Doha | Qatar

Convergence and divergence between oil and natural gas prices

By Saad Al-Kuwari

• Has the Coronavirus pandemic affected the gas market as badly as oil?
• Are gas prices regional and varying?
• The largest importers of liquefied gas in Asia start receiving more LNG shipments!

The Coronavirus pandemic has had a devastating impact on global oil markets, but natural gas companies are also facing declines.

In this article, we will look at how natural gas markets deal with low demand due to the Coronavirus pandemic.

At the present time, monitoring oil prices-reference oils, for example, Brent oil, West Texas Light oil, Dubai and Oman oil, to determine other oil prices, in terms of quality and spatial quality, is no longer difficult for specialists or analysts.

Specialised bulletins publish this periodically and in a similar manner. Daily, weekly and monthly rates are given, and some websites follow the development of oil prices in minutes, while most TV channels supply oil reference prices in their bulletins.

This does not apply to natural gas prices, however, as for the moment there is nothing that can be called “the global price of gas”.

Also, there is no reference to prices as in oil and the gas market remains regional (i.e. related to geographical regions in the world) and is not global, and the price has been determined according to the basics of supply and demand at a specific point, the “Henry Hub Center” in Louisiana, which passes some 14 of the major gas transmission lines to consumption areas in America.

It is difficult to follow regional prices except by specialists or analysts, and the reason for this is due to the limited trading in gas in addition to the limited exporting and importing countries, and its prices remain dependent on the agreement between the contractors in the markets of North America, Europe, Japan and East Asia.

The history of the modern oil industry began with the drilling of the first well with a rotary drilling rig in 1859 in the United States, where the quest was always to produce oil and burn the associated gas, which was considered a burden even if it was discovered in an independent gas field.

It is most likely that gas consumption started using it in oil production operations or in reservoirs to maintain its pressure. Then it was used in places close to production centres to operate machines and generate electricity and continue burning excess gas.

The gas industry quickly developed and the interest in gas began as an energy source, especially in generating high-efficiency combined cycle electricity and environmental gas properties in terms of few impurities and the relatively low carbon dioxide when burning it and as a nutrient in the petrochemical industries as well as the GTL industry.

As for liquefied gas imported to the United States, it relied on negotiations between the two sides by agreeing on a basis price that meets its cost and adds to it a premium that first adopted 15% to 20% of the iron prices.

And then it is turned into a relationship that adopted the prices of gas and fuel oils until we reached the stage of adopting the market prices in Henry Center for those who want to export liquefied gas to the United States, which greatly decreased due to increased production of shale gas there.

As for the European market, it has always been dependent on competition between gas and other competing fuels, such as Russian and Algerian gas.

The pricing of liquefied gas to Europe has been linked to a price equation that includes the base price added to it at a premium that depends on either the crude oil prices or the prices of petroleum products from the fuel and gas oils with the presence of commitment to pay in the event of receipt, or lack thereof, and for a period of three to four years to review the price equation either for the Asian market — for example Japan, which is the largest importer of liquefied natural gas in the world and is linked to the rate of imported oil prices to Japan, added to e-shipping and insurance cost.

The principles of the Japanese price equation were used in pricing most of the LNG imported into Asia, especially in South Korea, while Taiwan has verified Japan’s prices as a basis for its imports.

Gas consumption in the world reached 588mn tonnes of equivalent oil in 1965 while oil consumption was 1530, but consumption figures began to converge, as consumption of both gas and oil in 2019 reached nearly 1mn tonnes of oil equivalent, respectively.

Macroeconomic indicators led to much downward revision that updates LNG demand forecast monthly and in response to developments affecting the market due to the Coronavirus pandemic. In the first three months of 2020, imports actually decreased by 4.6% compared to the same period last year. Expectations are for more declines throughout the year as LNG stocks are full.

It is possible that prices will fall, as happened in the global oil market in April.

On the part of those affected by the price drop, gas experts exclude from the major repercussions in Russia, as LNG constitutes a share of its exports along with crude.

However, LNG exported by Qatar is done through long-term contracts, and if the buyer refuses to purchase, the buyer will be subject to heavy fines and its price is linked to the price of oil, especially in the North Asian, China and Indian markets.

So experts believe that the United States, which seek to export liquefied gas to Europe, will be the most affected in the event of falling prices as well as Australia, because of its expensive cost of recovery.

To avoid sharp fluctuations in the price of oil, the price equation was modified by partly linking the price to the price of oil through a linear relationship, which was defined by what was called (S-Curve) agreed upon between the seller and the buyer using a variable factor that preserves the seller’s rights in the event that the price of oil falls too much and preserves the rights of the buyer if it is too high.

Also, natural gas exporters and importers must cooperate with consulting firms at work to reach a reference price for gas pertaining to Asian markets, as is the reference price for American markets, and then the global price of gas is applied and dealt with by natural gas producers and consumers.

*Saad Abdulla al-Kuwari graduated in Chemical Engineering from Qatar University and obtained an MBA in Oil & Gas from Liverpool University. He was appointed CEO of Tasweeq in 2010. During his career, he has occupied several key positions in refining projects and processing, oil, gas and refined products, storage tanks and export terminals operation. He also has considerable experience in the field of Gas Processing Operations. He was also manager of Gas, Oil Petrochemical Marketing in QP Marketing Directorate for several years.

Source: Gulf Times



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