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Are low gas prices a game changer?

27 April 2016

Gas price fluctuations bring an element of uncertainty to the business case for projects that reduce gas consumption. Fast returns for a low capital investment are clearly the safest option, says Alan O’Brien, CEO of Sabien Technology.

When evaluating the feasibility of an energy-saving project, the accompanying business case should ideally include the potential for financial savings based on energy prices through the duration of the planned project.

In the case of gas, a combination of factors has caused considerable fluctuation in prices with an overall downward trend. In the UK, natural gas prices have fallen by over 50% since 2014.

Knowing if this trend is set to continue and if gas prices are set to remain relatively low for the foreseeable future is clearly important. If prices are to remain low, this must influence the commercial viability of projects designed to reduce gas consumption.

In particular, low gas prices will mitigate against large capital projects such as plant replacement – favouring proven retrofit controls that deliver a fast return even when prices are low, and an even faster return when prices are high. When prices are stable and/or high the remit has always been to maintain and/or reduce gas consumption.

When the pricing forecast is soft the remit is no different as your CO2 emissions are still the same no matter what price you are paying for your gas now or in the future. The key question is, how certain can we be that gas prices will remain low?

There are a number of factors that will influence this. For instance, there are strong indications that low cost shale gas from the USA will exert a downward pressure on prices over the medium to long term.

In the next three years the USA is set to increase its liquid natural gas (LNG) capacity for export to the Asian and European markets from virtually zero to 10.4Bcf/d (billion cubic feet per day). For quite a while it was believed that US LNG would undercut gas piped from the North Sea and Russia, and LNG from Qatar.

However, the fall in global commodity pricing has impacted on the returns that US LNG producers can expect from investing in additional infrastructure, potentially constraining their ability to undercut. Alongside this, Russian producers have stated a desire to maintain their current EU market share.

This, combined with depreciation of the Ruble, suggests that the cost of gas from new Russian fields will be lower than US shale gas. Moreover, global LNG capacity is set to grow by 28% by 2018. There are also other factors that will influence gas prices, such as the increased use of renewable energy technologies, but it does seem clear that competition for gas markets between the major producers will result in low prices for the next few years.

From the energy manager’s point of view this continues to focus the mind on energy-saving measures that meet their organisation’s investment criteria at these low prices.

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