Feature: Unfettered global natural gas market a sign of the times

London — Unless a deal is brokered between the world's biggest oil producers in the near future, the global oil market may start to look a lot more like its gas equivalent, with output effectively unchecked.

The global gas market does not have an OPEC or any other grouping of producers deciding a supply -- or price -- strategy.

There is no history of coordinated action on production and the closest thing to a "Gas OPEC" -- the Gas Exporting Countries Forum (GECF) -- has repeatedly ruled out joint intervention in the market.

"Lack of coordination in global gas always offered a preview to what we're seeing now in oil markets," Ira Joseph, S&P Global Platts head of global gas and power analytics, said Thursday.

Some producers take their own approach to dealing with market dynamics -- Norway's Equinor, for example, can optimize its domestic gas output, deferring production to a later date when prices are too low.

And some spot-exposed LNG producers -- such as Egypt -- halt output when prices fall below the cost of producing.

There can also be infrastructure constraints. Russia's Gazprom, for example, can only supply as much gas as its export pipelines allow.

GLOBALIZED MARKET

But with the gas market becoming increasingly globalized, the battle for market share seems to have moved up a gear, with producers keen to cement their positions in the world's key markets, particularly Europe.

With global gas and LNG prices at record lows -- from the Henry Hub in the US, to the TTF in Europe and the JKM in northeast Asia -- the question is who will move to limit supply first to let prices recover, and suffer lost market share in the process.

Joseph said the big three LNG suppliers -- Australia, Qatar and the US -- were maintaining record high seasonal production utilization of around 97%, despite record low pricing.

And in Europe, Russian pipeline gas has to compete with surplus LNG likely to land on its shores in 2020.

"Europe is the final resting place for gas during Q2/Q3, and right now it's absorbing 100% of LNG supply growth, so it's difficult for Russia to back off like it used to do," Joseph said.

Jean-Baptiste Dubreuil, head of gas analysis at the International Energy Agency, said in a recent interview that all producers and exporters were likely to be looking at options to "optimize their commercial position and create some short-term operational flexibility" given the ample global supply and potential demand slowdown.

But the rapid decline in prices and the demand implications of the coronavirus means decisions may have to be made sooner rather than later.

"It is not just those with the highest costs, it is also those whose governments and banks will not stand behind their losses who will eventually have to turn down," Jonathan Stern, leading gas analyst at the Oxford Institute for Energy Studies, said.

"As gas storages become full -- maybe as early as June/July -- things get really ugly for suppliers, and that's without knowing how bad the coronavirus impact on demand will be."

RUSSIA STANCE

Russia -- despite regularly extolling the virtues of its low-cost gas -- is not immune either as low prices eat into treasury revenues, but it may feel vindicated in its view of US LNG.

Stern said a parallel to current developments in the oil market would be that Russia would be "happy to see US LNG exporters suffer."

"And others won't be too distressed either," he said.

While Gazprom publicly has said its strategy is to retain a European market share of at least 35% and 200 Bcm/year of exports, it has also repeatedly dissed the competitiveness of US LNG in Europe.

In a most recent investor presentation in February, it said: "With global prices at a 10-year low in the winter season, LNG prices for deliveries from the Atlantic coast do not cover even the short-run marginal costs."

"Low breakeven costs provide Gazprom with a strong competitive advantage over spot LNG deliveries," it said.

However, Platts Analytics' Joseph points out that US LNG is still likely to come to Europe in a continued weak price environment. "US LNG becomes a bigger problem for Russia because netbacks suggest more of it will be dumped into Europe," he said.

While Moscow joined in the oil production cuts of the OPEC+ alliance for a while, in the end it abandoned the strategy and it's once again every producer for itself -- at least for now.

Was the Kremlin swayed by Gazprom's success in retaining European gas market share -- albeit at lower prices -- and set about prioritizing oil volumes over price?

Maybe. And maybe Moscow considers having a bigger piece of a cheap pie better than having a smaller piece of a more expensive one.

Since the start of LNG exports from the US Lower 48 in 2016, Gazprom has pumped more gas to Europe than ever before, hitting a record level of 201 Bcm in 2018.

It is also more pro-active in its selling strategy thanks to the launch in late 2018 of its Electronic Sales Platform, which helped it keep its sales in Europe at close to record highs last year.

"The development of sales on the ESP -- and direct spot sales on hubs -- shows Russia's increasing role as a shorter-term supplier to Europe," the IEA's Dubreuil said.

NORWAY, QATAR

Equinor -- which many had expected to cut production again this summer -- may be driving toward a market share strategy too.

Last summer, the company deliberately held back production in the hope of achieving higher prices later, but the company has hinted it will not follow that strategy again this year, saying it can get gas to market for less than $2/MMBtu.

Then there is Qatar, until recently the world's biggest LNG supplier by a mile until Australia caught up with its huge production expansion.

Qatar is also in a favorable position in terms of costs, with the head of Qatar Petroleum, Saad al-Kaabi, saying in October that he was focused squarely on being the lowest-cost LNG producer so that Qatar would always be guaranteed a market.

"We don't compete with anyone," Kaabi said. "I don't pay attention to that."

The OIES' Stern, though, said even Doha would be feeling the pinch of low prices. "Even Qatar will not make much money with gas and oil prices at current levels -- and that's saying something," he said.

Whether a move back to coordinated market intervention within OPEC itself or with its former OPEC+ allies comes soon remains to be seen, but the current carnage on the gas markets could be a warning to producers of the risk of letting market forces decide who wins and who loses.