Gas goes global

Unlike the highly liquid global oil market, natural gas has always been traded regionally. Asia, Europe and North America represent three different gas markets with their own unique dynamics.

Regional gas markets

Asia is very reliant on LNG (liquefied natural gas) imports. Natural gas demand significantly outstrips low levels of domestic production. Prices spiked after the Fukushima Daiichi disaster in 2011 when Japan began importing record volumes of gas for electricity generation to replace the output of nuclear power plants that were shut down.

North American gas production has always been strong, but exploded over the past few years. Hydraulic fracturing (or fracking) activity and the discovery of significant shale gas reserves halved North American gas prices between 2010-11. Prices remain at historic lows today. Henry Hub in Louisiana, where North American gas is physically delivered as well as virtually traded, is the world’s most liquid spot and futures market for natural gas. North America’s well-developed pipeline infrastructure also minimises transportation costs and promotes access to the market. And a high degree of competition lowers the barriers to entry.

Europe’s numerous trading hubs are still developing and are yet to match Henry Hub’s liquidity. Until recently the majority of European wholesale gas buyers maintained long-term contracts with mega-suppliers – namely Russia’s Gazprom and Norway’s Statoil. According to the Oxford Energy Institute, 2015 was the first year that more than fifty-percent of gas trades in Europe took place on the spot market. Demand has yet to return to pre-2008 levels and is still soft across the continent, but prices remain consistently higher than in the US.

Gas producers rely on pipeline infrastructure to connect supply with demand centres. This is why North America’s shale gas revolution and the subsequent decline in natural gas prices have not affected European prices – no pipeline crosses the Atlantic. But, LNG can easily be shipped between the continents. Why then are the world’s two biggest gas markets still disconnected?

Intercontinental LNG trade

LNG (liquefied natural gas) is made by cooling natural gas to -162ºC. This transformation to liquid shrinks the volume of the gas 600 times, making it safe and easy to ship. LNG is colourless, odourless and non-toxic. Nevertheless, the added cost of liquefaction, sea transportation in specialised vessels and regasification at the destination has so far limited global arbitrage opportunities.

Yet, a barrage of new LNG investment over the past few years has lead some to speculate that natural gas markets are globalising. The International Energy Agency claims that global liquefaction capacity will increase by forty-five percent between 2015 and 2021, with most of this growth coming from the United States and Australia. If this glut makes enough cheap LNG available then North American and European gas prices might slowly converge.

In February, the Cheniere Energy LNG terminal at Sabine Pass between Texas and Louisiana was the first to begin exporting. In anticipation of a LNG supply glut Eastern European countries, including Poland and Lithuania, have been building regasification terminals. Lithuania is testing floating regasification technology – offshore plants connected by pipeline to the shore. Spain, being part of a peninsula, is isolated from the European continent’s pipeline network. Historically, this has made it an important destination for LNG cargoes. In fact, the economic downturn since 2008 created an opportunity for Spanish buyers to reload LNG cargoes and sell them in Asia where prices are higher. This churn enhances liquidity. Otherwise, LNG is injected into the network all over Europe. There are important regasification terminals in the Mediterranean: Italy, Greece and France, as well as north-western Europe: the UK, the Netherlands and on France’s west coast.

US LNG producers are increasingly flexible too – offering variable volume contracts or FOB (free-on-board) cargoes. Variable volume contracts permit buyers to increase or decrease the amount of gas they take depending on their needs. They may purchase extra volumes to take advantage of high spot prices – reselling the LNG cargo or trading gas locally. Or they may reduce their volume off-take when local demand is low. FOB means a buyer has not yet been found nor locked into delivery. An LNG cargo leaves the liquefaction terminal and can be bought and resold “on board”. The cargo may eventually be dumped in a spot market at a loss if a buyer can’t be found, but LNG suppliers’ willingness to send out FOB cargoes shows liquidity to be improving.

