Though natural gas prices in the past couple of years have seen a dip in prices, the experts expect a demand in drift from US to China in the near future, says Rajeev Darji, Senior research specialist, X-Trade brokers, Europe
There is lot more of attention towards natural gas as the country is looking at migrating to gas based power production in a fast phased manner, an answer to the coal shortage. However, the pricing, both domestic and international, seems to mar a darker cloud on the process. In the near future we would see a rise in interest for natural gas.
At the international front, the prices have fallen drastically from US $13 to US $2.34, due to surplus accumulation during the year 2008. For the past two months, 10:30 am on Thursdays have been celebratory times for natural gas bears — this is when the weekly natural gas storage data is released. Nine straight inventory injections above estimates have built total gas in storage to 3.831 trillion cubic feet (Tcf), this is just below last year’s all-time record of 3.84 Tcf. It is expected that this Thursday’s data to yield a figure around 3.864 Tcf, surpassing the record high. The prices which are drifting down is not a good sign, as the country is not able to take advantage of massive resources of natural gas, the country is forced to swing through the political, volatile crude oil market and fear of OPEC.
According to EAI estimates, the working gas in storage was 3,831 Bcf as on Friday, November 4, 2011. A net increase of 37 Bcf from the previous week’s stocks. In last year at the same period stocks were 6 Bcf less and 215 Bcf above the 5-year average of 3,616 Bcf. In the East Region, stocks were 48 Bcf above the 5-year average following net injections of 16 Bcf. Stocks in the Producing Region were 144 Bcf above the 5-year average of 1,091 Bcf after a net injection of 15 Bcf. Stocks in the West Region were 23 Bcf above the 5-year average after a net addition of 6 Bcf. At 3,831 Bcf, total working gas is within the 5-year historical range.
As for conventional demand, in the United States, about 25 per cent of electricity is generated by burning natural gas in the power plants. Despite summer being at record high, the demand for the gas was not strong enough. The Electric Reliability Council of Texas (ERCOT) official considered Blackout which also did not help the price to rise substantially. With the demand from the household with the record high in summer and record low in winter the requirement to heat and cool is also not supporting the demand where the supply side is getting built up.
Now let us see from where the actual demand is getting build up, it is expected that the Export will shift towards China in the near future. The price of natural gas is almost more than 4 times at US $16 per mmbtu than the US price of US $3.4 /mmbtu, having huge gap to fill the supply gap. In fact, Cheniere Energy (LNG) recently secured a deal with BG Group (BGL), allowing it to export LNG out of the United States. But the process is moving at slower manner — it may be 2015 before the terminal at Sabine Pass in Louisiana is ready for delivery. The government must swiftly approve the six remaining export proposals and also encourage future proposals in order to increase the volume of exports. As of now, LNG exports are the only viable option to prevent natural gas prices from slipping even further towards the US$3 per mmbtu level.
In respect to the domestic demand within the US some strict regulation need to be enforced where the reliability on the energy sources which generate higher level of pollution should be reduced and force to use eco-friendly energy sources, which in-turn will reduce the country’s reliability on conventional power generation with oil and coal. This invites the need to shift the power plants turn to natural gas.
But, it is noticed that the natural gas demand is currently going through lean period – with the end of the peak cooling load for the summer and ahead of the winter heating season, coupled with the lower industrial demand with the slower growth in the economy. As a result commodity prices will remain under pressure with the sustain supply side with stronger production side. Prices are expected to remain down and may trade in the range of US $1.5/mmbtu to US $4/mmbtu for year 2012 & 2013.
Coming to the Indian scenario, country has two operational LNG terminals both in Gujarat. Country’s first terminal Dahej is operated by Petronet LNG and the second by Shell in Hazira. Two more projects are also expected be operational in couple of years. The first one to go on stream will be the LNG project in Kochi by the first half of 2012. BPCL-Kochi Refinery planned investments to the tune of Rs 20,000 crore in the near future and this would involve between 20 and 30 ancillary units, which would need LNG as its source of power supply and feedstock.
The Second key project will be at Sabhol in Maharashtra. This ambitious project will connect the south Indian states to the national gas grid. The Dabhol- Bangalore Natural Gas Pipe line with a length of 1,370 km with commissioning scheduled by mid-2012, will represents a significant development for the south Asian pipeline industry.
After conversion to LNG and regasification, Petronet sells gas to at a price bit over US $4/mmbtu. This is far higher than the US $ 1.2/mmbtu price at which the ONGC traditionally supplied Indian users. But with changing times and demand scaling up the new industrial users have been willing to pay this price.
