The Dirtiest Part of Cleanest Fossil Fuel Is Price

(Bloomberg) -- The upside to global natural gas prices is seen limited as competition with other energy intensifies.

Benchmarks in Asia and Europe have soared since mid-2016, leaving buyers in those regions paying triple the rate in the U.S., where prices kept in a much narrower range. While that’s been good for the profits of big producers from Gazprom PJSC to Qatar Petroleum, it left users hesitant to boost use of the cleanest fossil fuel.

“In the power sector, there are many competitors for natural gas, renewables being one of them and coal on the other side,” Fatih Birol, executive director of Paris-based energy policy adviser the International Energy Agency, said in an interview earlier this month. “If the price of natural gas goes up, there may be a question for demand growth.”

The Dirtiest Part of Cleanest Fossil Fuel Is Price

An expected liquefied natural gas boom, with record supply growth next year and as much as $200 billion earmarked for new projects in the next three years, may help pare prices outside North America. With the world transiting away from dirtier coal, strong demand seems pretty certain, but high prices aren’t, said Tatiana Mitrova, director of the energy sector at the Moscow School of Management.

Customers are too clever, she said, citing Germany’s promotion of LNG import projects in a bid to win lower prices from Gazprom, the world’s biggest gas producer. The Russian company may also face lower prices in Asia, said Mitrova, who sits on the board of oil-services company Schlumberger Ltd.

Gazprom knows the drill. It already suffered thin margins for some hub-market sales in Europe in 2015 and 2016, she said.

“Gazprom was supplying gas at break-even prices,” Mitrova said in an interview at the Oil & Money conference in London. “I’m afraid supplies to China might see the same development.”

Front-month Dutch natural gas prices dropped as much as 2 percent to their lowest in more than two months on Thursday. The contract has slipped 17 percent from a multiyear high last month, but is still up 40 percent on a year ago.

Markets are signaling lower prices as oil dropped, as this comparison of the forward curve for the Dutch Title Transfer Facility, Europe’s most liquid gas natural gas hub, over the past month shows:

The Dirtiest Part of Cleanest Fossil Fuel Is Price

With Russia, the Middle East, the U.S., Canada, Australia and Africa all competing to supply, prices will probably come under pressure, said Nick Campbell, director of energy intensive clients at Inspired Energy.

Still, there are other key areas of demand -- gas users beyond power generators. The manufacturing sector is a “main driver” for demand growth during the coming years, and renewables probably aren’t a viable alternative for many factories, the IEA’s Birol said.

Shell Says Natural Gas Faces Scrutiny as Demand Outpaces Supply

So gas sellers will probably continue to enjoy premium prices until the new infrastructure forces them down, said John Baguley, chief operating officer of LNG Ltd., which plans to export North American gas to Europe and Asia.

“If Gazprom is serious about putting the cheapest gas into Europe, Gazprom can do that cheaper than we can liquefy it out of the U.S.,” he said in an interview. “Unless Gazprom sees imported LNG as a serious threat and the contracts are in place, then the prices in Europe are going to be high, because they’ll exploit it to the greatest extent that they can.”

The Dirtiest Part of Cleanest Fossil Fuel Is Price

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