Gas Prices: Low Enough for Consumers, High Enough for Producers?

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"Some experts hold that current prices stimulate production, while others argue that the oil-linked price structure will not survive."

Long term oil-linked gas contracts are likely to persist and coexist with spot pricing though the percentage of the oil price in the indexation may change, Alan Haywood, Chief Operating Officer of Global Gas at BP said Thursday.

Gas consumption rose by 7.4% in 2010, the fastest rate since 1984, he said. Natural gas trade increased by 10.1% and LNG by 22.6%.

Between 2000 and 2010, demand in Japan grew from 12.7% to 17%, in South Korea from 9% to 15% and in Europe from 21% to 25%.

BP projects natural gas to continue to grow at 2% a year to 2030 with gas accounting for more than 50% of growth in fossil fuels, Haywood said at the World Petroleum Congress in Doha.

Gas was affordable when compared with coal when the cost of carbon is considered and affordable versus oil when higher production costs are taken into account, Haywood said at a session on the theme of whether gas prices were low enough for consumers and high enough for producers.

Haywood said he believed prices were, and sufficiently to stimulate production that matches demand growth.

"I would say [they're] about right. The market is working," he said, noting that the slump in the Henry Hub gas price in the U.S. to $4/MMbtu had not discouraged the development of shale gas.

"I think oil indexation will persist and coexist with spot pricing. I believe in the development of spot markets, of greater transparency. I think the price is enough to stimulate production that matches that demand," Haywood said.

He said that combined gas cycle turbines were more efficient and therefore more affordable and in many countries, gas competes with oil, displacing diesel, crude oil or fuel oil for power generation.

"That is why the forecast demise of oil indexation is premature, in part because oil is the incumbent competitor, because oil markets are more transparent, more familiar and more easy to hedge," he said.

There was no obvious alternative to indexation, Haywood said, adding that with the U.S. likely to start exporting LNG, "we may see more indexation to the liquid markets of Henry Hub but rather than $4, it may be a premium to reflect the cost of moving from one market to another."

This would create a new mix in which crude pricing, the spot markets and the regional price hubs in the U.S., Japan/Korea and the UK can coexist, Haywood said.

"We need to differentiate between the linkage to the oil price and the construct of the pricing," Haywood said. The question is what percentage of oil will be used rather than a change of indexation to oil.

"We need to be careful not to compare one market that is distinct and disconnected from another," he added.

Daniel Laure, senior vice president for markets and IT at France's Total, disagreed and said he did not believe the current price structure would survive.

"In the long term, it is not sustainable to have two energies with two different prices. I think there will be convergence at some time."

-Staff, [email protected]

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