IEA golden age of gas by 2035 but what about 2015?

The IEA’s Golden Age of Gas scenario presents a world energy market transitioning to natural gas domination by 2035. Coverage of the report has focused on the headline grabbing long term forecasts, but the report also contains useful analysis of the somewhat more predictable 2015 horizon. The IEA foresees the current global supply glut being alleviated by 2015. But the extent to which this happens will depend heavily on marginal LNG demand growth in Asia. The potential implications of this for European gas prices are significant.

July 4, 2011

The IEA foresees a Golden Age of Gas

There has been a steady stream of positive news on the outlook for natural gas over the past few months. One of the most prominent stories has been the publication of the IEA’s Golden Age of Gas scenario which presents a world energy market transitioning to natural gas domination over the next 25 years.

The unconventional gas revolution of the last few years has changed the perception of natural gas. The increasing cost and complexity of producing conventional reserves has been countered by the evolution of production techniques that allow access to an abundance of relatively low cost unconventional reserves. The IEA now estimate that there are over 800 tcm of remaining global recoverable reserves. This equates to 250 years of consumption based on current production levels. Reserves are split roughly 50:50 between conventional and unconventional (tight gas, shale gas and coal bed methane). As a point of comparison there was no mention of unconventional gas potential when gas reserves were analysed in the 2006 IEA World Energy Outlook.

There are also potential upsides in the reserve estimates as the shale gas estimates (largely based on US DOE EIA analysis) exclude potentially productive basins in China and the Middle East and do not consider the relatively unexplored potential of methane hydrates. The optimism associated with shale gas potential must be tempered with the uncertainty around the environmental impact of the fracking process and associated regulatory response (for example, France suspended all shale gas exploration in March this year). However the potential for unconventional gas to significantly diversify sources of supply, reduce geopolitical risk and promote competition amongst suppliers will be a key driving force behind its development.

The IEA sees global gas demand growth primarily driven by non-OECD countries, particularly China and India. The flexibility that gas offers in its ability to deliver diverse forms of energy (e.g. power, heat and transportation) supports growth across all demand sectors, but the IEA predicts the greatest increase in gas demand from power generation. This is likely to have some very interesting implications for gas infrastructure flexibility which we explore specifically in an article next week.

While coverage of the Golden Age of Gas report has focused on headline grabbing long term forecasts, the report also contains useful analysis of the somewhat more predictable 2015 horizon.

Global gas market over a 2015 horizon

The key issue facing the global gas market over a 2015 horizon is the extent to which the current gas supply glut is alleviated. The supply glut is the result of a combination of a number of factors: demand destruction from the financial crisis, the emergence of unconventional gas production in the United States and the commissioning of a large volume of LNG liquefaction capacity. The supply glut has already been alleviated to some extent in 2010-11 by strong demand growth, particularly in the Asia Pacific region. The IEA sees this set to continue as Japan, the world’s largest importer of LNG, looks to increase its gas imports as a replacement for nuclear generation and Asian developing economy growth continues. The United States is forecast to remain broadly self sufficient to 2015 as a result of the domestic shale gas boom. Europe, with a continuing decline in indigenous production, is likely to be competing for LNG with countries in the Asia Pacific region as supply and demand conditions return to balance.

The IEA’s view of the global supply and demand balance for 2015 is summarised in Chart 1.

Chart 1: Global supply and demand balance in 2015 (source: Timera Energy graphic based on IEA data)

The big story that is emerging is the role that China will play in the global gas market. China’s 12th Five Year Plan, covering 2011-15, looks to promote energy efficiency and the use of cleaner energy sources to power its economic growth. This includes targeting an 8.3% share for natural gas in primary energy demand by 2015 (or 260 bcm up from 85 bcm in 2008). The most likely sources of increase in natural gas demand are from residential gas use and power generation. It should be noted that the increase in gas fired generation capacity is policy driven, as new coal capacity has a significantly lower cost base than CCGT gas plants given low domestic coal prices.

Whilst higher global gas prices have encouraged the development of domestic production, China is also preparing for an increase in imports with additional LNG regasification and pipeline projects under construction or in planning. Marginal LNG demand growth from Asia will be a key driver of global gas market dynamics given that the recent growth in global LNG capacity is levelling out and the majority of forecast production is already committed via long term contracts as illustrated in Chart 2.

Chart 2: Asian sources of supply versus global LNG production (source Wood Mackenzie and Statoil)

The potential implications for Europe are significant. If China’s economic growth continues unabated, Europe will find itself competing for LNG cargoes with the powerhouse of global growth and regional gas prices will rise accordingly. However, if China falters there may well be a return to the global supply glut conditions and depressed global LNG spot prices that have dominated the last three years.

This article follows on from a previous article which explores the long term supply and demand fundamentals of the global gas market in the context of the oil and coal markets.