The Commodity Dictates the Trade

In the twentieth century, we used to characterize the different markets according to the supply/demand balance and whether it is favoring the sellers or the buyers in any trade regardless of the commodity being traded.

However, in the first decade that elapsed from the twenty-first century, the Oil and Gas trade can no longer be defined any more as a Seller’s Market – where supply is tight and demand is on the rise – or a Buyer’s Market – where supply is abundant and demand is volatile due to recession or other factors – it is indeed a Commodity Market. The traditional questions of who is selling and who is buying are not in fashion anymore, now it is a question of what the Commodity under question is and who is in need of it. A number of analysts link the economic slowdown that hit the world in 2007 directly to the historical high prices of crude oil that led to a chain reaction: gasoline became the strategic commodity that takes top priority on the pay list, and consequently the mortgage installment was pushed off the list and the rest is history. A decision to increase prices in the case of commodities like gasoline – with a direct effect on transportation cost – or natural gas – with a direct effect on electricity costs – can be considered political suicide in a number of developed and developing countries alike.

If we take gas market dynamics for example, there is a total delink between LNG global pricing indices nowadays. The US price mainly referenced to Henry Hub is US$2-3/MMBTU while Europe and Japan/Korea price markers are in the US$13-15/MMBTU bracket. The introduction of low-cost fracturing techniques to produce shale gas reservoirs, especially in North America, changed the gas availability balance in North America to the extent that the traditional import cost buildup that dominated Henry Hub for decades has changed for good. All of a sudden, the US has become a potential exporter of LNG, and it is now normal to witness heated discussions in the Congress about “how to protect Homeland Natural Resources”! The same debate that was often triggered by Petroleum exports of Middle-East countries, and why aren’t these countries maximizing the value of the commodity by using it in further applications on its own homeland.

The World is witnessing a sharp increase in domestic power demand of in a number of regions: China, India, Iraq, and in GCC as well. And given that more than 60% of the power generation around the world is currently fed by natural gas, it is very obvious that gas demand is on the rise more than ever.

Egypt’s dilemma of balancing gas export commitments and/or opportunities versus domestic needs of the commodity is well known and doesn’t seem to be reaching to an equilibrium point soon. The Egyptian authorities accepted the fact that gas as a commodity is needed domestically and that export is becoming a burden rather than an advantage. However, the domestic market demand – increasing at 2-3% per annum – is primarily gas-to-power and its value is hindered by subsidies. On The other hand, the gas export option provides an additional edge for Egypt to be more appealing to IOCs interest in the upstream sector, especially with the distinctive geographical location of Egypt in the heart of the Middle East, with a long Mediterranean shore line, and easy access to the Suez Canal. So Egypt is geographically well suited to play an export and/or transit hub role equidistantly to Europe and Asia, making use of its own resources as well as potential supplies from other countries by pipeline (from Iraq for example). If upstream investments are not steadily increased, automatically the growth in adding proven reserves will be negatively affected. Consequently, the ability of Egypt to keep meeting its energy demand even to fulfill the increase in domestic demand itself will be questionable. And the Petroleum sector’s contribution to the overall FDI of Egypt will be compromised.         

The GCC is no exception to this phenomenon. When we see LNG FSRU being commissioned in GCC states like Kuwait and Dubai to receive LNG imports from Qatar via LNG carriers, designed to cover 2,000+ miles journeys, being used to deliver LNG just 300-400 miles away from the shipping source, then definitely we are in a new era: an era in which the need for the commodity drives the purchase decision, regardless of how expensive it seems to be. Kuwait with all its crude oil production can’t run its power plants on liquid fuel, and Abu Dhabi – the neighbor state of Dubai and its partner in the same Federal Unity of UAE – will not spare gas to help Dubai while her own gas balance is in deficit.

And what an irony in Iraq: the flared gas quantities in the South of Iraq, more than 700 mmscfd, are enough to feed power stations capable of producing up to 3,000 MW of electricity while the Iraqi national grid currently supplies electricity for 2-4 hours per day. If we look further North, to the region of Kurdistan, we find that Iraq has succeeded in developing part of its gas potential swiftly, with the help of independent IOCs like Dana Gas and Crescent Petroleum, and two thirds of the Kurdistan region’s power demand is fed by locally produced 300 mmscfd of gas from the Kor Mor field. The Kurdistan Region’s public electricity supply is consistent almost 24/7 all year round despite the extreme weather: very cold in winter and very hot in summer. Despite the large annual budget for Iraq, more than US$130 Billion in 2011/12, there is a lack of electricity due to the lack of gas, and it is tarnishing the Baghdad Government’s achievements in oil infrastructure and exports. The comparison is always favoring the success of the Kurdistan Regional Government in providing the commodity needed for the welfare of the people, such as a sustainable supply of electricity, which is a natural measure of improvement in living standards in the developing world.           

Whether you are in the US, in Egypt, or in GCC states, in the twenty-first century, the commodity dictates the trade.

By Walid Hebeika, PhD , Energy Consultant


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