Gas market frustration underlined by IEA report

The failure of the world economy to recover gas sufficiently is frustrating the efforts of energy exporters to rebalance the gas market without sharp price declines, according to a report on the global gas market from the International Energy Agency.

The Paris-based energy consumers’ watchdog, in its latest medium-term global gas outlook, reduced its forecast demand growth over the next five years to 2 per cent a year on average, compared to 2.3 per cent in its previous forecast last year.

There are a number of reasons for the slower projected growth through 2020, the IEA said, including the encroachment of renewable energy technologies, which have become cheap enough to be a more favoured alternative as countries switch over from coal and nuclear.

But the fact that oil and gas had become so expensive in recent years, even in the face of sluggish economic growth, also meant that a switch to alternatives was accelerated.

“One of the key – and largely unexpected – developments of 2014 was weak Asian demand,” said Maria van der Hoeven, the IEA’s executive director. “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 falling costs for renewables, it was difficult for gas to compete.”

The IEA report comes as oil ministers from Opec meet in Vienna on Friday to assess the world market after their decision last November to keep pumping at the same level, even though their oil exports exceeded the world demand by about 1 million barrels per day.

The widely held view is that Opec – led by Saudi Arabia and its Arabian Gulf allies – will hold to its decision to keep producing at current levels and let higher-cost producers such as shale oil producers in the US cut back to balance the market.

“These countries [the Opec Arabian Gulf members] are willing to tolerate low oil prices now in the hope that prices are higher in the long-run” as the global economy improves, said Jason Tuvey, a Middle East analyst at Capital Economics. But “the big picture is that prices are still 40 per cent lower than a year ago and several members of the cartel, notably Venezuela and Iran, have continued to push strongly for cuts to the group’s production target”.

For the natural gas market, any recovery in Asian demand may be slowed by the fact that gas prices had been kept artificially high by oil prices, to which they are linked, according to the IEA.

“Demand for gas in Asia may not recover as quickly as the drop in prices,” the IEA report argued, adding that “a few Asian countries have decided to move ahead with plans to expand coal-fired power generation instead of gas-fired generation. For the fuel to make sustained inroads in the energy mix, confidence in its long-term competitiveness must increase”.

As with the oil sector, the lower forecasts for gas prices means that projects are being cancelled or delayed.

Even so, the IEA points out that the world gas market – and especially the Asian and Middle East markets – will have to cope with a flood of new supply from liquefied natural gas projects coming on-stream in the next three years, particularly in Australia.

LNG export capacity globally is expected to increase by more than 40 per cent in that period, even though demand is lagging badly – in Europe, about 80 per cent of LNG intake capacity has been sitting idle for months.

For the UAE, which has become a net gas importer in recent years, it is not clear what the overall effect will be. While it may hit early-stage gas production projects, such as Bab, it should lower import prices and favour developments like a planned LNG intake facility at Fujairah.

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