LNG and the Low-Price Mirage

By The Maritime Executive 03-16-2015 10:09:12

By James Ashworth

The dramatic fall in oil prices, triggered by sluggish demand and an expanding supply due largely to the surge in U.S. shale oil and gas, has led to oversupply. But this will rebalance, and faster than many expect.

The slowdown in China is being addressed by a monetary stimulus initiative that will restore demand. The biggest player in the game, China has not stood by idly watching its economic growth stagnate. In January 2015, the China Central Bank introduced a program of quantitative easing, injecting 1 trillion yuan ($162 billion) into its economy to stimulate new growth.

With an increasing public clamor to deal with catastrophic air pollution, we can also expect to see the Chinese energy mix shifting and demand for gas rising at the expense of coal and oil. And Japan, still predominantly in a post-Fukushima nuclear shutdown, is beginning to see its fortunes rise after a decade of slump, boosting gas demand.

Energy prices linked to an oil price of $40/bbl mean that half the world’s current oil production is sold at below full cost, clearly unsustainable in the long term, except for the few. OPEC’s decision not to tighten oil supply may, in part, be an attempt to undermine the shale advance. This will not work. The U.S. today is the world’s largest energy producer and is predicted to be a major exporter by 2020.

More significantly, the world’s major oil producers, needing high prices to balance their books, have growing populations, with the possible exception of Russia. Burgeoning population growth in the Middle East, combined with higher standard-of-living expectations, could see Saudi Arabia become a net energy importer by 2030. The Saudi Arabian population is growing at about 1.9 percent per annum and Iran at 1.3 percent.

But energy demand is not proportional. After the “Arab Spring,” people in the Middle East expect and demand a higher standard of living, with fridges, air conditioning, washing machines etc., so energy demand growth runs exponential to population growth. With maturity in the traditional oil fields, the oil price needed to sustain these oil-dependent economies can only rise.

Low prices have also stimulated demand. The International Energy Agency (IEA) and the Organization of the Petroleum Exporting Countries (OPEC) have raised their estimates for OPEC crude in 2015 by at least 200,000 barrels per day (bpd).

The current price-inspired delay or postponement in FID on gas projects could lead to tightening of gas supply and shortages from 2019/20. Future gas demand will outpace oil demand growth by more than double year-on-year, with annual gas demand, currently around 3,500 billion cubic feet (bcf), rising to 4,500 bcf by 2025 and over 5,000 bcf by 2035. Cutbacks in future supply, based on decisions made now, will see tightening in gas markets starting from 2019/20.

Despite the current energy price gymnastics, oil demand growth is past its heyday and will become an increasingly expensive addiction. The gas price advantage and environmental dividend over oil will prevail.

Looking forward, gas remains the most plausible and sustainable fuel for ships with more than 200 years’ supply in the ground. This will cover us until the mid-2100s, when we can expect to be moving towards zero carbon energy options. In the short-term, other limited options, such as scrubbers or alternative fuels, make sense where residual and replacement vessel values exceed the alternatives. But they are suboptimal. As such vessels age and the shipping market evolves, replacement with LNG-fuelled tonnage will be an economic essential. - MarEx

James Ashworth is Lead Consultant for Singapore-based business consultancy TRI-ZEN.

Editor’s Note: The opinions expressed herein are the author’s and not necessarily those of The Maritime Executive.

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.