The gas market goes global

By Tim King

Date: 14/07/05

The resilience and elasticity of the world's oil markets have been tested by jumps in demand and higher prices but, according to one of the world's leading corporate players, they have proved more than equal to the task.

Europe's gas markets, on the other hand, have yet to develop the same capacities even if some significant advances are now being made.

A visit to Brussels this week (12 July) by BP's chief economist Peter Davies coincided with a meeting of EU finance ministers at which the European Commission was admitting that its economic forecasts were based on outdated assumptions about energy prices.

Crude oil prices are now more than $55 a barrel (@45), albeit down from their previous levels in excess of $60 a barrel.

But Davies, who was in town to discuss BP's annual statistical review of energy, was upbeat about how markets had responded to unexpected developments in 2004, when oil demand grew by double the normal rate of growth.

This was due, in the main, to growth in China. Last year was, he said, the first in which China had had a real impact on world energy markets, having previously met demand growth internally from its own supplies. But in 2004, increased demand from China had principally been met by capacity increase from Russia.

"I think the message of the last year or so is that the world can get through a lot of transition and disruption and none of us had to line up at the petrol pumps. The international oil market has been allowed to do its job," he said.

While conceding that there was not much spare capacity, he said that 2005 would be "a much more normal year".

Assumptions about oil prices were having an effect on oil companies' calculations of what constituted economically viable reserves that were worth exploiting. Whereas the assumption for investment purposes used to be of an oil price of $16 a barrel, which crept up to $20, now, he said, "some investments are being made on the basis of higher prices at $25-$30".

The UK's North Sea oilfields would continue to decline, but the decline would be slowed by the high prices. There was beginning to be some investment in heavy oils, despite the cost of mining such reserves, found in Canada, Alaska and Venezuela.

Davies underlined the growing importance of oil from the former Soviet Union (Russia and the Caspian Sea area) to the growth in oil production and consumption. The Bakhu-Ceyhan pipeline was filling up and would be supplying a million barrels a day within three years. A pipeline was being built eastwards from Russia, which would contribute to the integration of the world's oil markets.

Davies' analysis of Europe's gas market was of a less fluid, less integrated market on the brink of significant changes. Liberalisation had moved things on from a starting point of regulated national utilities but "the infrastructure is not yet there". Nevertheless, he identified various significant developments.

There were new sources of gas supply coming into the EU. Supplies of liquefied natural gas (LNG) from Trinidad, Qatar, Egypt and Nigeria were coming on-stream with the UK expanding the capacity of its port terminals and becoming a net importer of gas. Libya and Azerbaijan were also supplying gas. The interconnector capacity between the UK and Belgium was being expanded. Earlier this month the construction of a gas pipeline between Turkey and Greece was officially inaugurated. Turkey was becoming a hub for gas imports.

"We are going to find the gas market becomes increasingly global. Europe will be surrounded by all these suppliers," Davies said.

Article takes a look at European gas market which, according to the author, had yet to develop the same capacities as the oil markets, even if some significant advances were being made.

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