Not yet a single market

European countries are keen to reduce their dependence on Russian gas for political reasons. However, uncertainty remains as to whether US LNG can compete with Gazprom on price.  Analysts at the Oxford Energy Institute estimate Gazprom’s cost of delivering gas to Germany to be 3.5 USD per mmbtu (million British thermal unit). Whereas the break-even price for the cheapest US LNG supplies is around 4.3 USD per mmbtu – even with Henry Hub still trading at historic lows. Gazprom, Europe’s largest gas supplier, has significant spare production capacity and some of the lowest cost production in the world. Given these conditions, LNG traders are unlikely to win a price war on the continent.

In sum, greater supply and liquidity in the global LNG market offers some opportunities for arbitrage between the continents and provides European gas buyers with options. This does have the potential to disrupt Europe’s monopolies and introduce greater competition into the market.  Yet, LNG and pipeline gas markets are not one and the same. Whilst the price gap persists, gas markets will retain their regional characteristics.


New Zealand’s contribution

Last year at the 21st United Nations Conference of Parties (COP21) in Paris, 195 countries negotiated a global agreement to address climate change. The agreement does not stipulate specific emissions reduction targets, unlike its predecessor, the expired Kyoto Protocol. Instead each negotiating party was asked to voluntarily submit their Intended Nationally Determined Contributions (INDC) for reducing global emissions.

New Zealand’s INDC commits to reducing greenhouse gas (GHG) emissions to 30-percent below 2005 levels by 2030. Currently, renewables comprise around eighty-percent of New Zealand’s electricity mix. The government plans to increase this to ninety-percent by 2025, following the closure of the two remaining large-scale coal-fired power plants before 2018.

This low-carbon electricity generation is a huge advantage. It might be exploited to decarbonise the transport sector, which produces seventeen-percent of New Zealand’s total GHG emissions. New Zealanders depend heavily on road transport. This is due in part to having a widely dispersed population. Fuel efficiency standards already apply, targeting heavy diesel vehicles for road freight in particular. Fully electrifying public transport networks in Auckland and Wellington, as well as providing incentives for private ownership of electric vehicles, would go some way to reducing GHG emissions from the transport sector.

Yet agriculture contributes almost half of New Zealand’s total GHG emissions. The sheer size of the agricultural sector is impressive given the island nation’s size and population. New Zealand produces around a fifth as much milk as the US – a country seventy times more populous. Agriculture is also behind New Zealand’s high carbon intensity per capita – fifth among industrialised nations.

Nevertheless, New Zealand is one of the world’s most efficient agricultural producers. Milk production has trebled since the 1990s though methane emissions from cattle doubled. New Zealand has been successful in researching and adopting efficient farming practices. This includes effective pasture management, and breeding and feeding animals to yield more milk and meat. The New Zealand Agricultural Greenhouse Gas Research Centre is investigating  new means to breed or feed sheep and cattle so that they produce less methane, or introduce enzymes to their stomachs, through harm-free drug treatment or vaccination, that reduce their methane emissions. The government has committed $48.5 million to the New Zealand Agricultural Greenhouse Gas Research Centre before 2019. A further  $45 million is earmarked for the Global Research Alliance on Agricultural Greenhouse Gases. These institutes promote technologies and practices to reduce agricultural GHG emissions worldwide.

Reducing New Zealand’s agricultural emissions is a significant challenge. Until better technology is developed and widely deployed to capture or mitigate agricultural emissions the government does not expect that aggregate agricultural emissions will be reduced substantially beyond 2030. In the same vein, low-carbon technology must be widely deployed within the transport sector to encourage further emissions reductions post-2030.

This is why the New Zealand government supports a global carbon market. Currently an Emissions Trading Scheme (ETS) operates in New Zealand. Transport fuels are included to incentivise less carbon intensive forms of transport, but the scheme excludes pastoral agriculture. The inclusion of this sector would significantly affect New Zealand’s global competitive advantage and exports.

