different markets. LNG trading will use HH for various reasons, but I think that HH pricing will come to the fore for a surprising reason that even a year ago thought unlikely: US gas exports.
I have it on unimpeachable, but for the same reason unattributable, information that US exporters and European buyers are talking LNG deals based on HH+ pricing from the US Gulf Coast.
It's unlikely to happen this year. The first requirement is to ensure that US gas storage fills up. Assume that the US hurricane season springs no surprises. Next, assume, as appears to be happening, that shale moves from strength to strength. That means converting the existing terminal to export.This means that US gas will need an export market to prevent a domestic price collapse, which is the last thing the nascent shale industry needs.
The only logical alternative is world markets, where NBP winter 2010 is already trading at well over $7MMBTU. Even $5 is a substantial improvement for both European consumers and North American producers. Last years $4 gas went to below $3. It will go there again. But exports can provide a bounce back. Stuck in the middle will be European consumers between the mammoth Qatar volumes coming to market this winter and at a minimum North American re-exports of recycled Trinidad, Peru and Nigeria cargoes that get parked at US LNG terminals. And if Qatar is worried about that, it's clear that if the Gulf Coast can export, then virtual and subsequent physical exports straight from the Marcellus to the world via Cove Point LNG in Baltimore will prove that shale gas will change the world.
US gas exports to the UK. If that won't nail down the lid on security of supply fears, what will?