Natural gas set to change global energy market, despite low prices

Energy will always be the central driver of the world economic system. Oil and coal - and the struggle to supply them – defined the entire modern era. There never seems to be enough to go around, with more countries emerging every decade wanting to ensure their own sources of energy.

Aside from the movement and migration of humans, no other “commodity” travels to more parts of the globe than hydrocarbon energy. Today the story has shifted to be all about gas.

New Zealand is a small part of this global energy economy. It exported just over $NZ2 billion worth of crude oil in 2012, according to NZ Statistics, most of this ending up in Australia.

No natural gas exports of note are exported from New Zealand – yet – but a January 2013 estimate suggested 29.42 billion cubic metres could lie under the ground and ocean around the islands.

That’s small on the world scale but, if New Zealand were to extract and export natural gas, it would simply join the dozens of other nations pouring gas into the world system.

There’s so much natural gas on the market today that prices are extraordinarily low compared with crude oil. So low in fact, that countries without natural gas export systems aren’t yet sufficiently incentivised to join the parade.

Cheap natural gas

The front month contract for natural gas as priced at Henry Hub (the yardstick for natural gas prices) is currently trading around $US4.40 per MMBtu (British thermal unit). This price reflects a whopping 25% jump from early November, which for any other energy commodity would be an excuse to break out the drills.

But the rise is simply from $US3.45/MMBtu, which puts into perspective just how cheap natural gas remains.

On the other side of the hydrocarbon family, WTI crude oil prices (West Texas Intermediate) have dropped to $US94 a barrel from a high of $US110 in September 2013. This drop, representing $US16, is only a 5% dip in the fluctuating history of oil demand over 2013.

Western nations have been churning out environmentally unfriendly carbon emissions for centuries. Burning coal and oil, for instance, is well understood to be acutely terrible for the rest of nature; a conclusion that scientists are gathering more evidence to prove each year.

Whether through the combined effort of the international environmental movement or through the invisible hand of Adam Smith’s market (or a mix of other causal reasons), the world is evolving toward greener and cleaner energy sources.

The world’s new-found romance over natural gas isn’t yet enough to entirely supersede petroleum (oil is still necessary to create plastics, for instance), but it is one of the cleanest burning fuels we have.

Nuclear alternative?

Nuclear energy is far cleaner of course but, due largely to the widespread fear of earthquakes and natural disasters, many countries are sidestepping this option.

In early 2014, Japan has almost no operational nuclear reactors following the 2011 Tohoku earthquake, which drastically damaged a coastal plant and left a radioactive mess.

The bungled cleanup at the plant is casting a gloomy cloud over the concept of nuclear energy. Germany, in partial reaction to the Japanese earthquake, has decided to shut down the majority of its nuclear reactors.

German chancellor Angela Merkel cited Japan’s “helplessness” in dealing with the meltdown at the reactor as the reason she changed her mind about the viability of nuclear power.

Generation IV nuclear reactors are theoretical designs not expected to be available for commercial construction before 2030. These types will be considerably more reliable and safer than present second- or third-generation systems, and some countries could choose revert back to nuclear energy in the future.

Taking steps to remove nuclear energy from Europe and Japan is already changing the energy landscape, just as it might radically alter it once more if they choose to take the nuclear path again in the future.

For now, the markets have spoken, and nuclear energy, despite its relatively robust safety record, has lost a crippling amount of consumer support around the world. This is having considerable downstream effects. The present trend away from nuclear energy is putting strain on the alternative energy options, especially crude oil.

The prices outlined earlier reflect the growing demand for petroleum in the global economy.

Global hunger for energy

However, natural gas, thanks to newly developed extraction techniques, is one of the cheapest options and, according to worldwide estimates, there’s plenty to go around.

The chief economist of the International Energy Agency, Fatih Birol, said recently that shale gas is changing the global economy irrevocably. Western countries are suddenly able to access previously untouchable deposits of enormous amounts of natural gas.

The US and Australia especially may be in a position in the near future to become fully self-sufficient for their energy consumption needs. This will radically change the cost of doing business in these countries and manufacturing costs, both of which might even create employment.

But the biggest change will be when they can send their gas around the world en masse.

Energy-hungry emerging nations in Africa and Asia are directly in their sights. American and Australian natural gas is hugely attractive, both because of their advanced logistics and their highly stable political systems. After all, a guaranteed supply of energy is just as important as actually having the energy resource itself.

In the Asia Pacific, and especially in China, demand for power and fuel is quickly outstripping supply. Yet advances in deepwater drilling techniques are presenting offshore oil and gas resources for recovery for the first time.

It must be remembered that underlying the ongoing threats and counter-threats between China and Japan over a string of islands is the vast amounts of energy resources around those rocks.

One estimate at the US Energy Information Administration suggests the oil stores in the South China Sea could be close to 11 billion barrels and 190 trillion cubic feet of natural gas.

Sure, the potential for military conflict over these resources remains low, but this may not always be the case as other South Asian nations grow and compete for similar resources in tight spots.

Demand for the revolutionary swamping of natural gas in China, India, Africa and other emerging markets continues to increase but supplies are so far outpacing those needs. As long as gas prices remain low, companies are not likely to develop new projects, which could ultimately cause shortages in high-import countries.

Nevertheless natural gas is here to stay. And the world energy system will look remarkable different this century because of it.

Nathan Smith has studied international relations and conflict at Massey University. He blogs at INTEL and Analysis