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US gas price needs rise to $4-$5/MMBtu to secure new developments: IGU

Highlights

There is no evidence of a slowdown in the growth of supplies of natural gas to world markets despite low prices, senior officials at global industry group the International Gas Union said Friday, but they warned that US prices would need to rise to $4-$5/MMBtu to encourage investment in new projects and to guarantee a continued abundance of gas supply.

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The fall in gas prices across the globe -- and particularly in North America, where prices are currently pegged at less than $2.40/MMBtu -- has triggered concern over future upstream investments.

"We're seeing investments being curtailed in some of the next tranche of early LNG developments," Mel Ydreos, the chairman of the IGU's coordination committee, told Platts in an interview.

"If you look at Canada, it's questionable when [final investment decisions] will be reached for some of those projects," he said.


"But there's so much supply coming into the market that we're in an excellent position for quite a while," he added.

But, Ydreos said, the current low price in the US was not incentive enough for upstream companies to invest in the development of new gas resources.

"In the US, $3/MMBtu gas is really not sustainable in the long run if you want to continue to have the abundance. A movement toward $4-$5/MMBtu is likely needed to continue to aggressively pursue resources," he said.

"Whether [low prices] are a good thing for the ultimate long-term supply situation, that remains to be seen," he added.

TECHNICAL INNOVATION

With gas prices so low in North America, producers have had to find ways to keep costs down to make production economically viable.

"There is a significant effort and focus on lowering extraction costs and innovating," Ydreos said.

"In the US, there have been tremendous innovations where literally productivity has doubled in the last two years. There's a real focus on ensuring that we're able to pull the resource out by being innovative to lower extraction costs," he added.

The increased use of gas as a cleaner fuel can also encourage upstream companies to invest in new developments.

"If governments are serious about confronting an issue that needs to be urgently addressed -- urban air quality -- and begin to deploy gas in a greater way, that will encourage continued investment into the development of resources, the development of LNG and the development of regasification [facilities]," Ydreos said.

"And all of that drives you to a much more liquid and hopefully global price environment," he added.

MARKET TRANSPARENCY

IGU Secretary General Paul Rasmussen added that transparency was increasing across markets.

"Gas markets are becoming more liquid and with the development of trading hubs, much more transparent," he said.

Prices are also becoming less linked to rival fuels such as oil, with gas hubs providing important price signals.

"I think gas to gas competition is likely where we're transitioning to, particularly as LNG becomes more prominent," Ydreos said, rejecting any increase in usage of other pricing systems such as coal-indexation, especially in Europe.

Gas prices across the world are increasingly aligning -- with the exception of the US.

"There has been significant convergence in the last 12 months, all related to abundant supply," Ydreos said.

Rasmussen said that the rise of LNG from places such as Australia, as well as expected new supply from Tanzania and Mozambique in East Africa, would work to benefit the environmental agendas of consumer countries like China.

"All this is part of the program to improve air quality in mega cities in China, so we'll see more on the export side," Rasmussen said.

Indeed, part of the IGU's mandate is to promote gas at the next UN Conference on Climate Change in Paris starting next month.

"Our view is that irrespective of whether there is a binding deal that results, or some agreement that is more voluntary, our focus is not on the event, but what happens after the event," Ydreos said.

He said the IGU hopes that countries will look to use gas more "to their benefit" and to reach whatever climate change targets need to be reached.

--Stuart Elliott, stuart.elliott@platts.com
--Edited by Keiron Greenhalgh, keiron.greenhalgh@platts.com