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BG warns major gas supply challenges need to be overcome

New sources of gas are poised to flood the market and depress prices. But major supply challenges need to be overcome, writes Damon Evans

The emergence of potentially significant new supply sources in the US, Canada and East Africa, has led to a belief that a wave of gas will flood the market and depress prices. But major supply challenges have to be overcome before surging global gas demand can be met, BG Group warned.

The emergence of potentially significant new supply sources in the US, Canada and East Africa, has led to a belief that a wave of gas will flood the market and depress prices. But major supply challenges have to be overcome before surging global gas demand can be met, warned.

The UK-based gas player has stakes in proposed export ventures in all three of the rapidly emerging hubs. But, Martin Houston, BG's chief operating officer, told the Asia Oil & Gas Conference that markets could be kept tighter for longer, as supplies from these new exporters will take much longer to develop than many people envisage.

He added that the "illusion of buyers' markets" and resultant "buyer inertia" in the form of a focus on proposed US liquefied natural gas (LNG) exports - totaling 220 million tonnes per year (t/y) - is a "panacea" that could hinder the development of new supplies.

Singapore-based consultancy Tri-Zen says the hype surrounding LNG exports from the US was driven by an expectation that it would be a "cheap" source, despite the fact that costs do not look particularly low and the projects are furthest from the major LNG markets.

BG expects only 45m t/y of exports to be in place from the US by 2020.

Houston believes the gas industry will struggle to meet the world's rising need for gas, widely seen as an abundant and inexpensive low-carbon fuel.

World gas demand is forecast to grow by around 2.5% per year - or double US gas demand of 650 billion cubic metres (cm) - to just over 4,500 billion cm by 2025, according to consultancy Wood Mackenzie.

It will be a "huge challenge" to meet this expected demand as existing output wanes and some $2.5 trillion is needed to boost underlying production by 9% per year to bridge the gap, said Houston.

Highlighting the enormity of the challenge, all identified sources of new supply, including unconventional gas sources in China, which many analysts forecast will take decades to develop, need to be tapped.

BG expects LNG demand to expand at 5.5% per year, hitting 420m t/y in 2025 to help feed the world's rising appetite for gas. As a result, $400bn needs to be invested in 150m t/y of new capacity on top of that being built and already existing, BG's analysis shows.

But Houston cautioned that the rapid emergence of latent supplies from the US, Canada and East Africa has fuelled some myths: it's now a buyer's market; that LNG prices will fall; and that oil indexation is under threat from new pricing hubs. "We (the industry) have prior form in being over-optimistic on LNG project delivery," he said, referring to dashed hopes for additional exports from Nigeria, Venezuela, as well as Iran.

He added that new projects in the US, Canada and East Africa, come with challenges, including regulatory, institutional, as well as infrastructure constraints.  Therefore they will take much longer to develop than many expect, warned Houston.

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