DCP228 and Business Electricity
What is DCP228? DCP228 is a regulation to be introduced by Ofgem in April 2018 which will change the way busin...Read More
The global gas industry is in a state of flux that could see a switch from over-supply to a serious shortage from 2022 onwards, according to McKinsey Energy Insights’ Global Gas Outlook to 2030.
Predicting business gas rates has been challenging due to narrowing divergence between business gas prices paid by different regions, the low cost of oil, and economic uncertainty in Asia.
The report from respected multinational management consulting firm McKinsey offers analysis, not just of short- and medium-term trends, but also the regional and economic factors driving the gas industry for anticipated market dynamics until 2030.
McKinsey finds that “a new pricing paradigm” will have significant effects. A strong global gas market growth over the last decade – driven in part by a surge in LNG supply – lining regional markets and opening new supply routes. Nevertheless, the report finds, independently operating regional markets linger and have translated to diverged prices.
In Europe, an economic slowdown means gas demand has stagnated, with gas generation not reaching the levels some predicted. Still, business gas prices have remained relatively high because of increasingly costly gas supplies from ageing North Sea fields and long distance pipe imports.
However, this situation is undergoing rapid changes. What McKinsey calls ‘partial convergence’ is starting to happen, with regional price differences beginning to fade.
Tumbling global oil prices have put downward pressure on business gas prices, with the cost per unit plummeting by around 50% between mid-2014 and mid-2015. Growth in liquid natural gas (LNG) demand is expected to remain strong in the short term at around 5% per year.
Cheaper business gas may be expected in the medium term as supply surges to 2020: McKinsey expects LNG volumes to show their fastest ever increase as a result of new liquefaction facilities coming online in the US and Australia. Australia is expected to match Qatar as the world’s leading LNG exporter by 2019, with the US following closely behind as third largest in 2020.
Shale business gas (obtained through hydraulic fracturing or ‘fracking’) looks set to deliver 60% growth between 2015 and 2030
The regionalised business gas pricing structure could diminish as exports ramp up.
But the longer term outlook is more uncertain, with demand governed in a large part by Asia’s increasing appetite for gas. The recent economic turmoil in China makes longer term demand difficult to predict. The uncertain outlook for the countries that will make up more than 90% of total new volume demand over the next 15 years – India, Pakistan and ASEAN countries – means the supply-demand dynamic for business gas is hard to forecast.
Nevertheless, McKinsey believes that a substantial amount of new business gas export supply capacity will be required by 2030 to satisfy Asia’s increasing appetite for gas.
Lower oil prices could both limit demand for LNG and constrain the ability of energy companies to make investments. A tightening global gas market could see a return to divergence in regional business gas prices.
What does this mean for your business gas tariffs?
In the short term, increased LNG imports as a result of global oversupply will create downward price pressure. Business gas originally intended for Asia will remain in Europe, further adding to an already over-contracted market.
Despite a shift towards gas-fired vehicles and ships, stagnation in other markets and competition from cheap coal (helping keep gas power plants offline) should offer a glut of gas for businesses and consumers.
In the medium term, though, additional imports of business gas will be needed to replace declining domestic production.
As Rembrandt Sutorius, General Manager responsible for the global gas service line at Energy Insights, points out: “Predicting the gas market with any great certainty is a challenge – this year alone we’ve seen tumbling oil prices, a slowdown in the Chinese economy and the defrosting of international relations with Iran – incidents which are typical of the diverse drivers of change in the industry.”
One thing is clear, however: the business gas glut means now is an excellent time to compare business gas suppliers. A cold snap could see a short term spike, and deeper structural changes could make putting in place a longer business gas contract advisable.
Our dedicated page has lots more information about business gas.
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