Press releases

Oil and gas market news

23 March 2011

IFP Energies nouvelles (IFPEN) would like to express its deep sympathy and solidarity with the people of Japan.

The tragedy experienced by Japan with the earthquake and tsunami on 11 March, followed by a major nuclear incident, also has implications for the global energy sector. Looking beyond the possible medium-term effects on the nuclear industry, repercussions in oil and gas markets can also be expected this year. This creates additional uncertainty in a market in which developments in the situation in the Maghreb and the Middle East are still very difficult to predict.
IFPEN takes stock of the short-term implications.
 

How can contradictory changes in prices, a drop in oil prices on the one hand and a rise in short-term gas prices on the other hand, be explained?
The drop in the price of oil of just $3 per barrel until 14 March, has accelerated for Brent crude, the benchmark price for the European market. It dropped a further $3 per barrel during trading on 15 March to $110 per barrel, still remaining nevertheless at a high level (the average for 2010 was $80 per barrel). The cause lies in concern about the slowdown in global economic growth after the tragic events in Japan. The significant slump in financial markets confirms this concern. However the economic risk now counterbalances the geopolitical risk.
 
It should moreover be stressed that Japan is likely to require petroleum product imports (4.4 million barrels consumed per day, namely 5% of global demand), since 6 of its 27 refineries have been closed by the earthquake (affecting 1.3 million barrels per day out of a capacity of 4.6% million barrels per day). This factor could potentially lead to an upward trend.

Why has there been a rise in natural gas spot prices?
On the gas market, the rise in spot or short-term markets, can be explained by the fact that part of Japan’s nuclear capacity is unavailable. Eleven plants belonging to the Japanese operators Tepco, Tokyo Electric Power Co. and Tohoku Electric are at a standstill, representing a 10GW loss of power. If this were to be wholly compensated for by natural gas power stations this would represent volumes of 13Gm3 of gas to be purchased on the global liquefied gas market, i.e. 15% more than was imported in 2009 (Japan imported 86Gm³ in 2009 - source: Cedigaz). Japan could also look to coal or oil to meet the needs of the electricity sector. It should be recalled that the nuclear sector represented 34% of total electricity production.

Is the European gas market affected?
The liquefied natural gas (LNG) market, which enables gas to be transported over long distances, has become a world market with potential for arbitrage between the European market and the Asian market. For its part, the American market has become quasi-autonomous with the revolution in shale gas. The European spot price is therefore dependent on international conditions, with the current situation having an upward impact on prices. The UK price, which is the benchmark for Europe, is currently €25.5/Mwh ($10.5/MBtu) a price increase of nearly 10% since 8 March. It is now getting close to prices index-linked to oil or petroleum products used in long-term contracts on the continental market. This represents a turning point since the two markets had been largely unconnected since the economic downturn began (2010 average – UK market: €17/Mwh; Index-linked contracts – €22.9/Mwh).

Is it possible to tell what lies in the months ahead?
The future for markets has never been less clear given the situation in Japan on the one hand and in the Maghreb and Middle East on the other hand. It is extremely difficult to make predictions at the moment.
 
There is major uncertainty surrounding Japan, looking beyond the human consequences which are impossible to predict. Firstly, the impact of the tsunami hit the north-eastern region, which represents 8% of GNP, extremely hard. This is the first factor affecting the partially paralyzed Japanese economy. The second factor, which is equally significant, is related to the nuclear incident whose consequences for the country cannot as yet be predicted. Projected increases in oil and gas imports should therefore be viewed with caution.
 
On a global scale, the likely effect on economic growth, estimated at 4.2% by the IMF in January, is currently difficult to gauge.

What is the impact of current events in the Maghreb and the Middle East?
The situation in the Maghreb and the Middle East remains a cause for concern. Although some countries such as Morocco are gradually entering a progressive era, the situation in Libya is deteriorating significantly, with a potential long-term impact on the 1.6 million barrels per day produced in this country before the crisis. In Bahrain, a state of emergency has just been declared the day after the arrival of troops from the Gulf, a military deployment condemned by Iran.
 
To round off this picture, we should note the risks in Nigeria in the run-up to the general election in April, with the threat to oil installations raised by the Movement for the Emancipation of the Niger Delta (MEND). Alongside Saudi Arabia and several other OPEC members, Nigeria is one of the countries likely to increase production in the face of the Libyan shortfall.

What role will OPEC play?
No collective decision has been taken yet as the next meeting is not scheduled until 2 June under Iranian presidency, in what will probably be a tense atmosphere. However, OPEC regularly adjusts its production depending on the level of demand. Excess production stands at over 2 million barrels per day above the production quotas fixed in December 2008. Moreover, in its latest report, OPEC announced record production of 30 million barrels per day in February, exceeding that for December 2008. According to the latest data from the International Energy Agency, Saudi Arabia has increased production by 0.4 million barrels per day between December and February, and the United Arab Emirates by 0.1 million barrels per day, more than compensating for the drop in Libyan production (- 0.2 million barrels per day on average in February).
 
The main problem is linked to the decline in production margins (now estimated at 4 million barrels per day) if Libyan production were to slow down over the long term. This factor would create tension in the market unless there was a significant turnaround in global demand. A state of unstable equilibrium currently exists in the market between these two factors, one producing an upward trend and the other a downward trend.

What are the long-term trends?
Let us consider an optimistic scenario first of all, which still remains feasible, of strong growth in Japan linked to reconstruction, as was the case after the earthquake in Kobe en 1995. Economic growth reached 1.9% in the year of the earthquake, then 2.6% in 1996, compared to 0.8% two years previously.
 
In more general terms, current events as a whole will clearly have major implications for energy policy. Two main themes which remain a priority were raised before this crisis in the context of concerns relating to climate change: energy efficiency and the development of renewable energies. CO₂ capture for electricity power plants also remains a serious option for the future. Lastly, a more tense geopolitical climate would be likely to reinforce national options, such as second generation bio fuels, for example. IFPEN’s R&D and industrial deployment approach fits into this vision.
 

The reasons behind the recent rise in fuel prices
Regular increases in the price of Brent crude since late September provide the first part of the explanation. It has risen from $77 per barrel on 17 September to $114 per barrel on 11 March, the most recent date for a statement of the price of products, with petrol at a record high of 1.51 cents per liter.
Over the same period, the euro has risen slightly against the dollar (from 1.31 to 1.38, i.e. +5%), but not sufficiently to compensate for an increase of nearly 50% in oil. Expressed in euros, oil is now at €83 per barrel (i.e. €0.52 per liter) as compared to €59 per barrel (i.e. €0.37 per liter) in September. This increase of about €0.15 per liter is currently included in the price of gasoline and diesel (due to the market effect on related products).
It should be noted that the current price in euros is close to the peaks reached in mid-2008, which explains the alignment of prices at the pumps. The euro then stood at about $1.6, which had a very significant cushioning effect in 2008.
(1 barrel represents approximately 159l).
 

Map of refineries, LNG terminals and nuclear power plants

Source: PAJ (Petroleum Association of Japan)

LNG terminals are operational, with the exception of the Sendai terminal :

Source: Japan Gas Association

Source: WNA (World Nuclear Association)