London (Platts)--6Jun2011/729 am EDT/1129 GMT

Natural gas use could overtake coal and rival oil to account for more than a quarter of global energy demand by 2035, supported by booming shale gas output and a weakened appetite for nuclear power, the International Energy Association said Monday.

In a new report, the IEA concludes that gas use may rise more than 50% to 5.1 trillion cubic meters by 2035 from 2010 under a "high gas scenario" with ample supplies and robust demand from China and other emerging markets.

The new estimate represents a 2% average annually growth rate and is 13%, or 600 Bcm, higher than the IEA's previous benchmark scenario for gas demand published in late 2010.

"We have seen remarkable developments in natural gas markets in recent months," IEA Executive Director Nobuo Tanaka said speaking at the launch of the report in London.

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"There is a strong potential for gas to take on a larger role, but also for the global gas market to become more diversified and therefore improve energy security," he said.

The report -- 'Are We Entering a Golden Age of Gas?' -- illustrates increasing uncertainty about nuclear power in the wake of Japan's Fukushima disaster and points to a more prominent role for gas in the global energy mix.

Gas use grows at the expense of oil, coal and nuclear under the new scenario, with gas overtaking coal to become the world's second biggest energy source by 2030.

Five year later, gas consumption would stand just 2 percentage points lower than oil at 27% of the energy mix, the study concludes.

NEW SUPPLY
Non-OECD countries would account for 80% of the demand growth for gas to 2035, with China making up nearly 30% of the total to rival the EU's total gas consumption, the IEA said.

Gas demand is expected to grow through China's implementation of an ambitious gas use policy and lower growth of nuclear power and an expected growth in vehicles fueled by compressed natural liquids.

To meet China's growth in demand by 2035, annual gas production must increase by 1.8 trillion cu m, which represents about three times the current production of Russia, the IEA said.

The IEA was upbeat, however, on the global supply potential to meet demand, estimating that the world's recoverable gas resources could last over 250 years at current consumption.

The IEA said more than 40% of the increase in demand will come from unconventional gas sources, such as shale gas or coal bed methane projects.

Although unconventional gas resources are now estimated to be as large as conventional capacity, uncertainty persists over its production outlook due to environmental and safety concerns raised by hydraulic fracturing, or "fracking."

The IEA believes, however, that if "best practice" production values are adhered to, unconventional gas could have 3.5% higher well-to-burner emissions than conventional gas.

Despite concerns over shale gas technologies, the IEA concludes that unconventional gas can be produced in "plentiful volumes" at cost similar to current US levels of around $3-7 per million Btu.

A large scale ramp up in unconventional gas outside the US, however, would likely require tighter regulations and operating practices adding to production cost, the IEA's chief economist Fatih Birol said.

"We do not think that the increased costs will be a deal breaker," Birol said.

While gas prices in the US and Europe are likely to continue benefiting from existing weak demand and booming supply in the short term, the current glut will likely dry up by 2015 supporting gas prices further out, the IEA said.

CO2 EMISSIONS
The IEA also warned that lower gas prices could push out renewables, if governments come under pressure to reduce renewables subsidies and opt for gas as an alternative.

Tanaka added that "while natural gas is the cleanest fossil fuel, it is still a fossil fuel. Its increased use could muscle out low-carbon fuels, such as renewables and nuclear -- particularly in the wake of the incident at Fukushima and the likelihood of a reduced role for nuclear in some countries," he said.

Although increased use of natural gas can result in lower emissions of greenhouse gases and local pollutants, the report found that within the "golden age scenario" carbon emissions would still be consistent with a long-term temperature rise of over 3.5 degrees Celsius.

At such a level, scientists warn that global warming could run out of control, with major disruption to the global ecosystem and rises in sea levels.

A greater shift to low-carbon energy sources, increased energy efficiency and deployment of new technologies including carbon capture and storage would still be required to limit temperature rises to 2 C, said the report.

"An expansion of gas use alone is no panacea for climate change," Tanaka said.

'Are We Entering a Golden Age of Gas?' is taken from the IEA's annual World Energy Outlook 2011 due to be published November 9.

--Robert Perkins, robert_perkins@platts.com
--Jillian Ambrose, jillian_ambrose@platts.com