BG Group’s new project could be revolutionary

THE coverage of third quarter oil company earnings published today will mask a more interesting story for the energy sector. Natural gas giant BG Group announced on Saturday that it had been given the go ahead to become the first company to liquefy gas from coal deposits. The new venture will have the capacity to produce 8.5m tonnes of gas a year in 2014, which is equivalent to 10 per cent of the UK’s annual gas demand. That’s an awful lot of extra gas pouring on to the market, which is very important news for contracts for difference (CFD) traders with positions on the FTSE 350 Oil & Gas sector, because it will push down the price of natural gas.

So what will be the impact? Alastair McCaig of WorldSpreads thinks that the extra supply will have a significant effect. He says that the reduced price could cause oil users to switch to gas: “The gas sector was always likely to get a better hold on power consumption, ultimately mounting a more serious challenge to oil.” He says this could move money out of the index to small gas producers on Aim, which could cause a small tumble for the index. Michael Hewson of CMC Markets disagrees: “The oil companies in the FTSE 350 Oil & Gas tend to include companies that cover both oil and gas, any change in gas price for the 350 will be negated by this.”

In contrast, Nobuo Tanaka, executive director of the International Energy Agency, thinks we won’t even notice the change in price because any excess “will quickly disappear” due to Chinese demand, leaving prices broadly the same. He has a point. BG Group already has an agreement to sell 3.6m tonnes of liquefied natural gas a year to China National Offshore Oil Corporation and a proposed agreement with Tokyo Gas for 1.2m tonnes a year.

These three different opinions demonstrate that natural gas is a hidden spanner in today’s energy debate and CFD traders will need to work out what effect they think it will have on oil and gas producers.

The industry also thinks it’s a big deal. Peter Voser, chief executive of Shell, said last month that liquefied natural gas supplies could meet a fifth of global gas needs by 2020. Should natural gas supply continue to increase then traders are sure to see the effects. Until then, the extent of the change is up for negotiation. Any of these opinions seems credible enough and CFD traders will have to try their luck.