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Executive Summary for Medium-Term Gas Market Report 2013
Executive Summary for Medium-Term Gas Market Report 2013
Executive Summary for Medium-Term Gas Market Report 2013
Executive Summary for Medium-Term Gas Market Report 2013
Executive Summary for Medium-Term Gas Market Report 2013
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Executive Summary for Medium-Term Gas Market Report 2013

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The Executive Summary of the International Energy Agency's (IEA) new edition of the Medium-Term Gas Market Report (MTGMR), for 2013. The new report predicts natural gas' piece of the worldwide energy …

The Executive Summary of the International Energy Agency's (IEA) new edition of the Medium-Term Gas Market Report (MTGMR), for 2013. The new report predicts natural gas' piece of the worldwide energy picture will grow 2.4% from now until 2018. Growth in the U.S. continues rapidly. The report also says natural gas use in the transportation sector is about to rapidly increase around the world, thanks to U.S. shale gas.

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  • 1. EXECUTIVE SUMMARYMEDIUM-TERM GAS MARKET REPORT 2013 11EXECUTIVE SUMMARY2012: moderate supply and demand growth, but drop in global interregional tradeNatural gas had a mixed year in 2012. While growth in demand (2.0%) was lower than the past decade’saverage (2.8% per year), considering the slower growth of the world’s economy, it was relativelyhigh. The share of natural gas in the global energy mix continued to expand: demand grew at ahigher pace than oil (1.0%), although slower than global renewable electricity generation (9.7%). Thisdemand picture reflects increasingly diverging trends among non-Organisation for Economic Co-operationand Development (OECD) regions and OECD regions alike. Growth in demand among non-OECDregions continued to outpace that of other regions, primarily because of China, where gas consumptiongrew by 13% in 2012. Even though this rate represents a slowdown compared with previous years,China is now only a few billion cubic metres away from catching up with the world’s third-largest gasuser, Iran. China’s contribution alone represented 40% of additional consumption among non-OECDregions. In contrast, the Former Soviet Union (FSU)/non-OECD Europe was the only non-OECD regionwhere gas consumption receded. Demand patterns also differ widely among OECD regions: OECD gasdemand gained a modest 1.6% in 2012, lower again this year than the world’s average growth. Whiledemand growth in OECD Americas and OECD Asia Oceania was well above the global average,demand in OECD Europe fell by 1.6%. Considering the mild weather felt throughout Europe in 2011which returned to normal in 2012, this additional loss, entirely driven by the industrial and powergeneration sectors, is even more indicative of structural weakness in the power and industry sectorsthan the 8.2% loss in 2011.The supply picture in 2012 underlined significant contrasts among regions, as the United Statescontributed single-handedly to almost half of the incremental gas supply. The second-largestincrease came from Norway, followed by Turkmenistan, Saudi Arabia, Qatar, and China. Growth inSaudi Arabia, Qatar and China corresponded to new field developments, whereas production inNorway was partially driven by demand in Europe, its main export market, and similarly inTurkmenistan, where production was partially driven by China. In contrast, Russian gas productionfell substantially, driven by a combination of lower domestic demand and a reduced call forexpensive Russian gas from importing countries. The production picture also reflected the struggle ofmany countries to increase their gas production, mostly due to upstream issues, delays in fielddevelopment or regulated domestic gas prices being too low to trigger the development of newfields. This was notably the case in Africa (Algeria, Egypt), the Middle East (Bahrain), Latin America(Argentina) and Asia (Indonesia, India).A surprising outcome in 2012 was lower interregional trade, driven notably by a 2% drop in theglobal liquefied natural gas (LNG) trade, while pipeline imports to Europe and the Middle Eastreceded as well. The decline in LNG trade was caused by an unexpected fall in supply. While globalLNG capacity increased with a new LNG plant in Australia, this new plant was insufficient tocompensate for declining global capacity utilisation: a combination of declining mature fields,difficulties in developing new production and rapidly increasing domestic demand, constrained byexports from Asia’s historical suppliers (notably Indonesia), as well as Algeria, Egypt, Oman and theUnited Arab Emirates. Additionally, pipeline bombings in Yemen significantly impacted global LNGexports. Many of these trends will continue to be a major feature of global LNG markets over themedium term.©OECD/IEA,2013
