Emergence of energy policies in Asia.
Rapidly growing Asian nations like India and China know that they must do something to mitigate their aggressively growing dependency on energy, especially oil. Last year, India’s leadership began discussing a long-term, visionary energy policy. Energy policies have much more influence than market forces in effecting change, especially on the demand side. With prices remaining volatile in 2006, governments will start becoming more visible in addressing energy issues in Asia. But will North American policy makers follow?
8. Narrowing of the global natural gas price arbitrage. In the past one of the biggest energy anomalies in the world has been the huge price gap between expensive natural gas markets, like the US and the UK, and other parts of the world. For example, when the price of natural gas at Henry Hub was $12.00 per mmbtu, in North Africa it was $3.00 per mmbtu. Markets quickly sniff out such ‘arbitrage’ opportunities and work to close the gap. The reason for the price anomalies is that natural gas is difficult to transport across long distances. Without pipeline access or liquefaction facilities, natural gas reserves in low value regions are ‘stranded,’ because the gas can’t get to market. That’s changing with the global construction boom in natural gas pipelines and liquefied natural gas (“LNG”) facilities. Many believe that cheaper natural gas from places like Trinidad, Qatar, Iran and Russia will eventually make it to North America, bringing US and Canadian prices down. There is no question that the arbitrage will eventually narrow as pipelines and LNG facilities are built. But it’s much more likely that global natural gas prices will rise closer to North American prices, not the other way around. Similar to oil, global natural gas resources are heavily concentrated under NOC control, with Russia, Iran and Qatar holding the lion’s share. What is the incentive of such countries to give their natural gas away at lower prices?
disruptions after last fall’s hurricanes caused legitimate concern about natural gas supply in advance of winter, causing the normal WTI-to-Henry Hub price ratio of about 6.5x to narrow to 4.0x. A mild winter so far, combined with disruptions in industrial demand, have led to acceptable levels of natural gas to remain in storage. There may still be some cold spells and large storage withdrawals to come during the remainder of the winter season. Prices will rally and the WTI-to-Henry Hub ratio will narrow. But don’t expect it to last. With oil at $60.00 per barrel, natural gas prices above $10.00 per mmbtu, as we experienced in 2005, are not sustainable.
10. North American gas markets will ‘see’ LNG. There are half-a-dozen LNG receiving terminals that are likely to come on line in North America by the end of this decade. Up to 6 bcf per day of new natural gas will be supplied to our domestic markets. To this point, the time horizon for these facilities has been ‘years away.’ With the first of the facilities likely to come on line in 2007, the reality will start to become much closer for the market to grasp this year. As these new LNG facilities become more ‘visible’ to the market, the forward price curve for natural gas is likely to become more stable, and less influenced by near-term seasonal factors. Cautionary Statement: “10 Themes Affecting Commodiy Prices in 2006” is provided by management of ARC Resources and contains projections, beliefs and other forward looking statements. Such statements are based on assumptions that involve a number of risks and uncertainties, including those referenced in this Annual Report in Management’s Discussion and Analysis. Results may differ materially from such statements for a wide variety of reasons, including geopolitical events, and economic, market and business conditions. Investors should consult their own advisors in relation to any investment decisions.
As long-term contracts expire, the global natural gas arbitrage will narrow over the coming years. And contracts may not mean much. NOCs representing both small and large producing countries have demonstrated their muscle. As they’ve done for oil, they will seek to extract as much value from natural gas as possible. We may see it happen this year.
9. A return to a normal trading ratio for natural gas. In the first couple of months in 2006, the price of natural gas at Henry Hub has fallen by about 45 per cent, down to around $7.00 per mmbtu. Although some are viewing this as a price collapse, we see it as a return to normal. Gulf Coast production