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The impact of high oil prices on global and regional natural gas and LNG markets.

Article Excerpt
1. INTRODUCTION

Natural gas markets have historically been regional with some linkage with international petroleum markets. However, as natural gas transportation capacity, including pipeline capacity and the capacity to produce, transport and receive liquefied natural gas (LNG), continues to expand, regional gas markets are increasingly becoming linked and moving toward a global market for natural gas. The linkages between natural gas and oil markets, and their future evolution, present a more complicated picture.

Oil and gas markets are linked in several ways. Natural gas competes with oil in several consumption sectors, making oil and gas substitutes. Natural gas liquids (NGLs) are produced alongside natural gas and are then stripped from the wet gas stream, with the NGLs sold into oil markets and the dry gas sold separately. The GTL process uses natural gas as a feedstock to produce low-sulfur diesel and other oil products. Further, oil and gas compete for exploration and drilling resources, and many current natural gas contracts base the contract price of natural gas on market oil prices. These last two linkages between oil and gas markets, however, are not accounted for in the INGM.

The INGM attempts to represent oil and gas competition in several demand sectors as well as the market affects of NGLs and GTLs. These multiple linkages between oil and gas markets lead to a complicated relationship between oil and gas prices in the model. Higher oil prices, generally, should stimulate increased consumption of natural gas in sectors where it can be substituted for oil. If this were the only way in which oil prices affected natural gas markets, one would expect the market price of gas to always rise in response to increased oil prices, as increased gas demand drives up the gas price and increases gas supply to meet the elevated demand, thus balancing the market. However, higher oil prices also lead to higher NGL prices and spur increased production of NGLs, and of their byproduct, dry natural gas.

Because of how NGLs link oil and gas markets, higher oil prices can lead natural gas prices to either increase or decrease depending on the regional gas supply/demand situation. If the elevated gas demand attributable to the higher oil prices is less than the increased gas supply attributable to the higher NGL prices, then for natural gas markets to balance, the gas price must come down to further spur demand. If the opposite is true, and the increases to gas demand are greater than to NGL and gas supply, then gas prices will rise in response to oil prices, as would generally be the case with substitute goods.

Higher oil prices can also spur increased demand for GTLs, thus elevating demand for natural gas as a feedstock for the process. This increased demand for natural gas can push up natural gas prices, leading to lower consumption in other sectors which then limits the upward pressure on gas prices, as consumers switch to competing fuels. However, the affect of GTLs on gas markets is limited by the extent to which global GTL capacity can reasonably expand.

GTL facilities require large upfront capital expenditures and potentially many years to recover the investment. Also, there are fewer commercial scale GTL facilities in the world and fewer under construction than there are LNG facilities, or other types of gas assets. This means there is less information on and greater risk surrounding what it takes to construct and bring online a commercial scale GTL facility. This also means there are fewer experienced personnel to complete such a job. Additionally, because of the significant energy losses in the GTL process, sustained low natural gas prices and high product prices are required to support the investment. The alternative GTL scenario is a response to these considerable risks and the significant affect of the GTL capacity expansion assumptions on the way the model responds to alternative oil price scenarios.

2. DESCRIPTION OF THE MODEL

The International Natural Gas Model (INGM) was developed to enhance the Energy Information Administration's (EIA) long-term assessment of world natural gas markets. The INGM simulates the natural gas and LNG markets from production, through processing and transportation, to end-use for 60 nodes which are detailed in Barden et. al, Table TA-1 and summarized in Table 1, below. The nodes are generally defined based on their current or potential significance in the world gas markets, as a major producer, consumer or transit location for natural gas. INGM uses a linear program (LP) to simulate gas markets with an objective of maximizing the cumulative discounted sum of producer and consumer...

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