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The Implications of a Global Natural Gas Market

Henry Hub Gas Price since 2008

Natural gas is one of the energy supply offers that contribute to the setting of electricity HOEP (market spot rate) in Ontario. Therefore, natural gas and electricity price in Ontario are highly correlated.

 

The purpose of this blog post is to explore possible outcomes of a scenario in which North American natural gas reserves are being exported worldwide as liquefied natural gas (LNG).

 

Recently the world was stunned to learn about China-Russia’s massive $400 billion, 30-year gas supply contract. China is hungry for energy. It already is the world’s largest consumer of coal and is growing at an aggressive rate. To satiate its growing appetite, China will likely need to make additional long term energy supply agreements with other gas exporters.

China and other energy starving regions will need to source out new and affordable access to world’s gas resources. One such source is in North America in which rapid development of extraction and transportation techniques of shale gas may provide feasible export routes to energy scarce regions.

Global Natural Gas Prices since 2008

Image Source – Oxford Energy

However, the scale of the infrastructure to export gas between continents does not currently exist. What does that mean? It means North America, which has abundant reserves of shale gas, has a price which is very depressed relative to the rest of the world. North American natural gas prices have been below $5/ mmbtu since about 2010. Whereas Europe, Japan and the rest of Asia are well above $5/mmbtu. Some are more than double our price in fact!

 

Typically the spread for crude oil is about $10 on a $100 total price, or roughly 10%. Because oil can be shipped worldwide, for relatively cheap cost. Since natural gas has many more barriers to shipment, the spread is far greater. This spread might decrease in the not so distant future as North America’s first Liquid Natural Gas (LNG) exports ramp up.

 

There are also pipelines which are currently being built to export about 2.6 BCF of gas to Mexico, which will be operational by the end of 2014.

 

So what does this mean for natural gas in North America? To put it bluntly, a global market will create global demand for our cheap natural gas. There are plans to export on both the South, East, and West sides of the continent. All of this growing worldwide appetite on natural gas will likely result in higher prices. Over the past few years prices have been depressed due to excess supply in the US, but the worldwide natural gas market is ever changing, and the outlook over the medium and long term looks quite bullish for North American natural gas prices.

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