Received wisdoms in global energy are falling like downed skittles as the world lurches into the biggest-ever U-turn in energy history. The US gas story shows the most dramatic and rapid changes. From the late 1990s until the past 2 years, billions of dollars were spent by developers of LNG regasification facilities in the United States, as well as most other OECD countries and by China and India. The received wisdom was that world gas resources were limited and depleting fast. The gas outlook for the US seemed especially dire: it was resigned to a future of declining domestic natural gas production, needing rapid growing LNG imports to fill a looming supply-demand gap. Outside the US, eyeing the world's largest single market for gas, developers of LNG projects were investing billions of dollars to meet the USA's projected import demand for LNG.
Now the US "energy patch" is confronted by chronic oversupply of gas and rock-bottom domestic prices, currently less than $20 per barrel equivalent of oil, with major gas producers such as Chesapeake Energy and XTO Energy, and smaller gas producers, forced to produce at below-cost, suffering heavily adverse trading conditions and strangled by accumulated debt. The new stampede is to export cheap US shale gas as LNG, to Asian and European consumers still paying as much as $90 per barrel equivalent for LNG and pipeline gas imports, with the inevitable implication this will heavily depress these current price levels for world traded gas.
Coming along for the ride and sure to down the biggest skittle of all - overpriced oil - recent news from the International Energy Agency forecasts that US shale-based oil production will climb so rapidly that the US can attain the same level of oil output as Saudi Arabia or Russia, the world's biggest oil producers, by about 2020. The impact of these two mega-changes are joined by the ongoing renewable energy revolution, which in the case of wind and solar energy exploits resources with a "fuel" cost of nearly zero. By around 2025, in situ gasification of the world's immense deep coal resources, by fracking and fire flooding will likely add more mega-change to global energy.
THE GAS HEGEMONY
Mass media and people magazine favourites include Russian and Qatari billionaires fattened by overpriced gas sold to captive consumers, using their "gas resource rent" to buy the staple fare of billionaire playboys: Ferraris, football teams, luxury hotels and Mediterranean villas. Their lifestyle based on high gas resource rents - basically due to restricted supplies from any other supplier - is now threatened, as already shown by Russia's Gazprom publicly accepting that it will be forced to "de-index gas from oil". Gazprom, which supplies about 25% of Europe's total present gas needs, is becoming a whole lot more consumer and customer friendly, with European utility companies forced by legislation to use renewable-source electricity supplies, and faced with stagnant power markets due to the extreme price of electricity - made higher by overpriced gas - in nearly all EU27 countries.
Very simply, the gas market will never be the same again.
For the US, the gas U-turn is the most dramatic. It has relatively well-developed infrastructures for LNG imports, in the form of now mostly-idle gas import regasification terminals built in the "Gas Cliff days" of the period from about 2004 to 2007, which can be quite rapidly and at non-punitive cost converted into export liquefaction facilities. To date in November 2012, 16 applications have already been filed with the US Department of Energy for gas export licences. Taking only these first applications, if all came into operation, their combined total capacity by 2020 would be 245 billion cubic metres per year, slightly more than one-half of Europe's total gas consumption in 2011. Almost certainly by 2020 the US will have major LNG export capacities, placing it at world number three LNG exporter after Qatar and Australia, noting that Australia, as recently as year 2000, was believed by many analysts to have only "minor gas resources and production capacity".
The new Big 3 exporters of LNG, however, will have more than a little competition - they will have a lot, from competitors easily able to rival their gas resource base. Totally comparable to Australia about 2000, or the USA in 2005, several other "unexpected gas exporter" countries are moving up fast, some of them certainly, and some only by potential at this time. These include Mozambique, Tanzania, Brazil, Guyana, Azerbaijan, Israel, Egypt, Cyprus among a constantly lengthening list.
In several cases, also including the US, there is a big “if” to whether LNG exports will be ramped up: the US government of Obama is more than cognizant that ultra-cheap domestic gas energy resources provide US industry with a clear competitive advantage. Local and domestic utilization of the gas, and export of energy-intense "embodied energy" products already features among the decision mix, similar to OPEC and NOPEC strategies for petrochemicals, fertilizers, aluminium and other energy-based industrial development, rather than crude oil exporting. Regional geopolitics also enters the picture, notably US relations with Mexico whose imports of US gas, by pipeline, is radically growing. In Israel's case, debate on developing its aptly named Leviathan offshore stranded gas resource includes calls for ensuring multi-decade energy independence with the gas, instead of exporting it.
