Sparks

Energy shifts to a buyer’s market

 By Nicholas Newman

A major shift of power is underway in the world’s oil and gas markets…

Until 2008, oil and gas producers were “market makers.” This meant they could fix prices and decide their output’s final destination. Also, until recently, oil and gas companies restricted gas wholesalers from re-selling gas, which they had bought from Russia’s Gazprom and Algeria’s Sonatrach to other markets. Today, such practices are fading as European and Asian markets bring to an end such anti-competitive practices.

Why a buyer’s market?

The ability of oil and gas producers to dominate the market has been weakened by current supply and demand trends. On the supply side, there is a world glut of oil and natural gas, as shown in the build up of huge inventories caused by new fields coming online and the success of fracking, which has turned the US into a net energy exporter. The global LNG trade reached a record high of 258 million tonnes (MT) but liquefaction capacity at 339.7 MTPA (million tonnes/year) far exceeded the amount of LNG traded on world markets in 2016, according to the (International Gas Union) IGU World LNG Report..

Gas in competition with oil
Many countries, including Malta, Mexico, and the US are substituting environmentally friendly cleaner gas for oil and coal. Already, California, South Africa, and the UK are showing growing interest in gas for power generation, to provide backup power at peak times and when renewables are not available. Similarly, energy intensive industries including plastics, petrochemicals and steel making are turning to gas and displacing oil and coal. In addition, regulators are ending many of the restrictive practices that hurt customer interests, such as cartels. So, market power is shifting away from producers.

Malta gets LNG cargo (Konrad Mizzi, lngworldnews.com)

As a result, oil and gas prices have fallen and are still less than half of their peak in 2013-2014. This is despite OPEC’s November 2016 agreement to cut crude production. Indeed, the unintended consequence of production cuts is a resurgence of US crude production. As, Chris Main Energy Markets Strategist, Citigroup Global Markets said at Flame Amsterdam 2017, “OPEC’s agreement to cut output hoping to harm US shale has rebounded since an upturn in price, alongside cost cutting, greater efficiency and productive resources, has allowed a resurgence in American shale oil.” OPEC’s failure to increase prices significantly reflects the loss of market power by a producer cartel.

Competition
The surplus in natural gas is also strengthening the hand of buyers. Already, Algerian, Azerbaijan, Norway and Russian piped gas exports to Europe have to compete with LNG deliveries from Libya, Nigeria, Trinidad, Qatar[xvii] and now, most unexpectedly, the United States. In addition, two new gas pipelines, Nordstream 2 and the Trans Adriatic Pipeline, which link gas fields in Asia to Europe, are likely to add to the existing gas glut in Europe. Once open, they will increase the bargaining power of European gas buyers like RWE, E.on, and ENGIE. Increasing competition for customers not only affects market prices but also increases the buyer’s market power.

New gas and oil supplies

In the next few years, rejuvenation of Iranian oil and gas fields and in Mexico, reforms of the energy sector, foreign participation, and recent new finds, will add substantially to world supplies. For shale operators, even at current prices, a bonanza in output and profits is in prospect “since the technology used is both cheap and offers a quick return compared to traditional billion dollar mega projects,” said Professor Dieter Helm at the Flame conference, Amsterdam 2017. Except for shale oil and gas production in which the time between drilling and output is a matter of months, conventional oil, and gas is a long-term business.

Noble Energy makes new discoveries in GoM and Eastern Mediterranean (subseaworldnews.com)

Many of the world’s energy projects under development or coming on line were planned perhaps five or even eight years ago and cannot be stopped. Most striking is what is happening in both US shale gas and LNG production. For example, the IGU World LNG Report — 2017 Edition, lists 28 new LNG plants under construction as far afield as Russia to Australia. Based on optimistic forecasts, some LNG export projects under construction are huge. For instance, the American facility at Cove Point will turn around 750 million standard cubic feet per day of piped gas into LNG. Russia’s Yamal LNG unit has a planned capacity of 16.5 million tonnes of liquefied natural gas per year. These suppliers will be actively searching and be competing for customers.

Cove Point Terminal (dominionenergy.com)

A change in prospective market demand

The forthcoming wide scale adoption of automation, robots, 3D printing and artificial intelligence are likely to dampen future energy demand in transport. Manufacturing will re-shore manufacturing, so it is close to customers, and this will make large inroads into shipping. Today, half of global oil market demand is for road transport. Electric vehicles will displace oil as a major fuel for vehicle transport, if not as soon as the optimists suggest, perhaps by 2040.

Formation of a Buyer’s Club

In Asia, Korea Gas Corp., Japan’s JERA and the China National Offshore Oil Corp., which collectively represent about one-third of the world’s LNG purchases, have joined forces to exchange information and “cooperate in the joint procurement of LNG.” Together they will exert a buyer’s market power. A similar idea, to exert buyer power in the European gas markets, was put forward by Donald Tusk, now European Council President. But it gained little support from EU member states. Increasing supplies of oil and gas alongside increased competition for customers by new suppliers including Iran, Mexico, and the US will further erode the market power of producers. The forthcoming transport and manufacturing revolution will, most likely, merge the shift towards a buyer’s market and end the golden age of oil.

SEE MORE: Energy traders words by Nicholas Newman

about the author
Nicholas Newman
Freelance energy journalist and copywriter who regularly writes for AFRELEC, Economist, Energy World, EER, Petroleum Review, PGJ, E&P, Oil Review Africa, Oil Review Middle East. Shale Gas Guide. https://nicholasnewman.contently.com/