Natural Gas is Not Like Oil

(c) 2009 F. Bruce Abel

My very first blog on this site (you can check it out) was the topic Natural Gas is Not Like Oil.

Now, see how prescient I was?

Read on from this excellent site today:


Nov 16, 2009
The Gas Oil Link
In UK natural gas prices, 2009 has seen a paradigm shift, a game changer and a revolution.
The paradigm shift has been the drop in energy consumption. Although the recession had a big part in this, energy consumption of oil, gas and electricity started to go down in 2005 in what are called "developed" economies which signifies that the "recovery" if it ever shows up, does not mean a return to the bad old days.
The revolution has been shale.
The game changer is the globalisation of natural gas prices, primarily deriving from the sudden emergence of shale reserves pointing toward a future permanence of prices divorced from a link to oil prices.
The gas oil link has always been controversial among UK end-users but had been considered permanent due to the power of the link's big fans at Gazprom and Algeria's Sonatrach among others.
The link is over 50 years old and in Europe started out in the Netherlands. At the time, natural gas was a disappointment; the real prize was oil. Natural gas didn't have anywhere near the infrastructure or popularity it does today and gas had to compete with oil. Gas was naturally cheaper than oil, but had to remain priced in comparison to oil. This made sense when comparing gas versus oil in fuel switching at generators or as feedstock in chemicals or for very large end users. It wasn't very rational in pricing at small users - no one we know has dual fuel central heating. The link was logical in the days when oil was plentiful and carbon was a non-issue. Today, gas has two major advantages to oil: it has 31% less carbon content and doesn't have any of the supply issues, actual or imagined, that surround oil.

http://nohotair.typepad.co.uk/no_hot_air/2009/11/the-gas-oil-link.html

Is this permanent? Via the FT's Energy Source Blog, we asked Fatih Birol, chief economist of the International Energy Agency the following. I've highlighted some key points:
The link between oil and natural gas prices is getting very frayed. Do you see it breaking permanently?
A. Dear Nick Grealy, in Europe and Asia-Pacific, gas is imported mainly under long-term contracts, which, in most cases, link the price of the gas to changes in the prices of oil under what are called indexation formulae. The original logic behind this arrangement is that gas competes against oil products, though increasingly gas competes more against other fuels, including coal and electricity. For now, the exporters and many importers are happy to stick with oil indexation. But the glut of gas that is building up does could put increasing pressure on both sides to adjust their pricing terms and even move towards an alternative pricing system, the most obvious of which would be direct indexation to spot or future gas prices. Russia’s Gazprom and Algeria’s Sonatrach – the two biggest external suppliers to Europe – have lost market share over the past year to cheaper spot LNG. They may decide at some point that enough is enough, and opt to move away form oil indexation, though they have made it absolutely clear that they have no intention of doing so for the time being. And the big importers may also start asking for it, as the gap between the price of cheaper spot gas and the price of gas under their long-term contracts widens. For now they don’t want to upset the status quo, but again that could change – especially if their confidence in pricing on the basis of spot markets increase. Certainly, the gas glut proves a window of opportunity for Europe and Asia to move to a more rational system of market-based pricing

So I'm setting up a new label: natural gas is not like oil

So it is easier to see just my blogs on this topic.