Given time, oil and natural gas prices will come back in line with their traditional 6:1 energy-equivalent pricing. Whether oil prices decline or gas prices rise remains to be seen, but BP CEO Tony Hayward said he thinks it will be a bit of both.
“I suppose if you go back beyond two or three years, gas had always traded at a bit of a discount. It wasn’t massively disconnected in terms of the energy it provides,” he told reporters following a speech in Houston last Thursday. “Today it’s very significantly disconnected because the demand for oil is higher globally than the demand for gas is domestically. What will happen is people will start substituting because gas on an energy-equivalent basis is much cheaper than oil, so if you’re in the chemical industry using oil you want to try and find a way to use gas. Economics will work and the gap will close. How long it will take, who knows?”
It’s a safe bet that oil prices will have to come down a lot to make consumers smile. It’s also likely wise to assume that gas prices would have to travel a good bit higher in order to entice more liquefied natural gas (LNG) away from producing countries and to U.S. shores, particularly during times of peak demand in Europe. Hayward told NGI that development of the global LNG market is being slowed significantly by domestic gas demand in would-be LNG exporting countries.
“The international LNG market will develop less strongly than any of us expected perhaps three or four years ago and the reason for that is that the demand in the producing countries is very strong, so there is less traded LNG going forward than we had anticipated three or four years ago,” Hayward said.
As the United Kingdom imports more of its gas supply from Norway over the next two to three years, some previously UK-bound LNG cargoes could be redirected to the United States, Hayward conceded, but “I think the fact remains that there is likely to be less tradeable LNG available around the end of the decade than any of us had previously thought because of the very strong demand in the producing countries.. Egypt, Indonesia…Wherever you look there’s very strong demand that is holding gas in the domestic producing countries rather than allowing it to be exported.”
As for oil prices, Hayward said in “the medium term” oil should trade in a band of $60-80, “probably. And we will continue to test projects into the $30s, between $35 and $40. While prices are strong today what you can’t ever forget is that oil is a commodity. Commodities have been for 150 years been subject to price volatility and cyclicity. And who knows what the oil price will be in 15 or 20 years time when some of the investments that we’re making today will be coming to fruition.”
During his talk Hayward alluded to a restructuring under way at the giant oil and gas company (see NGI, Oct. 15) and told the Houston Forum audience that the majority of the company’s Chicago operations would be consolidated in Houston. It was announced at the beginning of the year that Hayward would be named CEO of BP following the resignation of John Browne (see NGI, Jan. 15).
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