New Zealand’s agricultural emissions are ultimately associated with meat and dairy products consumed elsewhere in the world. Almost all agricultural produce is exported. New Zealand agricultural producers could not pass on the cost of carbon to consumers even if they were required to participate in the NZ ETS, since China, the US, Australia, Japan, the UK and other importers are liable to seek lower-cost supplies in the global marketplace. If other agricultural exporting countries were required to integrate a carbon price into their sales then the playing field would be more even. In fact New Zealand would have an advantage as one of the more productive agricultural exporters. This would also incentivise low-carbon farming and food production globally.

Currently, the electricity sector is leading the charge to decarbonise the world’s economy by encouraging the uptake of renewables. Yet agriculture comprises 14.5 percent of global GHG emissions. To realise more ambitious reductions in the next decade and beyond, significant research, development and funding needs to be directed towards agricultural technology and practices.

Or we might consider the vegetarian’s solution to climate change. Demand for meat has been rapidly rising in developing and emerging economies including China, India and Brazil. Though a reversal of this trend – and reduced global demand for meat and dairy – may not be the solution that the New Zealand government pictured.

La question nucléaire: à la recherche d’une énergie parfaite

En 1985, deux agents français ont sabordé le navire Rainbow Warrior de l’organisation écologiste Greenpeace dans le port d’Auckland en Nouvelle Zélande. Cette opération, effectuée dans la mer territoriale néo-zélandaise, a été conduite sur ordre explicite du Président de la République Française, François Mitterrand. Le Rainbow Warrior faisait alors cap vers l’atoll de Moruroa, situé en Polynésie française, où les militants de Greenpeace avaient tenté d’empêcher des essais nucléaires menés par les militaires français.

Cet incident a marqué un tournant décisif dans la politique néo-zélandaise puisque la résistance au nucléaire est devenue une partie importante de l’identité nationale néo-zélandaise. Cela est toujours le cas aujourd’hui. Tandis que la France se montre toujours fière de ses prouesses technologiques dans le domaine nucléaire, également en matière de production énergétique.

En France, le nucléaire constitue deux tiers de la production électrique, alors que quatre-vingt pour cent de l’électricité est produite de façon renouvelable en Nouvelle-Zélande. Cela ne signifie pas pour autant que Nouvelle Zélande produit moins d’émissions de gaz à effet de serre. Au contraire, vu son immense secteur agricole, les émissions par habitant la place en 5ème position dans le monde, soit seize places devant la France. En outre, c’est grâce à sa géographie que les néo-zélandais parviennent à générer la plupart de leur électricité de façon renouvelable, par le biais de la hydroélectricité et de la géothermie. Peu de pays bénéficient d’un tel écosystème qui permet la production d’électricité par ces moyens peu polluants. Normalement, pour augmenter leur capacité à produire de façon renouvelable, les autres pays sont obligés d’investir dans le solaire ou l’éolien, qui ne sont pas sans coûts.

L’énergie nucléaire a clairement des avantages. Elle ne produit pas d’émissions GHG en générant de l’électricité. Deuxième avantage, les français paient un prix moyen d’électricité beaucoup moins cher que les néo-zélandais. De plus, sa capacité de production est très stable, alors qu’en Nouvelle-Zélande, pendant les années de précipitations inférieures à la moyenne, le risque de coupures d’approvisionnement augmente beaucoup vu la dépendance du pays à l’hydroélectricité.

Face à l’obligation de fournir de l’électricité à une population beaucoup plus importante en France qu’en Nouvelle-Zélande, le gouvernement français a dès lors choisi de se tourner vers le nucléaire. En revanche, la consommation néo-zélandaise ne nécessite pas les gros volumes d’électricité que les centrales nucléaires sont capables de générer. Même s’ils n’étaient pas politiquement contre l’énergie nucléaire, les néo-zélandais n’en auraient pas besoin. Cela rend cette décision politique plus facile pour le petit pays qu’est la Nouvelle Zélande.

