Fresh perspective on the future of energy

Recent global events have prompted a long-overdue assessment of the natural gas industry to ensure the fuel is included in the world's future energy mix.

Adnoc's LNG facility. The gas market seems to be tilted towards a surplus situation resulting in shorter-term prices coming down. Courtesy Adnoc

Oil prices are being affected by the recent political upheaval in the Middle East. The price of Brent crude is in the range of US$110-$120 a barrel, as a geopolitical risk premium enters the market.

The recent tragic events in Japan, particularly the damage at the Fukushima nuclear power station, have touched us very deeply and give us cause for great concern. I strongly believe that we will learn from the situation in Japan and that there is some rethinking to be done.

As of today, it is clearly too early to have answers ready and consequences assessed. But I would not exclude that the future energy mix might be affected by the know-ledge that we will gain from these events.

We need to reorganise our energy systems. The decarbonisation of the European economy will lead to a sustainable-energy system for the 21st century. The reorganisation of energy infrastructure that we are all striving for in Europe is not a short-term project; it is a marathon. The natural gas industry needs to develop answers for gas to be a part of the future energy mix.

Like crude oil prices, benchmark natural gas prices in the West - notably at national balancing point (NBP) in the UK and Henry Hub (HH) in the US - have fluctuated significantly over the past few years. Prices plunged more than 50 per cent in 2009 to $4.75 per million British Thermal Units (BTUs) and to $3.95 per million BTUs respectively.

In the US, the surge in shale gas production, which more than doubled between 2008 and last year, reinforced a further slide in natural gas prices.

In Europe, there has been a dramatic decoupling of oil-indexed prices and title transfer facility-indexed gas prices, as a result of recovering oil prices and surplus gas in the market. This effect is so significant that "old" oil-indexed supply contracts are actively being renegotiated towards gas indexation to bring some sustainability back into the marketplace.

Looking forward this year, NBP prices in the UK are expected to slightly strengthen and, importantly for liquefied natural gas (LNG) suppliers, will hold a significant premium over HH prices of about $4 per million BTUs. Although the recovery of natural gas demand is expected, it is premature to talk about a turnaround in this trend, which remains lacklustre.

The development of new LNG importers from the Americas and the Middle East, which will have an effect on supply availability, is a topic of interest in the gas market. This region, although blessed with large natural gas reserves, has in recent years faced a substantial gas deficit as a function of regional infrastructure developments that have significant power generation requirements.

Kuwait and Dubai are already reliant on LNG imports to supplement domestic gas supply, and the region is expected to import significantly more LNG in the coming years with the possible introduction of Bahrain, the Northern Emirates and Saudi Arabia into the market.

In Asia, the story is not very different from a year ago. The gas market seems to be tilted towards a surplus situation, resulting in shorter-term prices coming down from the levels reached in 2009.

What are perceivably different in this buyer's market are the varying slopes being offered by LNG sellers under long-term contracts. These prices tend to reflect the source of supply, such as conventional versus unconventional, and contract negotiations are beginning to focus on non-price factors.

Looking ahead, trade flows between the Atlantic Basin, Middle East and Asia will become more international. There is the possibility that the Middle East will form its own LNG "price marker", with implications for price developments in Europe and Asia. After all, these are the two most natural alternative markets for Middle East gas supplies.

But there are two other subjects that will become crucial to the energy industry and need attention.

First, the role of Asia and the shift of economic gravity from the Atlantic to the Pacific will focus our thoughts for the next decade. These future relationships, whether commercial or political, will define the use of energy in our industry.

And second, although a "softer" issue, which I believe is of paramount importance, is the message that we as an energy industry give to the world.

We must highlight the benefits, both in terms of cost and the environment and the superlatives of this fantastic industry. And we must redefine our role and perception in the public eye to ensure a sustainable future and acceptance of our industry by governments and peoples alike.

John Roper is the Middle East head of E.ON Ruhrgas