The price of natural gas is not something that the general public is very aware of, which is a pity. This figure has more impact than anything else on the price we pay for electricity. 50% of Israel Electric Corporation's (IEC) expenditure goes on fuel for generating electricity, and among the various fuels, gas will rule supreme in the coming years. The price set in the agreement recently signed between IEC and the Tamar gas exploration partnerships was $5.35 per mmbtu (million British thermal units). Every additional dollar on this price is worth billions to the gas suppliers, and means a substantial rise in the consumer price of electricity.
At present, Israel is in a fairly good position as far as the price of its gas is concerned, but the US is well ahead of it. A comparatively simple technological development has tuned the US into a global natural gas power. Thanks to shale gas, the price of gas in the US has plummeted by almost 90% since 2008, and in the view of experts this is just the beginning of a global energy revolution that, among other things, could put at risk the dream of Israeli gas exports.
Variable local prices
Oil has a uniform price the world over for each of the different oil types. Natural gas, by contrast, has a regional price that varies from one agreement to the next. The result is huge differentials in gas prices around the world. The cheapest price is in Saudi Arabia, $0.75 per mmbtu, while the highest price, in Japan and Korea, is as much as $16.
Japan and Korea are two industrial countries that consume large amounts of gas but have no reserves of their own and have to import all the gas they use from such places as Qatar and Australia. For gas to be transported over these distances, it has to be liquefied (LNG) by being cooled to a temperature of minus 160 degrees Celsius. This requires the construction of cooling and liquefaction installations costing billions, and shipping of the LNG in special refrigerated tankers. LNG currently accounts for 30% of the trade in gas, and this percentage is expected to rise steeply in the coming years.
At these prices, it is clear why Israeli gas entrepreneurs seek the construction of LNG installations and to export as much gas as possible to the Far East markets. However, there are threats to the price of LNG. The first is the growth in the supply of conventional gas thanks to new discoveries. The second is the entry of a new type of gas into the international game.
In the last century, it was discovered that gas and oil could be produced from certain shale deposits by a process known as fracking, in which a mixture of water, sand, and chemicals is injected into the rock at high pressure. Technological innovations such as horizontal drilling have made the production process much cheaper. Since 2000, the US shale gas industry has grown by a factor of 12. About a quarter of the annual consumption of gas in the US is shale gas, and by 2035 its share of the market will grow to 50%.
The shale gas revolution has caused the price of natural gas in the US to become decoupled from the oil price. In 2008, when the price of oil reached $140 a barrel, gas was at a peak of $13.5 per mmbtu. But last week, when the oil price was again soaring, the price of gas on the NYMEX market sank below $2, and returned to the level of the late 1990s.
The USA will permit limited exports
From a country that was about to become an importer of LNG, in less than a decade the US has become one of the world's biggest gas producers, with gas reserves that can meet consumption for the next 120 years. Large quantities of gas that countries such as Trinidad, Algeria, and Qatar earmarked for the US market have been diverted to Europe.
The big question is whether the US will decide to export its cheap gas. If it does, gas prices in Europe and the East are liable to plunge. Dr. Brenda Shaffer, an expert on international energy markets in the University of Haifa's School of Political Science, does not believe that this will happen soon. "The US will probably allow specific exports from a few areas in which large gas surpluses have arisen, such as Louisiana, but we will probably not see a strategic policy change in the coming years," she says.
According to Shaffer, voices are growing louder in the US calling for gas to be retained for the local market. "The Federal Energy Department in the US reached the conclusion that the main benefit that can be derived from the gas is not through exports but through domestic consumption, in order to lower energy costs to industry and boost the competitiveness of the US manufacturing sector."
Shaffer points out that research in the US has concluded that US gas will not be able to compete in the Far Eastern markets, despite its cheapness. But a serious threat to exports of Israeli gas to the Far East is liable to develop from the direction of China, which could undergo a revolution similar to what has taken place in the US. "US companies are negotiating to export their technology to China, and to other countries such as Russia and Poland," says Shaffer. "It's still too early to tell whether the gas shale deposits in China are suitable for production as in the US, but the potential size is as great as that of the US, so that there is a reasonable chance that within a few years, China will cease to be a gas importer and will perhaps export gas to its neighbors."
Europe is the second most important market for natural gas exporters. The European market has in recent years been dominated by Russia, which has 31.3% of the world's conventional gas reserves. Shale gas gives the Europeans the opportunity of becoming independent. Europe is estimated to have gas shale deposits almost as large as those of the US.
However, the Europeans are not working as energetically as the Americans and the Chinese. France has even announced a ban on shale gas production. The official reason is the environmental damage liable to be caused by the fracking process. This process causes small earthquakes, and is liable to lead to pollution of aquifers.
However, the real reason for the French announcement is apparently the desire to protect the nuclear power production industry. "Natural gas is the now the great enemy of nuclear power and renewable energy," says Shaffer. "Its cheap price, and the fact that it is less polluting than oil and coal, make it the fuel most in demand by power producers. Renewable energy is still not a good enough source for producing electricity, and gas is emerging as a kind of bridge until such time as technology will make it possible to base the electricity economy on sun and wind."
Published by Globes [online], Israel business news - www.globes-online.com - on April 18, 2012
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