FLOATING LNG REGAS HAS POTENTIAL FOR SIGNIFICANT GROWTH

The liquefied natural gas (LNG) industry, once thought to be inflexible, continues to show its adaptability. The availability of significant volumes of flexible LNG in the market has created opportunities for LNG to enter new markets at attractive prices. Some of these markets may not justify traditional regasification terminals, either because they require volumes to be delivered only on a seasonal or sporadic basis or because they require relatively small volumes. Floating regasification—which was first deployed to reach inaccessible markets and to capitalize on short-term arbitrage opportunities in the Atlantic Basin—is enabling players to target these markets.

• A new market for floating regasification. The ability to fast-track regas access for new LNG importers, the lower upfront capital investment than for traditional onshore facilities, and the current abundant availability of low-cost (relative to oil) spot cargoes have breathed new life into this market segment.
• Shipping underutilized. The low levels of utilization currently prevalent in the LNG fleet means that there are vessels available for conversion for use as regasification vessels. This abundance and ensuing low spot charter rates reduce the opportunity cost of making such a conversion. Several purpose-built ships are already part of the fleet.
• Floating regasification will remain the choice for niche markets. Limited storage capacities and relatively low regas capacities make floating regas an attractive choice for seasonal gas supply in the absence of a sufficiently integrated national pipeline network and for importers with immediate but potentially impermanent demand for LNG. Traditional oil-for-power plants are also looking to floating LNG as a way to lower fuel costs.

RUSSIA AND TURKEY ENERGY RELATIONS: A PARADIGM SHIFT AHEAD?

For over a year Turkey and Russia have been involved in an intense diplomatic exchange, leading to an unprecedented number of visits at the highest level. Such high-level efforts to deepen energy cooperation between Turkey and Russia have come at a time when Ankara’s traditionally pro-Western orientation is being widely debated.

But are Turkey and Russia indeed at the threshold of a major paradigm shift? We first examine the broader developments in Turkey’s foreign and energy policymaking as they illustrate the emergence of a setting conducive for testing new boundaries in Turkish-Russian relations. Next, we analyze the actual state of the overall energy relationship between Ankara and Moscow. We conclude that

• Turkey’s entreaties toward Russia are part of an increasingly multidimensional energy diplomacy. Ankara’s active energy diplomacy with Russia reflects its proactive foreign policy overall and certain internal developments.
• One of Ankara’s principal goals is "rebalancing" what it considers to be the one-sided nature of Turkey’s energy relations with Russia, but it appears that Turkey lacks sufficient leverage to really change the overall dimensions of the relationship, so disappointment may follow.
• It is too early to expect a paradigm shift in Turkish-Russian relations; neither side appears ready to take the decisive step that would shift energy cooperation to an entirely new level. Instead, both sides have strong reasons to delay a binding decision on the two key components of the ongoing bargain: the South Stream gas pipeline and the Samsun-Ceyhan oil pipeline. Furthermore, a number of other developments are at work that even over the next year could dramatically alter the underlying rationale for these centerpiece projects.

US INDUSTRIAL GAS DEMAND: A MODEST UPTURN IN THE SHORT TERM BUT NOT A LONG-TERM RENAISSANCE

Industrial natural gas demand is poised for a long-term decline. Although surging shale gas production has created the potential for a period of low natural gas prices, discussion of resurgent industrial gas demand ignores several factors. Knocked down by the 2008–09 economic recession, US industrial gas demand hit its lowest level in over two decades, averaging 16.8 billion cubic feet per day in 2009. Not a short-term pull-back, this decline is part of a gradual but substantial downward trend dating back to the mid-1990s. Although the nascent economic recovery and low gas prices will result in a partial recovery, in IHS CERA’s view industrial gas demand will not return near the levels of the early 2000s:

• Near-term recovery is overshadowed by systemic long-term decline. With an economic recovery and low natural gas prices, US industrial gas demand will rebound partially in the near term. However, considerable growth constraints in gas-intensive industries, efforts to reduce energy consumption, and recovering gas prices will likely mean further declines in total US industrial gas demand past 2015.
• The ten-year demand outlook for six of the seven natural gas–intensive industries is flat to declining given industry drivers. Only the chemicals sector shows growth potential if gas prices remain low. However, chemical makers are not planning significant new capacity investments, lacking sufficient confidence in low natural gas prices for the long term.
• Expectations for US gas demand growth rest on the electric power sector. With residential and commercial demand outlooks flat to declining, significant gas demand growth can only come from greater gas-fired electric generation.

EUROPEAN ENERGY MARKETS AND THE MULTISPEED ECONOMIC RECOVERY

The June 8 IHS CERA Roundtable Conference in Rome focused on the interconnected issues facing oil, gas, coal, and power markets, including the multispeed nature of the global economic recovery.

• The world economy is recovering, but the pace varies by region. Global economic growth has returned to a rate that is above the expectations at the start of 2010. Debt levels, which are at the core of the eurozone crisis, will continue to play an important role in slowing recovery in Europe. Economies are resilient, but the recovery in Europe will be slow.
• Supply and demand are out of balance in the oil, gas, carbon, and power markets. Short-term oil prices have been range bound in the past six months as strengthening demand has been offset by OPEC spare capacity. There are medium-term concerns about investment in new capacity. Coal prices are broadly stable going forward, driven by strong demand in China and India, but with a flat supply cost curve. Abundant gas supplies have depressed spot prices, creating a wide differential with oil-indexed long-term contract prices in Europe. This is expected to close as the global gas market tightens beginning in 2013. The economic recession has led to an oversupply of carbon credits that is keeping carbon prices low. Downward pressure on both natural gas and carbon prices will create a low price environment in the next two years for electric power.
• The oil spill in the Gulf of Mexico is not expected to have a major effect on supplies. IHS CERA expects tougher regulations on offshore drilling to reduce supply from the deepwater frontier by a modest 200,000 barrels per day by 2015, but the cancellation of new licensing rounds and the prospect of regulatory response in the United States and other countries may cause a greater long-term impact.

CLIMATE CHANGE AND CLEAN ENERGY FORUM WORKSHOPS HIGHLIGHT KEY GLOBAL POLICY, MARKET, AND TECHNOLOGY TRENDS

At the Climate Change and Clean Energy Forum (CCEF) Workshops in Washington, DC, May 26–27, 2010, and Rome on June 10, 2010, IHS CERA convened CCEF members to discuss our latest research.

• Landscape. Targeted policies have been and are likely to remain key drivers of clean energy investments.
• Policy analysis. Our analysis of the key US climate proposals shows that targeted policies will remain an important driver. It also shows that the "soft ceiling" proposed in the American Power Act is intended to provide more certainty—but the fact that the ceiling is likely to be exceeded creates a new set of risks.
• Scenario outlooks. Our planning outlook includes a climate bill that targets the power sector in the United States, but we do not foresee an increase in Europe’s 2020 targets and do not think all the targets in these key regions will be met.
• IHS CERA Green Spread. The cost premium for renewable energy has increased over the past five years, and a combination of changes, primarily in natural gas prices, would be required to close the cost gap.
• Targeted policies. The total cost of targeted policies is significant but potentially sustainable, depending on the willingness of consumers to pay higher power prices.
• Energy innovation. Understanding research, development, and demonstration funding; targets; and achievements can help companies recognize signposts for the future cost of carbon abatement, improve understanding of the potential pace of individual technology advancement, and identify opportunities for investment.
• Carbon abatement outside emissions trading. Offsets are a key driver of carbon prices. Understanding offset market fundamentals will be critical to understanding overall carbon market dynamics and assessing offset investment opportunities.