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IEA cuts global gas demand growth forecast for Asia

The International Energy Agency has taken the step after surprisingly weak Asian markets

The International Energy Agency (IEA) has cut its global gas demand growth forecast on the back of surprisingly weak Asian markets. Only a few years ago the IEA saw that region as exemplifying the future golden age for gas, while even then the golden age in Europe was a thing of the past.

Compared to its predictions last year, the Paris-based agency cut its five-year production projection substantially – by 140bn cubic metres (cm) to 3926bn cm. Global gas demand is expected to expand by an average 2% between 2014 and 2020, slower than the 2.3% averaged over the previous ten years. 

“The experience of the past two years has opened the gas industry’s eyes to a harsh reality: in a world of very cheap coal and plummeting renewable energy costs, it was difficult for gas to compete,” Maria van der Hoeven, executive director of the IEA, said at the launch of the agency’s medium-term gas report.

Asian gas demand, long regarded as a future engine of growth, proved unexpectedly soft in 2014. Demand expectations have fallen in the key markets of Japan, South Korea and China.

In Japan, gas demand is set to fall. The only uncertainty is when: it depends on the scale and timing of the nuclear power comeback. Meanwhile, in South Korea, the significant rollout of new coal-fired power will dent future gas demand.

In China, after years of double-digit expansion, the pace of gas demand growth slowed to 8.6% in 2014. Growth has continued to slow into this year. Aside from a cooling economy, low oil prices have deterred consumers from switching to gas, which is relatively more expensive. The outlook for China, Asia’s biggest gas market, looks uncertain, said the IEA.

Mid term gas demand forecasts

Across Asia, the competitiveness of gas versus other fuels remains a significant demand uncertainty. 

In non-OECD Asia, very high import prices in 2013 and 2014 undermined gas demand growth, especially in the power sector. Indeed, several Asian countries have taken active steps to limit the share of gas use in their power mix and have prioritized coal capacity expansions over gas.

Plunging oil and gas prices raise the question of how demand, particularly in Asia, will respond. For now, Asian spot liquefied natural gas (LNG) prices continue to fall - they have already halved since 2014 – as rising supplies flood the markets. Oil-linked contracts have also started to fall. 

While, the IEA forecasts a price-driven increase in consumption, the sensitivity of Asian demand to lower prices is uncertain and has yet to be fully tested. In the short run, better affordability of gas imports is likely to trigger higher consumption. But in the medium term, the picture becomes more complex. Trust in gas as an attractive strategic option must increase for the fuel to make sustained inroads in the energy mix of much of developing Asia. The IEA warned that the gas industry must prove it can deliver gas supplies at price levels substantially below those that have prevailed in the recent past.

In recent years high LNG prices have dented the viability of gas. Consumption growth is fading amid tough competition from coal and renewables. For instance, as the cost of solar technology continues to fall, its potential to displace incremental LNG demand within emerging markets in southeast Asia, particularly Thailand and the Philippines, is rising.

If the current low prices persist, LNG markets could start to tighten up substantially by 2020, as investment in production capacity stalls, which would cause prices to rocket again, thus hindering the market’s development.

Still, the ability of industry and policy makers to establish pricing mechanisms that better reflect gas fundamentals, rather than being tied to oil prices, could help increase the fuel’s attractiveness as a long-term strategic option in the region.

Strong environmental policies can play a role in enhancing the position of gas too. Aside from offering greater flexibility and boosting energy security, as a transitional fuel gas can offer certain environmental benefits by cutting carbon emissions and air pollution relative to other fossil fuels.

But it is the availability of ample and cheap supplies that is by far the best means of ensuring a bright future for gas, said van der Hoeven. The industry must prove it can deliver production economically, at prices substantially below those that have prevailed in the recent past. 

Nevertheless uncertainties abound. Technological advances, geopolitical changes, and strategic policy shifts can call give rise to an unexpected re-shaping of gas markets. “Large-scale shale gas developments in Mexico and Argentina, a rapid uptake of gas in the transportation sector, the emergence of Iran as an LNG exporter, or further acceleration in Russia’s shift to the east might all become the next black swans of gas markets,” cautioned van der Hoeven.

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