More prosaically and highly predictable, growing export supplies of gas, both LNG and pipeline, can only and will only depress global gas prices towards the rock-bottom of present US domestic prices. The "gas rent" will disappear - like the "oil rent".
MEGA CHANGES FOR EUROPEAN ENERGY
Even more so than Asia, Europe's energy outlook - already heavily impacted by its climate-energy programme for massively developing non fossil energy resources - now features the combination of lower priced and abundant gas for decades ahead, and renewable energy forever. This creates a game changer with effects right across the energy sector, and far beyond.
The ironical twists and turns of this are multiple. Gas demand in Europe has been falling, partly because of cheap coal exports from the US, where the domestic coal industry is living out its worst-ever crisis as power generators massively switch from coal to cheap and clean gas. European gas demand is also impacted by the "gas rent" imposed on European consumers by gas exporters, growing renewable-source power generation, industrial decline, and by Europe's ongoing economic crisis. European "climate crazies" can ponder the irony that greenhouse gas emissions in the US are falling, despite its lack of climate policy or forced emissions trading, whereas in Europe and despite its obsessional climate policy, greenhouse gas emissions are rising.
Already today, however, pipeline gas pricing in Europe is becoming highly liquid and volatile, due to the dominant pipeline suppliers - Russia, Algeria and Norway - exercizing multiple and generally lower tariffs, for customers, to retain market share. A flood of new LNG from US suppliers will hasten this transition, increasing the pressure on Europe’s big pipeline gas suppliers to re-think their prices, or lose market share. The next stage of this process promises to be more dramatic: Europe's pipeline suppliers, and LNG supplier Qatar can still at present obtain more than $15 per million BTU for their gas on a spot basis. One-half of this price or $7.50 per mln BTU would be a "miracle price" for US domestic gas producers at this time. Grading this up a little to cover the billions invested in LNG facilities, to around $8.50 per mln BTU or $50 per barrel equivalent of oil, European gas imports and gas consumption would be transformed - upward.
Given the already-destabilized and transitional structure of the European energy system, this additional mega-change, to cheap abundant gas, can be counted on to wreak massive changes. In particular and because the European energy transition plan and national programmes feature electricity and producing power from renewable energy, the present unrealistic price, and high forward price of electricity in Europe could disappear from the wish-list of European energy mandarins and politicial deciders - by sheer and pure market forces. Overpriced electricity is no more "necessary" for free-flowing and transparent market economies, than overpriced oil and gas.
Several EU27 countries, for a mix of reasons including the climate policy and protecting nuclear power in some cases, have set forward prices for electricity to domestic and commercial users as high as $350 per barrel equivalent (over 20 US cents per kWh). With cheap gas, and zero fuel cost renewable energy-based power, these price levels are fantasist as well as economic suicide.
THE BIGGEST CHANGE OF ALL
To be sure, the IEA's recent announcement the US "could rival Saudi Arabia and Russia" by its oil production, by 2020, has political content or is even a politically-motivated false flag. The industrial and financial - rather than resource - limits on radically expanding US shale oil production through 2020 also depend, very simply, on world oil prices. Shale-oil expansion depends on high priced oil.
Triple digit oil prices have since 2009 become a supposed New Normal but are in no way so. $100 per barrel is extreme relative to the price of any other type of energy, any other energy system. The major problem for oil prices is that global producers are fundamentally dependent on overpriced oil, which we can set at any price over $60 to $75 a barrel for Brent.
The extreme rigidity of global energy markets is already on view, every day, with gas priced in Asia and Europe at around 400% of US domestic gas prices (over $15 per million BTU compared with $3.50 inside the US). This is changing, and the days of overpriced gas outside the USA are now counted. For oil however, the overpricing is entirely global - whether inside the US or elsewhere. Change towards lower prices will come, but in the case of oil this change will trigger even more massive ripple effects than the global gas revolution and Europe's renewable energy revolution.
Ironically or not, one major unexpected-to-some but entirely logical impact of declining oil prices will be yet more deflationary pressure added to the global macroeconomic mix.
As recent articles by myself have argued, deflationary recession is likely a more real threat to the global economy, than hyper-inflation. Through a probably massive reduction in global gas prices, forecast conservatively by BP, the IEA and US EIA at about 33% below current prices outside the USA by about 2017-2020, accompanied by a large reduction in oil prices, the potential is raised for major and further economic downturn at the global macro level. Cheap energy is most certainly a game changer, and the most massive ever U-turn in world energy moves on.
By Andrew McKillop
Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights
Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012
Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.
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