Natural gas prices, notwithstanding Jim Cramer who called 2008 the year of natural gas, and notwithstanding T Boone Pickens, who has big plans for it, has also corrected quite sharply on the back of correcting oil. However, things in Asia are quite a bit different.
One thing that needs to be stressed is that natural gas is not a worldwide commodity in the sense that there is a unified world market, with unified prices for it. It’s still a pretty fragmented market. This is understandable, as there is not a worldwide connected network of pipelines.
And the alternative mode of transport is not cheap, transporting it via tankers. The stuff needs to be cooled at really very low temperatures (minus 161 degrees Celcius, or minus 258 degrees Fahrenheit, if you must know).
Also, much of the market is governed by bilateral long-term supply contracts which have specific pricing formulas, so we can really say that many different prices exist, there is no unified worldwide natural gas price.
Having said that, the market is globalizing though, and big price differences have caused tankers with LNG to change course in mid-ocean, to go to a destination with a more favourable pricing regime.
Now, as we have argued before, Asia really is the place to be for natural gas. In the US, they are sort of rediscovering it as the price increases have made previously uneconomical shale gas and other forms of so called tight gas.
Tight gas sits within rock that doesn’t allow it to flow much, if at all, so many more wells have to be drilled and the wells themselves have to be treated, making this kind of gas much more expensive to develop.
But the booming demand is really in Asia, and the booming demand coincides with supply shortage. Combine the two and what do you have.. rising prices. It’s not hard to explain why natural gas is in such demand in Asia:
- Fast growing economies with rising energy needs and few local resources need to get their hands on any kind of energy
- Watch the extraordinary measures they have to take in China to get the air clean enough for the Olympic Games, the need for relatively clean energy is even much higher than that for energy in general.
Now, this from Bloomberg this morning:
- “The Big Three (Japan, South Korea and Spain) and other Asian buyers (mainly Taiwan, China and India) will continue to pick up cargoes at prices higher than prevailing in either North America or northern Europe,” Pan EurAsian Enterprises Inc., a U.S. LNG consultant, said in a report yesterday.
- India may have paid as much as $20 per million British thermal units for a spot cargo this month, Nick Davies, chief executive officer of Brisbane-based Arrow Energy Ltd., said at a conference in Singapore on July 29.
- A spot LNG cargo typically weighs between 55,000 and 60,000 tons. LNG is natural gas chilled to liquid form, reducing it to one-six-hundredth of its original volume
By the way, if you didn’t know, a ‘British thermal unit’ is equal to a thousand cubic feet, or 1Mcf, so this indicates that they paid more than twice the Henry Hub spot rate of this morning ($9.35 per Mcf) the most used spot rate in the US.