  • 2. EXECUTIVE SUMMARY12 MEDIUM-TERM GAS MARKET REPORT 2013Less surprising in 2012 was the shift of the global gas trade towards hungry Asian markets.1Thesemarkets attracted increasingly higher volumes of LNG (+18 billion cubic metres [bcm]), whichdiverted LNG from Europe, while increasing amounts of pipeline gas were imported from Central Asia(+9 bcm). As of 2012, Asia represented 46% of global interregional gas trade, up from 40% the yearbefore. With this increase, Asia overtook OECD Europe, previously the largest importing region,which now accounts for 45% of global gas imports. While Europe remained by far the largest pipelinegas importer, Asia imports almost four times more LNG than Europe. This reflected higher demandfrom historical LNG importers such as Japan, Korea and Chinese Taipei, and the import needs of theregion’s largest energy users, China and India. The shift in demand also underlined the emergence ofnew LNG importing countries, such as Thailand and Indonesia, which will soon be joined by Malaysiaand Singapore.World gas demand rises by 15.6%, but grows at a slower rate than coalOver 2012-18, world gas demand is expected to increase by 15.6% (2.4% per year), to reach3 962 bcm. This increase of 535 bcm is equivalent to current Middle Eastern gas production, or1.7 times that of the current global LNG trade. If this incremental consumption were to be met byLNG supply, this would require an investment of over USD 1 000 billion. Demand growth is lowerthan what was forecast in the previous edition, the Medium-Term Gas Market Report 2012 (17.1%).This also implies that gas demand will grow at a slightly slower rate than coal (2.6% per year), but stillfaster than oil (0.7% per year) (IEA, 2012a; IEA, 2013a). While China remains the fastest-growingcountry, in absolute volumes, OECD Americas and the Middle East follow with incremental gasconsumption of 84 bcm. Other non-OECD regions continue to see strong demand growth, despitesome local gas shortages, with the exception of the FSU/non-OECD Europe gas market, which growsmodestly at 0.8% per year.Looking forward, the outlook for natural gas among OECD regions is expected to vary dramatically,ranging from booming demand in OECD Americas (particularly in the United States) to anaemicgrowth in OECD Europe, where consumption rises by a mere 12 bcm to reach 525 bcm by 2018.European demand would therefore be some 20 bcm below the average pre-global economic crisis(2005-08) demand level. This represents a significant downward revision from last year’s forecasts(561 bcm by 2017), due almost entirely to low economic growth and more conservative expectationsin the power generation sector. Since renewable electricity production outpaces total additionalgeneration needs by 13% over 2012-18, combustible fuels are left with a decreasing residual load,despite the shutdown of nuclear facilities among certain countries. Over the next two years, anunfavourable gas, coal and carbon price relationship will contribute to a further drop in European gasdemand to 500 bcm in 2013 (from 513 bcm in 2012). Forward prices indicate a price relationshipimproving in favour of gas in the second half of the decade, which will lead to a recovery.Nevertheless, gas-fired power generation remains at around 100 terawatt hours below its peak of 2008.OECD Americas presents a much more positive outlook, even though gas prices are assumed toslightly increase. Growth in demand in the United States is seen in all sectors, with the powergeneration sector alone accounting for half of overall growth. Generation from gas-fired powerplants will nevertheless drop in 2013, after an exceptional drop in gas prices was seen in 2012. Thisenables coal-fired generation to recover in the short term. Additional gains from gas-fired generation1In this context, Asia includes markets as widely different as the mature OECD Asia Oceania LNG importers (Japan and Korea), China and theother non-OECD Asian countries.©OECD/IEA,2013
  • 3. EXECUTIVE SUMMARYMEDIUM-TERM GAS MARKET REPORT 2013 13will therefore be driven by increasing power demand. The residential/commercial sector, however,shows an underlying declining trend that is only compensated for by the fact that 2012 wasexceptionally mild. In Asia Oceania, the major uncertainty is the future of nuclear energy in Japan.Assuming that a partial return of nuclear power plants leads to a decrease of expensive andinefficient oil-fired generation, gas-fired generation will show only modest gains in the medium term.Australia’s gas consumption rises sharply following the introduction of a carbon price and LNGliquefaction plants from 2015, while Israel benefits from the development of its domestic gas fields.Gas use in road transport to take offThe road transport sector is foreseen to be a new factor of demand growth as gas expands as atransport fuel. In the past, consumption of gas in the transport sector was seen among non-OECDregions – in Asia and Latin America, as well as China, Iran and Egypt – motivated by oil