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Global gas demand rises but coal is still king

An International Energy Agency report says that rising consumption and low prices will drive this boost

Global gas demand will increase by almost 16% over the next five years but coal will remain the fastest growing energy market in the short-term, the International Energy Agency (IEA) said.  

The agency's Medium-Term Gas Market Report, released in June, sees total gas demand rising by 2.4% per year from 2012 to reach 3.9 trillion cubic metres (cm) by 2018. Total gas demand in 2012 was 3.4 trillion cm in 2012, it said.

Coal demand will, however, outpace natural gas, rising by 2.6% per year between now and 2018. Demand for oil will rise by just 0.7% per year in the period, the IEA said. Global coal and oil consumption totalled 3.8 billion tonnes of oil equivalent and 89.8 million barrels a day in 2012, according to Cedigaz figures. 

The IEA said economic fragility, low carbon prices and renewable energy targets all bolstered demand for coal, particularly in Europe.

Demand

In 2011, the IEA released its Are We Entering a Golden Age of Gas? report in which it projected that global gas use could rise by more than 50% by 2035, reaching 5.1 trillion tonnes (6.9 trillion cm) - roughly  25% of energy demand.

The IEA said the question of whether we are entering a golden age of gas "is no longer necessary" as global consumption increased by 124 billion cm last year. This is around 8% higher than Norway's total gas production in 2012.  However, in its latest report, the IEA has revised its figures, saying weak economic growth in Europe and production difficulties in the Middle East and Africa prompted the downgrade.

Maria van der Hoeven, the agency's executive director, said natural gas "remains a fuel of contradictions" and that huge regional differences persist in terms of pricing, supply and demand and industry structure.

Non-OECD consumption

Gas demand will continue to grow fastest in non-Organisation for Economic Co-operation and Development (OECD) regions, the IEA said, where consumption will rise by 406bn cm between 2012 and 2018, accounting for three-quarters of global incremental gas demand.

China alone will drive 36% of this additional demand, with non-OECD Asia and the Middle East also driving demand. The IEA expects China's gas demand to soar by 12% per year to reach 295bn cm by 2018, up from around 150bn cm in 2012.

In contrast, the former Soviet Union (FSU) was the only non-OECD region where gas consumption fell last year. FSU gas demand dropped by 2.6% in 2012, to 584.9bn cm, according to Cedigaz figures.

OECD demand

The IEA said the outlook for natural gas among OECD regions is expected to vary dramatically. While demand in the OECD Americas regions will boom, it will remain sluggish in OECD Europe.

European consumption is expected to rise by just 12bn cm by 2018, reaching 525bn cm. This is around 20bn cm below the continent's average gas demand before the global economic crisis began in 2008.

Cheaper coal will continue to depress European gas demand this year. The IEA estimates gas demand will total 500bn cm, down from 513bn cm in 2012. Last year the agency forecast that European gas demand would reach 561bn cm by 2017, but  weak economic growth has forced a revision.

In the US, gas demand is expected to grow in all sectors, with power generation alone accounting for half of overall growth. Generation from gas-fired power plants is expected to drop in 2013, as Henry Hub prices increase.

The absence of US policy constraints on coal-fired plants means coal will regain some of its share of the power market. This will be driven by higher US gas prices, which are expected to rise this year after falling to 10-year lows in April 2012.

This, in turn, will increase US greenhouse-gas emissions from the power sector, the IEA said, after falling by 200m tonnes last year, bringing them back to a level last seen in the mid-1990s.

Transport

The transport sector could provide a significant boost for global gas demand, driven by rising US shale-gas production and with more stringent environmental policies being put in place in China.

The US shale gas revolution has triggered strong investor interest in natural gas as a transport fuel. The IEA expects gas use in road transport to rise to 2.5% of total global demand, around 98bn cm, by 2018. This is up from 1.4% of global gas demand in 2012.

The IEA said global gas demand in the transport sector was 48bn cm last year, up from 34bn cm in 2010. Non-OECD Asian countries accounted for around 26bn cm of this, with China alone consuming around 12bn cm in 2012.

The IEA said the number of global natural gas vehicles (NGVs) on the road totalled 16.2m as of mid-2012, up from 1.3m in 2000. However, NGVs still only make up 1.5% of the total number of road vehicles.

The IEA said that in each region the gas value chain must be developed alongside increasing demand growth to solve "the chicken-and-egg problem" of having a sufficient number of filling stations and NGVs. This will involve developing sufficient gas supply and building liquefaction plants to feed heavy-duty vehicles powered by liquefied natural gas (LNG), as well as compressed natural gas refilling stations.

Supply

Global gas supply increased by just over 2% last year, down from an average of around almost 3% per year for the last decade.

OECD countries in the Americas and the Middle East were the major contributors to this increased production, while there was also strong supply growth of around 7bn cm in China. Russian gas production fell and Europe managed to reverse declining output trends thanks to a substantial increase of 13bn cm in Norway's production.

US gas production rose to 681bn cm, a year-on-year increase of almost 5%, and contributed single-handedly to almost half of the global incremental gas supply last year. The second-largest increase came from Norway, followed by Turkmenistan, Saudi Arabia, Qatar, and China.

