Global gas prices will start to converge soon, expert predicts
"It's hard to remember that 10 years ago the price of oil was $20 (a barrel)," said Edward Chow, a senior fellow in the energy and national security program at a Washington, D.C., think tank. "It's hard to know where all this is heading."
Unprecedented price volatility and market changes coming faster than ever are making it tougher to accurately forecast oil prices and market demand, Chow told an audience of almost 100 people at an Alaska World Affairs Council luncheon May 12 in Anchorage.
He did suggest, however, that global natural gas prices will start to consolidate, moving away from separate pricing in North America, Europe and Asia markets. "We will see a gas market in the next 10 to 15 years that will look a lot more like the globally connected oil markets," said Chow, who has 30 years experience in the oil industry, with 20 years at Chevron in the United States and overseas. He currently serves as a senior fellow at the Center for Strategic & International Studies in Washington.
Current spot prices for LNG delivered to Asia are almost double some European prices and maybe six times the price charged in U.S. markets. Analysts are far from unanimous, however, whether the growth of the global LNG tanker trade-making natural gas much more movable by sea than delivery by pipelines -will bring the world closer to a single gas price.
But with so much natural gas available worldwide, Chow said, over time price will be determined by gas-on-gas competition rather than gas-on-oil as is the historical norm in Japan where LNG is priced as a percentage of the price of oil.
The abundance of U.S. shale gas production is part of the global LNG equation, especially in the Atlantic basin, Chow said, noting that foreign LNG once intended for U.S. buyers is being diverted to Europe because it just isn't needed in North America.
Whether Alaska gas gets a share of the Asia LNG market will depend, in part, on the state being nimble enough to compete in the changing market, while offering stable fiscal terms to a project developer, Chow said. (Anchorage-based Northim Bank sponsored the World Affairs Council oil and gas series.)
"Having stable conditions is very, very important" to companies making investment decisions, he said. Alaska has to compete for investment dollars, while also competing with gas supplies from Australia, Mozambique and elsewhere, all chasing after Asia buyers.
And if the boom of U.S. shale gas can be replicated anywhere, "the Chinese will do it," Chow said, adding uncertainty to LNG demand in Asia.
Part of the problem for oil and gas investment decisions is the long lead time to develop a prospect. In this business, Chow said, "if you're lucky," it may take a company five to seven years to make its first dollar of return on an investment. But mega projects can take 10 to 15 years. Meanwhile, while waiting for production and cash to flow, the market and prices can change – a lot.
Anymore, oil prices are driven by sentiment rather than by supply-and-demand fundamentals, Chow said, pegging the "political risk premium" – the threat of war or political upheaval – at $20 per barrel.
"The peak oil theory is bunk," he said, dismissing the notion that world oil production has peaked and is headed down. Higher prices are drawing more oil out of the ground, and will continue to do so, Chow said. "Who knew we were going to find a significant oil field in Uganda," or a major gas find offshore Mozambique and another offshore Israel.
"The shale gas revolution is the best demonstration" of ingenuity and technology unlocking new reserves, he said.
Chow concluded his remarks with a more personal comment on U.S. energy policy and politics. America needs a national dialogue "not marked by slogans," he said. "We need politicians willing to risk political capital" to confront and deal with the nation's reliance on oil.
To that end, he said he supports a "really robust" increase in the federal tax on motor fuel. A minimum of 50 cents a gallon higher, with much of the money to go toward road work, he said. Driving up the cost of gasoline at the pump will help steer the nation away from imported oil as a transportation fuel.
But he acknowledged his gasoline tax is a losing election campaign.