importdependency, utilisation of domestic gas and urban air quality. However, the shale gas revolution hastriggered strong investor interest in natural gas as a transport fuel in the United States. Gas use inroad transport represented 1.4% of global gas demand in 2012, but this share should rise to 2.5% by2018 as consumption grows to around 50 bcm in the same period (9.4% of additional gas demand).This covers around 10% of the incremental energy needs of the transport sector, more than electriccars. China is dwarfing developments in other regions as its consumption triples to 39 bcm, due tothe combination of the need to develop cleaner transport vehicles, attractive gas prices versus oiland the wish to reduce oil dependency through alternative vehicles technologies. Strong demandgrowth is also seen in other Asian countries as well. In the United States, the expanding use of gas intransport is supported by the divergence between gas and oil prices, as well as policy incentives.Especially promising in the United States is the conversion of long-haul heavy trucks from diesel fuelto LNG. In contrast, despite limited growth in Europe, the industry is looking to develop new marketsto compensate for the bleak picture in other sectors.In each region, each part of the gas value chain needs to be developed simultaneously in order tosolve the chicken-and-egg problem of having a sufficient number of filling stations and natural gasvehicles (NGVs). This implies developing sufficient gas supply and building liquefaction plants to feedLNG heavy-duty vehicles, as well as LNG or/and compressed natural gas refilling stations. Theeconomics should be attractive for all parts of the gas value chain, in particular owners of fleets ofcars or trucks. Use of LNG as a trucking fuel seems to answer many concerns, in particular thechicken-and-egg issue, as fleet owners can team up with LNG retailers and a positive return oninvestments can be reached within a few years. The car industry should be able to deliver a sufficientnumber of vehicles by introducing NGVs in their product range, and by working on decreasing theprice premium over alternative gasoline or diesel vehicles, provided that economics and policyincentives generate demand for such vehicles. Necessary conditions include: the harmonisation ofstandards and rules; proper training of personnel involved in trucking; handling NGVs and fillingstations; and retrofitting vehicles into NGVs.Other uses of gas in the transport sector are also under investigation, but are significantly lessadvanced than road transport. Gas use by bunkers remains a longer-term issue, more likely to takeoff if and when new emissions regulations kick in globally. There is also mounting interest in gas usein the rail sector, notably in regions such as North America and Asia, where locomotives use diesel.©OECD/IEA,2013
  • 4. EXECUTIVE SUMMARY14 MEDIUM-TERM GAS MARKET REPORT 2013Incremental supply is dominated by OECD Americas, the FSU regionand OECD Asia OceaniaThe OECD Americas, OECD Asia Oceania and FSU/non-OECD Europe regions are set to provide 55% ofincremental gas supply over the period 2012-18. That these OECD regions will be able to bring suchvolumes of additional gas supply to global markets marks a breakaway from the trend of the lastdecade, when non-OECD regions represented 90% of additional supply. The evolution of productionin OECD Americas will depend on additional gas demand, the relationship between oil and gas pricesfor wet gas, and potential LNG exports, while OECD Asia Oceania and FSU/non-OECD Europe regionswill rely primarily on exports. In the case of Asia Oceania, the timeliness of new Australian LNGexport projects is important for their incremental supply. For the FSU/non-OECD Europe region,import needs from Europe and China, combined with the competitiveness and availability of alternativesupply sources in those two regions are the main factors. This does not alter the region’s potential tobring significant volumes of gas to the markets, through both traditional and rising Russianindependent producers. While China becomes the fourth-largest gas producer, production amongother non-OECD countries in Asia, the Middle East, Africa and Latin America struggles to increase dueto various concerns, including low regulated gas prices, political instability and regulatory uncertainty.In the Middle East, additional production fails to meet incremental domestic consumption.Oil and gas companies have been focusing particularly on East Africa and the Eastern Mediterranean.But significant development in those two regions is not expected to take place before 2018.Geopolitical challenges in the Eastern Mediterranean, the need to balance exports with domesticrequirements, potential changes in fiscal policies, the need to develop a regulatory framework and,finally, the costs of developing new infrastructure are the most significant issues that could deferproduction beyond 2020.Shale gas continues to capture