Néanmoins, nombreux sont les peuples qui ne soutiennent pas non plus l’énergie nucléaire, compte tenu des risques associés trop graves pour être ignorés. C’est le cas notamment aujourd’hui en Allemagne et au Japon, où la majorité de citoyens s’élève contre l’énergie nucléaire, ainsi qu’en Nouvelle-Zélande. En plus de nombreux décès causés par une explosion nucléaire, des maladies graves frapperaient par la suite tous ceux se trouvant à proximité. Après une telle catastrophe, l’environnement local resterait toxique pour des décennies. L’économie agricole de la région serait détruite. Aucune compensation ne suffirait à couvrir les pertes humaines et les dégradations de qualité de la vie pour les survivants. Même si le risque d’accident est statiquement faible, cela ne règle en rien le problème des déchets radioactifs produits lors de la production d’électricité.

Pourtant, le nombre de gens tué dans les explosions des mines de charbon ou affecté par les maladies pulmonaires est plus important que le nombre de victimes des accidents et des bombes nucléaires combinés. À la fin, il faut comprendre que tous les choix ont leur compromis en énergie. Le peuple français ainsi que le peuple néo-zélandais, comme tant d’autres, font face à cette problématique et essaie d’allier l’abordabilité, l’accessibilité et la sécurité tout en limitant les polluants.

En reconnaissant sa violation de la loi internationale par rapport à le naufrage du Rainbow Warrior, la France s’est excusée officiellement en 1988 et les relations diplomatiques avec la Nouvelle-Zélande ont été rétablies. En 1991 un accord d’amitié a été signé entre la France et la Nouvelle-Zélande. Depuis cet accord les deux gouvernements consacrent des fonds à la promotion d’échanges culturels. Les bourses scolaires font partie de ce programme culturel. L’auteure de ce blog était bénéficiaire de cette bourse en 2013 et elle est venue en France pour étudier la politique énergétique. Ce blog vise à comprendre les choix politiques en matière d’énergie sans condamner pour autant, tout en réalisant que l’énergie parfaite n’existe pas.

Low-hanging fruit

Energy efficiency wants more energy for the same amount of fuel. This means both energy bills and pollution from burning fossil fuels fall – to the delight of government and environmental agencies alike.

There are three key sectors within which efficiency gains can have a significant impact in both the developed and developing world: transportation, buildings and electricity.

Simply replacing old cars and trucks with newer versions reduces overall oil usage per vehicle. New vehicles are built to higher fuel efficiency standards as the technology continues to improve, so that you can drive your car further and further using less and less petrol. Manufacturers were busily engineering new models whose improved fuel use and decreased gasoline bills made them attractive to consumers, even before regulation insisted on higher fuel efficiency. Inefficient and dirty, (but cheap) diesel is now highly regulated in the developed world. It is all but obsolete for passenger vehicles. Low-quality fuels for marine transportation and long-distance trucking have yet to be attacked with the same rigour.

It’s also about not wasting energy. Inefficient buildings release huge amounts of unused heat.  Simple measures include nailing shut the last few millimetres between insulation boards – this final step brings the greatest benefits – or using straight, fat water pipes rather than slim, angular ones. These are not universally understood or implemented.

Insulation, heat pumps and newer appliances compliant with current efficiency standards make a huge difference. The invention of light emitting diodes (LED) revolutionised lighting. Previously incandescent light bulbs lost most of their power as heat. Solar and geothermal installations can make buildings energy neutral or turn them into prosumers.

Although this involve additional costs, many energy savings measures pay for themselves within a few years, as heat and electricity bills are cut.

Retrofitting older buildings and replacing appliances is necessary to address standing building stock. Unlike cars, buildings are not replaced every few years. Most of today’s buildings will still be standing in fifty years – but we suffer from an agency problem. Landlords do not pay the energy bills and tenants do not wish to invest in someone else’s property. Yet, even property-owning households and businesses hesitate to retrofit. This is where government incentives can play a role. Heating, cooling and electrifying buildings makes up a third of global energy consumption, so lifting efficiency by just a few percentage points gets purchase and demonstrates the worth of such efforts.

Efficiency was transforming electricity production until renewables shook up the model making even the most flexible and efficient Combined Cycle Gas Turbine (CCGT) plants, which save and reuse heat produced during power production, unprofitable. Nevertheless efficiency can still give thermal power producers an edge on the competition, since decreased fuel use cuts operating costs. Further, governments are imposing tariffs on heavy polluters including inefficient diesel and coal-fired relics. This additional marginal cost crowds some of them out of the marketplace saving energy and reducing pollution.

