ANALYSIS
Europe has about six per cent of the world’s technically recoverable shale gas reserves. However, European shale gas developments will likely require more time because land resources and the political and regulatory environment are not expected to favour any significant shale gas production before 2020. Based on A.T. Kearney scenarios, European shale gas production in 2035 could account for two to 10 per cent of total domestic consumption. Europe is therefore expected to continue to rely on imports of both piped gas and LNG to meet its internal demand. Shale gas impact on the GCC The impact of US shale gas on the GCC has been rather limited so far, but shale gas could represent both an opportunity and a threat for the GCC countries in the future. The effects vary widely across the region. The challenges faced by gas-rich Qatar are substantially different than those faced by the other gasshort GCC countries. We expect shale gas will cause no major disruption to the GCC before 2020, but the scenario could be fundamentally different in the longer term. Qatar faces potential threats. Qatar, the world’s largest exporter of LNG with a capacity of 77 MTPA, enjoys long-term gas contracts linked to the price of oil. However, the contract structure is coming under pressure as customers, encouraged by new natural gas supplies, are looking to end the indexation to oil prices and seek shorter, more flexible agreements. For example, Asian customers, currently representing almost half of Qatar’s LNG exports and paying a price premium of US$5 to US$7 per MMbtu, are trying to secure natural gas supplies from North America. As mentioned above, Japan and India have already signed agreements with North America linked to the Henry Hub price. In Europe, where the gas supply is more diversified and prices more competitive, Qatar is facing the same issues. For instance, the United Kingdom recently signed a contract with Qatar for only five years. The biggest threat for Qatar in the medium to long term is major unconventional gas developments and over investments in LNG capacity, potentially resulting in overcapacity and pressures on the price of natural gas in all major markets. Future shale gas exports from North America, and shale gas developments
Figure 5
The world’s ethylene capacity is expected to rise well above demand Global ethylene capacity vs. demand (in million metric tons)
Sources: A.T Kearney analysis
in China and other markets, are still uncertain and are not likely to have any relevant effect on Qatar until after 2020. The realisation of all the announced LNG projects could result in an oversupply in 2015-2020, creating favourable demand-side economics. However, project delays and cancellations are likely because the uncertainty in the natural
gas market is making buyers increasingly reluctant to sign the long-term contracts that have traditionally underpinned large LNG projects and is resulting in more difficulties in achieving the final investment decision. The Qatar National Development Strategy is based on an LNG price (cost, insurance, and freight) of US$9.60 per MMBtu. In 2012, the average price of Qatari LNG was about 40 per cent higher, with substantial differences across markets. (For example, Japanese LNG prices averaged US$17 per MMBtu while European prices have been more restrained at US$11 per MMBtu.) A drop in the price of LNG would directly impact Qatari GDP and net government savings. For example, a price drop of 30 per cent to US$6.90 per MMBtu would cause a reduction of Qatar’s GDP by about US$100 billion over a five-year time frame and a decrease in net government savings from 5.7 to two per cent of GDP. The other GCC countries could benefit from shale gas but also face threats of natural gas substitution for oil. GCC countries other than Qatar face natural gas shortages as a result of sustained growth in domestic energy consumption. The UAE and Kuwait have recently turned into net importers of natural gas, and Saudi Arabia is burning an increasing amount of oil to meet its growing domestic demand. Both the UAE and Kuwait
Figure 6
Armed with a supply of ethylene, North America is poised for explosive polyethylene export growth North American ethylene derivative supply (% of installed capacity)
North American polyethylene export (million metric tons)
Sources: A.T Kearney analysis
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