Monitoring the market

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David Hobbs - head of research at Cambridge Energy Research Analysts (CERA) talks to UME about the natural gas markets and the opportunities on offer in the current climate.

What is happening in today's natural gas markets?

There is more gas available today for import, but the important issue for producers is whether or not there is going to be sufficient demand for it. In North America particularly the conventional gas revolution has cast into doubt whether there will be a real need for imported gas.

Does extra available capacity mean Qatari exports will replace Russian ones in European markets?

Despite the furore over supply issues last year, Russia has historically been a very reliable supplier of gas. There are both sides to the Ukranian cut-off story, and I think these discussions draw a lot of parallel's with the ‘oil-weapon' scares of the 70s which was, in practice, very rarely deployed.

However, that doesn't mean there isn't a growing desire to diversify away from a perceived over-reliance on Russian gas to Europe. In some countries Russian gas is actually a smaller part of the portfolio than the media makes out, and primarily it's Eastern European countries where it is a majority supplier. Diversity is always good, but how much people are willing to pay for that diversity is an important question to ask.

What is different about the current oil price crunch to the low price environment from a decade ago?

Typically it is the big ticket projects which normally fall first. That's not been the case this time, but that's largely attributable to the rapid speed of the decline. If you go back to 1988-89 it was actually quite a long run-in, over a period of three years before we ended up in the abyss of sub-$10 oil.

As a result, back then, there had been a deferral of big capital projects. Also, as a share of overall supply these big projects were not as important to overall supply as they are now. That's the big difference.

In the late 90s there was a foreseeable decline which saw the big capital projects taken out of the equation, companies ran for cash flow and laid people off, and IOCs reduced exploration and reduced their dividends. This time around, the run-down happened in such a short time frame, just six months, that the response has been back-to front compared to normal run of events in slowdowns. Once the market has had a chance to normalise we'll likely see a reversion to the norm.

Do you think some big projects could be cut?

If oil stays where it is I think we'll certainly see some companies deferring big capital projects. However, if we have some sort of supply interruption that kicks the oil price back up, then all bets are off. All capital can be funded at $70, and we'll see no major cutbacks.

What does this mean for projects in the pipeline in the Middle East?

Every country in the Middle East is hungry for energy in one form or another. We've seen a change in emphasis because of the demands of domestic consumption. People were looking at how to develop as much gas as possible so that it can be free up oil for export. Now Oman and Dubai are good examples where the maths dictates that investment in any form of energy they can get is needed. It's no longer about freeing up oil for export, it's about keeping the lights on.

On a wider scale this means that it's really not inconceivable that you could see coal fired power stations being built here in the Middle East. We're almost certain to see nuclear power stations being built in the region. You'll see much more solar development.

In fact with solar it's already being pushed as a major area of focus, however, it will be interesting to how long those plans survive in any long-term oil price slump, because ultimately the economics does matter. In general terms it's wrong to think of the Middle East as being different from any other region. Looking at a portfolio approach will be key in the years ahead, because right now we simply can't say for sure what the advantage fuel will be.

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