Demand-side management can address some of the short-fallings of today’s decentralised electricity system. With smart metering industrial and household consumers can react when electricity is scarce (wind or solar production is low). The higher prices signal factories to run less energy-intensive processes or wait for off-peak prices and hours, and household consumers can decide to take a shower or do their washing later on. In fact  smart grids can even automate some of these decisions, at both the local and national level.

Once upon a time, rising energy consumption was an accurate indicator of how fast an economy was growing. No longer. In the OECD, efficient technologies and smarter policies have decoupled energy consumption and development, proving that environmental concerns need not frustrate economic ones.


Invisible Fuel, The Economist

Energy Efficiency topic, International Energy Agency, OECD

Why is oil suddenly so cheap?

Between 1998 and 2008 the price of oil increased ten-fold. Everyone was talking about peak oil – the idea that production would plateau and demand for oil would outstrip supply. Skyrocketing prices would force us to replace what we put in our cars. In 2008 prices broke the $100/barrel ceiling – and then kept climbing.

What does it mean to say oil is $100 per barrel? When we talk about dollars we mean American dollars. Barrels are just a standard measure of volume (159 litres). The price of oil refers to a benchmark – a reference price. In the United States this is West Texas Intermediate (WTI), which is a blend of crude oils from diverse suppliers, which mingle at a physical hub in Cushing, Oklahoma. In Europe the benchmark is called Brent – a blend of North Sea produced crude oils. For a crude to become a benchmark there must be enough suppliers and enough barrels that the supply, and therefore the price, cannot be controlled by one player.

Crude oil needs to be processed and refined to produce the more valuable products, such as gasoline or jet fuel, that industry and consumers can actually use. So it is refineries that buy crude oil from producers. However refiners don’t all buy WTI. There are many different varieties of crude oil. An oil producer will mark up or mark down their crude oil relative to a reference price. This is why we call WTI and Brent benchmarks.

What determines this mark up or mark down? The quality of your oil. Oil can be light or heavy – a lighter, less viscous crude produces more of the more valuable petroleum products such as gasoline during the refining process. Oils are also classified as sweet or sour, which refers to the sulphur content. Sulphur is a pollutant which must be removed during refining. This is expensive to do. So the more sour your oil the more pricey the sulphur-removal process.

Oil producers are in the game to turn a profit.The WTI price affects your profitability as a producer.  For example, let’s say WTI is $100/barrel. If it costs you $70/barrel to extract crude oil from a well and you are selling it at a $20 discount to WTI then your profit per barrel is $10/barrel. (That’s a huge win.)

However, if the international price of oil – the WTI benchmark – falls $10 then you lose your profit margin.

A few years after WTI hit $100/barrel (and then went higher) it suddenly fell to $50. Multiply that by the millions of barrels being bought and sold and you can imagine there were some pretty big winners and losers. That’s the situation we have today. But why?

In less than one hundred and fifty words:

1. Since 2008 Europe underwent a recession which dampened demand for oil as economic growth dwindled and consumer spending dropped.

2. The United States is the world’s biggest oil consumer and used to drive global demand. However, over the past few years an energy revolution no one predicted took place in the US. As shale gas “frackers” began producing natural gas and pumping it into the regional pipeline networks, associated shale oil was also being produced. The best fields are called “wet” since they produce oil as well as gas, oil being more valuable. So within a few years the US went from being a huge importer to near self-sufficiency in crude oil production.

3. This meant that global oil markets were dramatically over-supplied. The supply glut happened because two of the biggest markets – Europe and the US – simply weren’t as hungry for crude oil anymore.

These days we actually talk about peak demand for oil. Technology and extraction processes get better every year, so it’s likely we will be able to produce oil for many years to come. However, production will become more expensive and, as environmental pressures weigh in, oil will become pricey enough that consumers and governments look for replacements. Even if that means buying an electric car or investing heavily in public transport.

