Copyright of the Daily Oil Bulletin 2017
Global Natural Gas Glut Expected To Persist, IEA Says
The International Energy Agency (IEA) says the structural oversupply in the global natural gas market is set to persist in the coming years as nearly 140 billion cubic metres (bcm) of liquefaction capacity currently under construction becomes operational, mostly in the United States and Australia.
Adding to the mix is the fact that Qatar, the world’s largest exporter of LNG, meanwhile, lifted its self-imposed development moratorium in early 2017, providing the basis for renewed expansion of its own export capacity.
“These developments have already started to reshape gas markets and will continue to do so in the future. However, the ample availability of gas does not mean that risks to security of supply have disappeared, as demonstrated for instance by current problems with LNG plants in Yemen, Nigeria and Algeria, and by the recent standoff between Qatar and its neighbours,” the IEA said in its World Energy Outlook-2017 report released this morning.
In its report, the IEA said that the global gas market has been buffeted by the twin effects of a massive wave of investment in new LNG supply and a slowdown in demand growth that pushed growth in global gas consumption down to 1.3 per cent per year between 2010 and 2015, compared with annual growth of 2.8 per cent in the first decade of the 2000s.
“Together with lower oil prices, which have brought down oil-indexed gas prices in recent years, this has led to a marked drop in gas prices around the world,” the Paris-based agency said.
According to the IEA, the International Gas Union estimates that the average global wholesale price of gas fell to $3.35 per mmBtu in 2016 — the lowest level ever recorded in their surveys, which began in 2005.
On the global demand side, the latest data suggest that the long-awaited demand response to lower gas prices may have finally started to happen. Global gas use is estimated to have grown by 2.6 per cent in 2016, a marked rise over recent demand growth rates, and preliminary demand data for the first months of 2017 suggest continued momentum, notably in China.
“It is not yet clear whether gas demand has turned a corner, but the gas industry has certainly become more inventive: a lot of the growth in 2016 came from a multitude of relatively new and small LNG importing countries like Egypt, Pakistan and Jordan,” the IEA said.
The IEA said the number of countries importing LNG has risen from 15 in 2005 to around 40 as of mid-2017. But the year also saw some remarkable developments in mature gas markets.
“In the United States, for the first time ever, more electricity was generated from gas than from coal in 2016. Even the European Union, where gas has had a dismal few years, saw a rise in gas use for power generation,” the IEA said.
The reasons for greater gas use varied from country to country: in the United Kingdom, it was driven by coal-to-gas switching underpinned by an administered carbon price floor. In a similar vein, Korea’s new president has outlined a new energy policy program that envisages an expanded role for gas in power generation at the expense of coal (mostly for air quality reasons) and nuclear.
The IEA projects that natural gas will continue its rise of becoming the fossil fuel of choice within the global energy mix.
“Our projections suggest that gas is set to perform much better than other fossil fuels over the coming decades. However, the role of gas varies widely across different countries and regions,” the IEA said.
“The competitive landscape is changing rapidly, and gas faces challenges from coal in many markets, and from renewables in others: depending on circumstances and sectors, new low-carbon technologies can be both threats to, and enablers of, gas demand growth.”
Highlight of natural gas outlook
The IEA said the production of natural gas expands globally by 1,685 bcm over the next 25 years, reaching over 5,300 bcm in 2040. The U.S., Russia and Iran are the three largest gas producers today, a ranking that remains unchanged over the Outlookperiod although China comes close to that of Iran by 2040.
The agency projects that the U.S. will add some 300 bcm to global gas supplies over the next 25 years, more than any other country, followed by China (200 bcm), Russia and Iran (both around 145 bcm). Unconventional gas — shale gas in particular — accounts for over half of the incremental production worldwide over the period to 2040.
“North America continues to lead the unconventional gas revolution, but China, Argentina and Australia play increasingly important roles too,” the IEA said.
Unconventional sourcesaccount for more than half of the incremental gas output.
“Unconventional gas is not a homogenous group: shale gas production — especially in North America — is the clear frontrunner, adding 725 bcm to the global gas balance; next comes coalbed methane, which contributes over 60 bcm, followed by tight gas, which contributes over 35 bcm,” the IEA said.
The IEA noted that the U.S. is the “undisputed growth engine” for global shale gas production: output reached over 445 bcm in 2016, and the agency projects a rise to 800 bcm by 2040. Canada’s shale output will also grow.
“Although the surge in U.S. shale gas production delays the shale gas boom in Canada, good quality resources and positive spill-over effects from the United States underpin a marked ramp up in Canadian shale output in the second-half of the Outlookperiod, bringing production to almost 155 bcm in 2040,” the IEA said.
In the IEA’s New Policies Scenario, global natural gas use increases by 45 per cent in the coming 25 years, with industry accounting for a third of the growth (up from less than 20 per cent over the last 25 years), slightly ahead of the additional gas used for power generation.
Developing countries in Asia, Africa, Latin America and the Middle East account for 80 per cent of the increase in global consumption. The tilt towards industrial gas use is particularly pronounced in the next 10 years.
In the second-half of the Outlook period (to 2040), gas demand in the power sector picks up again as a move away from coal in some markets creates more room for gas to grow, alongside renewables.
According to the IEA, with projected growth of 1.6 per cent per year, prospects for gas are good in the New Policies Scenario, but a return to the growth rate of 2.3 per cent seen in the previous 25 years is “not in the cards.”
“Depending on the circumstances, renewables can facilitate or curb gas demand growth. In addition, in many gas-importing countries, especially in Asia, beating coal on cost alone is a tall order, highlighting the importance of a supportive policy environment if gas is to thrive,” the IEA said.
Long-distance trade grows by three-quarters to 1,230 bcm in 2040. The bulk of the expansion comes from LNG, which increases its share in trade from 39 per cent per cent in 2016 to some 60 per cent by 2040. With the main exception of new pipelines to China from Russia and Turkmenistan, which have strong financial and political backing, complex large cross-border pipelines find it hard to advance in a world with ample supplies of LNG.
With 140 bcm of LNG capacity still under construction, gas markets remain well supplied for the next few years. By the mid-2020s, however, market over-capacity is absorbed by import growth.
“Investment in new capacity therefore is needed from 2020 onwards, and much of the new supply comes from low-cost sources of gas in the United States, Russia and Qatar,” the IEA said.
Although the European Union remains the largest importer of gas, the Asia Pacific region accounts for some 85 per cent of the growth in net imports, underpinning a shift in trade flows from the Atlantic basin to Asia.
“Much of the import growth in Asia comes from new importers in South and Southeast Asia, further strengthening the diversity and globalization of gas markets,” the IEA said.
Long-term scenarios to 2040
In the New Policies Scenario, the main scenario, the underlying policy, macroeconomic and demographic assumptions lead to gas consumption growth of 1.6 per cent per year between 2016 and 2040, a stark deceleration compared to the 2.3 per cent observed over the past 25 years.
In this scenario, gas expands its share in primary energy supply from 22 per cent in 2016 to 25 per cent in 2040. New gas projects are needed to meet the projected gas demand growth and many of these are either remote or technically challenging or require significant infrastructure construction, putting upward pressure on gas prices.
Cumulative investment in gas supply (upstream, transmission and distribution infrastructure, liquefaction and regasification facilities) adds up to $8.6 trillion over the Outlook period.