Russian gas production fell by 16bn cm, around 2.7%, driven by a combination of lower domestic demand and a reduced call for expensive Russian gas from importing countries. The production picture also reflected the struggle of many countries to increase their gas production, mostly due to upstream issues, delays in field development or regulated domestic gas prices being too low to trigger the development of new fields. This was notably the case in Africa (Algeria, Egypt), the Middle East (Bahrain), Latin America (Argentina) and Asia (Indonesia, India).

Growth in Saudi Arabia, Qatar and China corresponded to new field developments, whereas production in Norway was driven by demand in Europe, its main export market, and similarly in Turkmenistan, where production was partially driven by China.

LNG

The IEA said global LNG trade fell by around 2% last year driven by an unexpected fall in supply. Declining mature fields, difficulties in developing new production and rapidly increasing domestic demand all contributed to the drop.

Asian markets attracted increasingly higher volumes of LNG, around 18bn cm more year-on-year, as well as higher volumes of pipeline gas (9bn cm more). This was driven by soaring demand from Japan, South Korea and Taiwan. The growth in demand from Asia saw LNG from other markets, including Europe, diverted to meet demand and take advantage of the premium Asian buyers were willing to pay. Last year Asia represented 46% of global interregional gas trade, up from 40% in 2011, overtaking OECD Europe as the largest importing region. OECD Europe's share of global LNG trade fell by 4% last year to 45%.

In Asia there is however major uncertainty surrounding Japan's nuclear energy capacity. This will be the main factor which could curb gas demand in the region.

Tight supply

The IEA said global LNG supply will remain tight as security concerns in areas such as North and West Africa and Yemen pose threats to export operations. Domestic gas demand growth, often because of subsidised prices, is also diverting supplies from traditional exporters, such as the Middle East. Declining output from existing gasfields in Oman, Egypt, and Indonesia also poses problems, the IEA said.

The situation will improve from 2015 onwards, when new supply will come online, mainly from Australia. 

The IEA said from 2018 there will be intense competition for buyers among the 900bn cm per year (cm/y) of LNG projects which are being planned. The US, East Africa and Australia will each bring around 100bn cm per year to global gas markets.

Interregional gas trade is set to expand by 30% between 2012 and 2018, largely driven by the 100bn cm increase in LNG trade. Additional LNG supply will come from Australia and the US, while LNG supply from many Middle Eastern, Latin American and Asian LNG exporters will decline.

Van der Hoeven said the outlook for US LNG exports looks brighter than before as unconventional gas output continues to increase. The US Department of Energy approved Freeport LNG as its second major export project in May.

Unconventional gas

The growth in US unconventional gas production will affect global gas markets over the medium term mainly by increasing the availability of LNG, van der Hoeven said. 

The US accounted for around 90% of the 620bn cm of global unconventional gas production in 2012, up from around 583bn cm in 2011. The IEA said flexibly priced US gas could provide the liquidity to develop an Asian gas hub and a more integrated market, as well as provide an alternative supply option for Europe.

Global demand for imported gas will remain buoyed by constraints to domestic shale gas production, in places such as China and Europe.  Although China is actively pursuing shale gas exploration and has huge reserves, they are proving technically challenging to extract. The IEA said while these difficulties can be overcome, Chinese gas production will be dominated by other unconventional sources until at least 2020. These include tight gas, coal-bed methane (CBM) and even coal gasification. China's CBM output reached 12.5bn cm last year.

Main points from the IEA report:

- Global gas consumption will increase by 100bn cm/y until 2018. This is 70bn cm/y less than the previous forecast because of lower European demand and supply disruptions in the Middle East and Africa;

- Global gas demand will rise by 2.4% per year but will remain behind the 2.6% per year increase in coal consumption. Oil demand will rise by 0.7% per year;

- Transportation emerges as a major demand driver, accounting for 10% of gas demand growth by 2018, driven by China and the US;

- In the absence of constraints on coal-plant operation, power-sector emissions increase by 120 million tonnes;

- Security issues, production delays and domestic demand growth cause tight LNG supply until at least 2015;

- Persistent cost inflation and oil-indexed contracts place LNG at a disadvantage to coal across Asia;

- Unconventional gas production will remain a US phenomenon in the medium term. Exploration in other regions will continue but be hindered by geology, infrastructure and environmental constraints as well as lack of social acceptance;

- No major shale gas development is expected to take place outside the US, and possibly China, before 2018. Over the forecast period, most unconventional gas developments will be in CBM and tight gas;

- China will account for almost 30% of the growth of global gas demand. Gas will significantly help to improve air quality in China and by 2018 it will absorb the entire production increase from Central Asia as well as one-third of the global increase in LNG supply;

- The tightness of LNG supply enables some recovery of Russian exports to Europe. In the long term Russia will only maintain its position as a premier gas supplier by developing the resources and infrastructure for large-scale Asian exports;

- The IEA sees oil-indexed gas prices coming under increased pressure as the spread between US gas prices and Japanese LNG imports continues to widen. Most LNG coming online by 2015 will however have oil-linked prices; and

- Singapore is seen as the most likely country for an Asian natural gas trading hub to develop.

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