High energy prices will stick around
Gas prices have given up their panic premium, but new sources of supply don’t come cheap, says Max King
Six months ago, Cornwall Insight, a consultancy that nobody had previously heard of, was forecasting that the energy price cap would reach £6,616 per year. Mainstream media accepted that without question. In fact, the price cap was set at £2,500 and although the government has said that it will be lifted to £3,000 in April, gas prices have fallen so far that the same firm is now forecasting that the cap will be only £2,200.
Gavin Law from the McInroy & Wood division of leading energy consultants Wood MacKenzie remains cautious. “It is too simplistic and too short term to think that the energy crisis is over,” he says.
Oil prices fell back below those prevailing when Russia invaded Ukraine, after more supply came onstream and Russian oil was rerouted. Gas prices in the UK and Europe were rising before the invasion, but the spike in prices, fear of a shortage and the closure of nuclear plants in the summer led to a panic. They have since fallen 80%, as a result of several factors – the panic premium disappearing; lockdown in China; mild weather over the new year; a 20% fall in use due to high prices; and new sources of supply.
Most significantly, gas from Russia was replaced by liquefied natural gas (LNG), which has risen from 12% to 35% of the European market. LNG is liquefied at low temperature at atmospheric pressure to a density 600 times that of gas. It is then transported by ship and regasified at the destination. This involves a great deal of upfront cost – typically $10bn-$20bn, but $60bn for the giant Gorgon facility in Australia. However, LNG is economical over long distances, and more flexible as ships can be rerouted.
Before the advent of LNG, gas was often a waste by-product of oil production and vented or burnt. The cost of pipelines meant that gas had a lower value than oil for its thermal content. Much has changed, but gas is still inflexible compared with oil. High upfront costs require long-term contracts, usually for 20 years, to justify the investment. That puts LNG out of the reach of all but the largest companies. These are “utilitylike, but plants throw off a lot of cash”, says Law.
“Optimisation is the key to the process – you can’t afford spare capacity or inefficiency.”
Start this year, deliver in 2026
European demand for gas starts to fall in spring, so the crisis appears to be over. However, Chinese demand is likely to recover, 2023-2024 could be a cold winter and supply disruptions other than from Russia are possible, says Law. Russia doesn’t have the infrastructure to export gas from western Siberia to China and new LNG projects will take three years to come on-stream. Decisions made in 2023 won’t increase flows until 2026. This means that “higher prices could be with us for a few more years”.
It could be longer if governments disrupt the oil and gas majors through tax, regulation, or obstruction. At some point, gas will flow from Russia again, but LNG developers will tie buyers into long-term contracts. Eventually, there will be a glut “if markets work properly” and prices will revert to $8-$9 per million cubic feet, where they now are in North America.
“LNG has risen from 12% to 35% of the European market”