Peak demand didn’t happen when prices skyrocketed in 2008. It might yet. Or it’s possible that demand for oil is dropping away. The international price will wane if other energy sources or energy efficiency measures become more competitive and attractive. We will have to wait and see if oil demand recovers in Europe or if Asia’s growth fills the gap.


The perfect energy source – that is cheap, safe, abundant, reliable, environmentally friendly and producible on any scale – doesn’t exist.[i] When it comes to energy, we can’t avoid making judgment calls. Energy is policy. It is a choice.

Do we want the most stable, reliable electricity production possible? A government-sponsored nuclear industry, like France’s, makes sense.

Or is cheapest best? This is most relevant to developing economies. Coal is abundant, transportable and very cheap. And very polluting. China is the world’s biggest consumer of coal, but it still plays a huge role in countries like Germany, Poland and the US.

Or do we want to reverse climate change? If so, our society needs revolutionary rethinking. Cars, freight and planes would have to all but disappear.

Sunshine and wind are abundant in many countries and not polluting in themselves (the production of parts, installation and noise pollution aside). But who will bear cost of realising an entirely new smart electricity grid? What power generation will be used as back-up on the days the wind doesn’t blow and the sun doesn’t shine?

This blog is intentionally bipartisan. I am interested in solutions, not ideology. Developing solutions that address climate change and pollution, while also supporting development and fairness, and allowing for profitability. This requires both creative thinking and diverse inputs. We can benefit from the efficiency and dynamism markets encourage without rejecting the crucial role governments can and do play – and should, since safety is at stake.

Misunderstanding of energy issues is pervasive – exacerbated by misleading articles in the media. And our politicians struggle to promote their own energy policies, as they themselves lack clarity about the issues.

A lot of activists with worthy motivations – preventing dangerous climate change from engulfing the planet or radiation from poisoning another generation of young Japanese – make hasty suggestions about how to deal with the problems that worry them.

This isn’t surprising as energy issues are complex. They don’t conform to classic economic models. Each sector seems to have its own strange dynamic. Gas is regional. It is transported by pipelines and blighted by geopolitical manoeuvring. And it has yet to make strong in-roads into the transport fuel market to compete with petrol. It is still mainly being used by industry and for heating.

Oil is traded a hundred times more in paper than in physical barrels. This liquidity stems both from its being easy to transport as well as from strong competition. Yet, fundamental constraints affect the oil market too. The stuff of value is the refined petroleum product obtained from processing crudes. And the refineries that do this are both very expensive and inflexible, and can only be used to refine a particular crude oil.

Oil’s price level directly affects inflation and the cost of living in most of the countries that consume it. And, in the big producing countries, it often forms the backbone of their governments’ budgets, and can dramatically increase or decrease income levels.

Electricity may not be the biggest contributor to climate change, but the debate around renewable energy, particularly solar and wind power, takes centre-stage here. Electricity markets reflect their infrastructural base as electricity can’t be stored it must be consumed immediately after it is created.

The make-up of electricity systems varies greatly according to country – and within nations. For example, New Zealand’s predominantly renewable electricity mix is based on geothermal and hydropower. This is only possible because of the country’s local geographic and climatic conditions.

The often forgotten market is dirty, but abundant coal.

Coal is usually local. It is also the fuel that would suffer most if a price for carbon was integrated in its valuation. A little appreciated fact is that shifting 1% of global coal usage to natural gas would be the equivalent of increasing current renewable energy production by 11%.[ii]

A good understanding of the dynamics of the energy industry and markets is necessary if we are to be serious about addressing the global problems we face; whether these are fair consumer prices, climate change, energy poverty and access, economic and industrial growth, energy supply security or global financial stability. I’m very serious about these – although I don’t believe the solutions are easy or obvious. But we mustn’t be dismayed or dissuaded by the complexity of problems that face us. We will discuss them here.

[i] Although a cheekier analyst might suggest that energy efficiency – not wasting energy – is the cheapest fuel we have.

[ii] Data from BP Energy 2035 Energy Forecast, C.Ruhl, January 2014