McKinsey: Capturing value in global gas  

McKinsey has a look at developments in the global market for natural gas, including some analysis of the impact of potential LNG exports from North America - Capturing value in global gas: Prepare now for an uncertain future.

Liquefied natural gas (LNG), while only accounting for 10 percent of the global gas market currently, will be a key determinant of market prices and eventual value creation, as it is the only supply source mobile enough to plug supply and demand gaps in international markets. At the moment, it is in short supply. But because uncertainty about future prices has made buyers reluctant to sign new long-term contracts under traditional terms that link gas prices to oil prices, developers of gas reserves outside North America have been hesitant to sanction new LNG facilities, particularly as LNG project costs are rising rapidly. ...

Over the past decade, regional gas markets have become much more connected, with the number of LNG or pipe routes carrying over five billion cubic meters per annum (bcma)—more than doubling between 2001 and 2011. Yet despite increased linkages, gas prices in regional markets have diverged (Exhibit 1). Three market disruptions explain this. ...

In North America, rapid growth in shale-gas production has led to four years of oversupply and plummeting gas prices. Between 2008 and 2012, production grew at an annual compound rate of 29 percent. However, gas demand failed to keep pace as consumers were slow to switch from other fuels, energy-efficiency measures offset demand growth, and exports have not been an option, since it can take five years to build an LNG export terminal and acquire the necessary permits. Consequently, gas prices in North America fell from $8.9 per million British thermal units (MMBtu) to $2.8 per MMBtu over the same period.

In Asia, LNG prices have been boosted by economic growth, coupled with Japan’s decision in 2011 to shut down its nuclear capacity following the Fukushima disaster. Japanese gas demand grew by more than 20 percent between 2010 and 2012, from 95 bcma to 117 bcma. As Japan has no domestic gas, this all had to be imported as LNG.

Finally, in Europe, an economic slowdown—combined with energy-efficiency improvements and the availability of cheap coal—contributed to an annual decline in gas demand of 1.6 percent between 2005 and 2012. This is in marked contrast to annual growth of 2.7 percent over the previous 15 years. At the same time, liquidity on traded gas markets rose as buyers who found they had contracted excess capacity sought to sell it on. As a result, prices in Europe have fallen, breaking the traditional link with oil prices. Getting to grips with longer-term uncertainty

The impact of all three developments is likely to persist in the medium term (see sidebar “Why supply will likely remain tight this decade”). But the longer-term outlook is far less clear. Four factors will be major drivers of future market dynamics and prices.

North American gas developers are eager to export their plentiful supply of cheap LNG to higher-priced markets. By the end of 2013, they had applied for export permits for more than 380 bcma—equivalent to all of the world’s current liquefaction capacity. If even one-third of this capacity were built, it would have a significant impact on global LNG prices, threatening the viability of higher-cost capacity additions in countries such as Australia and Russia and in Africa, as shown in Exhibit 2. North American exports could be highly profitable at recent LNG prices of $18 per MMBtu but could still turn a profit even if they fell to as low as $12 per MMBtu