The first is that the world needs natural gas as an energy source, and this is particularly true in Asia, where the potential partial failure of the monsoon with 40% of India being declared drought areas, means that there will be less hydro power available than in normal seasons. So far the rains are 25% below normal (an event which I noted earlier has been tied to El Nino events. One of the ways that India is hoping to solve its chronic shortage of electric power has been by a greater commitment to hydro-generation.
Hydropower is viewed as more flexible than most other sources of fuel, which is important to India, where much of the demand is domestic.
As an illustration, if the approximately 150 million households in India were to turn on two 100 watt light bulbs at 7 pm, the power system would experience an instantaneous surge in demand of about 30,000 MW! Today, this peak demand is often met by households turning on small gasolene and diesel generation units, which, in addition to being polluting, are a serious health hazard in congested areas. And, with rising wealth, households are switching on a lot more than two light bulbs. Although hydropower plants are subject to daily and seasonal variations in water flows (which affects the production of electricity at that point in time), they are not subject to the fluctuations in fuel costs that trouble thermal power plants.Thus the country is negotiating with the World Bank for increasing support for hydro projects. But they need rain.
Unfortunately, at the moment, power supplied from existing plant is down 10% from last year, while demand has risen. The water levels in the reservoirs, for example, should normally rise by about 5% over a monsoon week, last week it was only 3% . Given that hydropower provides about a quarter of the nations generation capacity this could put further strain on the national economy, where the back-up bill is estimated to be $26 billion a year, and the cost of the outages alone totals some $9.2 billion.
So where can additional power be obtained. One solution is through increased use of natural gas and Qatar’s RasGas has just agreed to increase LNG supplies by 50% starting in November, upping the tonnage from 5 million to 7.5 million tons per year. This comes at a time when India is developing its own gas supplies , but while they equate to 880 – 1,000 mcf/day, demand rose to 9,800 mcf/day last year (up 25%). Thus the increased need for the LNG cargoes, and the current purchase raises the shipping to 120 cargoes a year.
At the same time Turkey has been visiting Qatar seeking to improve its imports of natural gas (currently via LNG) but with the hope, down the road, of seeing the gas shipped by pipeline. The current target is some 140,000 mcf over the course of a year (average of 383 mcf/day). Some of that supply will come from production originally aimed for the UK where demand has fallen.
But if it also reduces the volumes that might otherwise be targeted toward the US this winter it will potentially stop the continued slide in US prices and help the industry, though not the consumer. Perhaps it is in that hope that rig numbers are beginning to creep up.
The second thought is that the production from gas shale wells is very short lived (60% production in the first year) and thus starting up new production to replace the older declining wells is a smart thing to do, and someone is probably tailoring that into their calculations as they place new well orders.