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Get set for volatility: a new future for gas

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Prices are down, supply is up and the future looks bright. But in a sector marked by change and uncertainty, what are the big issues for gas?

Ben van Gils, Leader of our Global Power & Utilities Center, has worked for years with clients in the gas industry. Plug in asked him what he sees as the top five issues for gas right now:

  1. Pricing volatility

  2. In an industry dominated by long-term contracts (particularly in Europe), a switch to volatile pricing mechanisms will be a huge change:

    “Utilities must prepare for volatility in an industry that was absolutely characterized by long-term stability. That is the main challenge right now,” Van Gils says.

    Companies should start building price volatility into their risk identification and procurement strategies.

  3. Shale gas — the game changer

  4. Van Gils recalls the uncertainty at the World Gas Conference in 2006 around the future of the industry. In 2012, “it’s obvious,” he says, “that we have so much gas we don’t even know what to do with it.”

    “The supply is so plentiful and it will come from totally different parts of the world than we are used to. The entire geographic spread of the sector will change.”

    This is having a huge impact on the industry, says van Gils.

    “All of a sudden, gas is a global business, not because of transportation or market limits, but because of the geographic spread of where shale gas is produced.”

  5. A role in renewables

  6. The increased global push toward renewable energy creates opportunities, according to van Gils.

    “In a market where renewables are important, you must always have fallback installed generation for when the wind doesn’t blow and mills don’t work.

    “Gas is ideal because it is extremely flexible, with new technology allowing gas-fired backup to be switched up and down quickly.”

    Gas may even be the “solution for the future” in terms of cleaner energy challenges and reducing carbon emissions.

    “At the moment, post-Kyoto Protocol negotiations are dominated by politics. If we transfer the discussion to energy sources, gas can be an influencer in reshaping the whole energy market.”

  7. Investment pressures

  8. While current gas prices are low, a predicted growth in demand puts pressure on utilities to prepare now. The balance between current and future needs is one of their biggest challenges, says van Gils.

    “Utilities must invest in two competing priorities,” he explains.

    “The first is replacing existing infrastructure around the world, especially in America and Europe. The second is expansion, and the need to fund new investments.

    “But the profit margins they are allowed to realize in a regulated market are simply not high enough to satisfy both needs.”

  9. Responsibility of the regulator

  10. This is where the regulator plays a “tremendous role” in gas’ future, says van Gils, who also points out the connectivity between gas and electricity.

    “Pressure from the regulator not only keeps gas prices low but also influences the reasonably low electricity prices. If utilities’ profit margins go down, the gas market will be in big trouble, firstly because utilities won’t have the funds they need and, secondly, because the electricity market will immediately follow.

    “The regulator must allow for sustainable electricity prices which are not influenced by lower gas prices and therefore help utilities maintain a steady profit margin and enough liquidity to fund both replacement, and new, investments.”

    Utilities are urged to protect their positions in the current regulatory environment.

Future issues of Plug in will examine some of these issues in greater depth.

The bright future for gas

While demand for gas is down in the Eurozone, longer-term global energy demand growth prospects remain largely unaffected, mostly because of the expected future energy needs of non-OECD countries. A recent report by the International Energy Agency (IEA) suggests a “golden age” for gas, driven by three key factors:

  • China’s expected implementation of an ambitious policy for gas use
  • Lower predicted growth for nuclear energy
  • More use of gas in road transportation.

The IEA says an increase in production equivalent to about three times Russia’s current production will be needed simply to meet gas demand in 2035. ”1

How we can help

Utility businesses must continuously assess the potential impact of market conditions on their operations and capital base. Our Transaction Advisory Services team works with clients to help them make better and more informed decisions about strategically managing capital and transactions in a changing world.

1 Are we entering a golden age of gas? World Energy Outlook 2011, Special Report. International Energy Agency, 2011.

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