the attention of companies and governments alike, but no majordevelopment is expected to take place outside North America and possibly China by 2018. Over theforecast period, most unconventional gas developments will be in coalbed methane and tight gas.Activities will nevertheless continue on unconventional gas exploration, in particular shale gas –many countries are assessing the potential for unconventional gas and debating whether specificenvironmental regulation is required and whether such production should be allowed, encouraged orpromoted through specific incentives, hence preparing the ground for unconventional gas productionto potentially take off by 2020 outside North America.Unprecedented tightness in global markets should lessen by 2015-16After a declining LNG trade in 2012, LNG markets are set to face unprecedented tightness over2013/14, as little additional supply capacity is expected to come on line and many existing LNGfacilities continue to face declining supplies. The situation improves from 2015 onwards, when anew wave of LNG supply is set to arrive, largely from Australia, despite cost overruns and delays.There is no question of how thirsty markets are for this LNG, given that the bulk of this supply hasalready been spoken for under long-term contracts by Asian offtakers, mostly based on oil-indexedcontracts. These projects will need high gas prices due to their steep costs, the US Sabine Passproject being the exception. Looking beyond 2018, there is intense competition among the 900 bcmper year of LNG projects currently at the planning stage, notably in North America, East Africa andAustralia, each of which will bring some 100 bcm per year to global gas markets. While some projectsin Australia and the United States have already signed a few long-term contracts, they face various©OECD/IEA,2013
  • 5. EXECUTIVE SUMMARYMEDIUM-TERM GAS MARKET REPORT 2013 15challenges: uncertainties on approvals by the Department of Energy (DOE) and Federal Energy RegulatoryCommission (FERC) in the United States, and a steep rise in capital costs in Australia. Meanwhile, EastAfrican projects appear much less advanced.Interregional gas trade is set to expand by 30% over 2012-18, largely driven by the 100 bcmincrease in LNG trade. Pipeline trade expands at a slightly slower pace. Additional LNG supply originatesin Australia and, to a lesser extent, the United States, while LNG supply from many Middle Eastern,Latin American and Asian LNG exporters declines. The FSU/non-OECD Europe region brings additionalpipeline supplies to the rest of Europe and China, but Europe remains by far the largest importingregion. China becomes the second-largest net importer and OECD Asia Oceania the third-largest netimporter. Non-OECD Asia’s net exports diminish significantly so that the region is only a few billioncubic metres away from becoming a net importer.A sustained price divergence is putting oil indexation under pressureAs regional market prices are at unprecedented levels of divergence, oil indexation is coming underincreased pressure. The spread between US Henry Hub (HH) gas prices and Japanese importsreached a record average price difference of USD 16 per million British thermal units in mid-2012.US gas prices reflect the region’s supply and demand fundamentals and its sustained high oil prices,triggering increasing associated gas production, while many European buyers have renegotiated thepricing formulas in their long-term contracts and introduced a higher share of hub indexation. Thishas not been the case in Asia, where most long-term contracts continue to be linked to oil prices.Looking forward, oil indexation is being increasingly challenged in Asia (and continues to be inEurope) given the burden imposed on these countries’ economies. However, the fact that mostLNG coming on line by 2015 is linked to oil prices implies that oil indexation is likely to continue todominate. Two factors are nevertheless putting pressure on LNG and pipeline suppliers are insistingon oil indexation for projects still at the planning stage: 1) US LNG projects that have signed long-term contracts pegged on HH prices; and 2) rising interest among Asian countries in developing anAsian natural gas trading hub. Singapore is seen as the most likely country for such a hub, but otherregional trading hubs could be developed afterwards building on this initial development, as was thecase in Europe earlier this decade. There are nevertheless a number of prerequisites to fulfil, such asputting in place third-party access to infrastructure, liberalising wholesale gas prices and possibly thepower sector (an important and growing user of natural gas), and having an arms-length relationshipwith the government. This requires sufficient flexible LNG available on global gas markets. Under currentconditions, Asian buyers are reluctant to commit to LNG or pipeline supplies based on oil indexation.©OECD/IEA,2013

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