* Coal, gas have similar supply and demand patterns
* Australia, USA become coal and gas exporters
By Henning Gloystein
LONDON, Nov 21 New natural gas discoveries and
rising demand are changing gas from a cluster of regional
markets into a global marketplace, but instead of becoming a
second oil market gas is likely to become more like coal.
Because gas and oil were being produced largely by the same
exporters and both fuels were often used in the same industries,
gas has historically been pegged to the oil market through
But a rising disconnect between gas and oil suppliers and
new bilateral contracts between exporters and their customers
based on regional gas exchanges mean that gas, like coal, is
more likely to take its cue from specific regional prices rather
than global benchmarks, such as oil's Brent crude.
"A new relationship is developing between oil and gas
prices," Axa Investment managers said in a research report
published this month.
Additionally, the rise of new gas supplies from countries
that don't export oil, as well as the emergence of Asia as a
major demand hub, have boosted trading of liquefied natural gas
This will shift gas trading away from pipelines towards a
seaborne commodity set to emerge next to coal as the world's
dominant fuel for electricity generation.
"More LNG terminals ... mean liquid fuels can come from
anywhere," Axa said.
This would mirror developments previously seen in the coal
market, which emerged as a globally traded commodity in the
second half of the 20th century as suppliers around the world
began serving centres of big demand in America, Europe and Asia.
Global LNG trading is much younger, and as a result of the
immature market, LNG prices differ widely by region.
Currently, North America benefits from the lowest gas prices
at around $3.5 per million British thermal units (mmBtu), while
Asian importers have to pay almost $14 per mmBtu for LNG
Europe, which relies more on pipeline imports from Russia,
Norway and North Africa, is priced in between at around $11 per
But analysts say that prices will converge as the market
"Rising LNG supplies are likely to lead to increasing price
connectivity between regions and a degree of price convergence,"
the International Energy Agency (IEA) said in its latest World
Energy Outlook to 2035.
This would take the gas market in the direction of coal,
where regional prices vary but at much lower differentials than
the current LNG market.
Prompt physical deliveries for Australian coal currently
cost around $85 per tonne, and South African cargoes are priced
around $83 per tonne.
LOW SPOT TRADING VOLUMES
Rising global gas supplies do not necessarily result in more
liquidity of the traded commodity.
Despite massive combined annual demand of 6.3 billion tonnes
of oil equivalent (3.6 billion tonnes for coal, 2.7 billion
tonnes for natural gas), LNG and coal trading are marked by low
physical spot volumes.
Oil, by contrast, is one of the world's most traded products
although its annual demand for physical cargoes of 4 billion
tonnes is not much bigger than that of coal.
The reason for the low liquidity in coal and gas is that
these products are usually supplied under bilateral long-term
contracts between supplier and customer, leaving only small
volumes to be freely traded.
Both established LNG exporters such as Qatar, as well as
upcoming suppliers such as the United States and Australia,
prefer long-term supply contracts over spot
This too follows the trend in coal, where bilateral
long-term contracts dominate the market.
The World Coal Association says that only around 15 percent
of global coal consumption is internationally traded.
AUSTRALIA, USA JOIN EXPORTERS
In terms of supply and demand, gas and coal markets are also
becoming more similar.
On the demand side, traditional hubs such as North America
and Europe are seeing increased competition for the fuel from
Asia, especially China and India.
In coal, China is already the world's top importer.
On the supply side, Australia is already a major exporter of
coal, and the country is poised to become a top supplier of LNG.
In North America, which is both a large coal consumer and
miner, the recent shale gas boom has meant U.S. coal companies
have begun to export in order to find new customers.
Its high shale gas reserves mean that U.S. gas producers are
also planning to become LNG exporters, adding another supply
source to the world gas market.
"We project that North American exports of LNG reach 35
billion cubic metres (bcm) by 2020 and more than 40 bcm by
2035," the IEA says.
In Africa, Mozambique and Tanzania hope that recent offshore
gas discoveries will lead to an LNG export
With South Africa, the continent already has a major coal
(Editing by Jason Neely)