Global natural gas faces challenges from coal, pricing difficulties: IEA

London (Platts)--10Jun2014/712 am EDT/1112 GMT


Despite its many advantages, natural gas is losing ground globally to its rivals while buyers and sellers struggle to agree on what constitutes a fair price, the International Energy Agency said in a report published Tuesday.

In its annual Medium-Term Gas Market Report, it said global gas demand grew less last year than did demand for competing fuels: estimated at 3.49 trillion cubic meters, it was up just 1.2% from 2012, while oil demand rose 1.4%, coal was up 3-4% and renewables were up more than 4%.

Demand is forecast to reach 3.98 Tcm by 2019, representing 2.2% compound annual growth from 2013, while last year the IEA said the compound annual growth rate would stand at 2.4% between now and 2018. That itself was down from the IEA's forecast the year before of 2.7%.

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Discounting the impact of cold weather on demand, consumption was actually stable year on year. And without China -- accounting for half the growth at 13.3%, with production up 9% at 117 billion cubic meters in 2013 -- and droughts in South America pushing up demand for liquefied natural gas, the picture would have been much grimmer for the gas industry.

Thanks to cheap coal, growing renewable capacity and weak industrial demand, the EU power sector has lost demand totaling 41 Bcm in 2012-2013 inclusive, dragging the region's gas demand to 470 Bcm, lower than it was in 2000, and not now forecast to reach 500 Bcm until 2016, compared with its peak of 567 Bcm in 2010.

Despite the weak global growth, demand forecasts are high in Asia, reliant on liquefied natural gas, and four regions are competing to take the largest slice of the "quite limited Asian LNG import pie" -- North America, East Africa, Russia and Australia. Each could provide more than 100 Bcm/year. But the IEA says they want lower prices, damaging the profitability of the projects.

There has been a well-documented standoff between Japan and Korea on one hand and the producers over the past few years, with the US Henry Hub seen as the buyers' index of choice, until a liquid hub comes into being nearer to home. Japan and Korea import nearly all their gas as liquid, and there are no hubs for trading in Asia.

Gas supply rose 1.1% to 3.48 Bcm, but the IEA forecasts this to exceed 4 Tcm by 2020, based on average temperatures, oil prices dipping from $109/barrel to $91/b, an Asian-US price difference accordingly shrinking from $12.5/MMBtu to $8.8/MMbtu, and economic growth forecasts produced by the International Monetary Fund.

Of the 490 Bcm of new demand, some 40% will primarily come from US and Australian LNG export projects, even though only one is being built in the US, and 53% of it will end up in the power-generation sector, although this is the single most complex sector to understand, the IEA says.

"Despite many merits, such as large reserves, its clean-burning qualities and flexibility, gas has to fight to maintain its position in all the regions, facing different challenges in each," the IEA says.

A pricing mechanism that reflects supply and demand fundamentals is of paramount importance: subsidies exacerbate demand and inevitably lead to shortages a decade later, while high prices shatter the competitiveness of gas, favoring other energies, it said.

Last year, production increases in the former Soviet Union were offset by a slower rate of growth in OECD Americas -- the US, Canada, Chile and Mexico -- and a 4% decline in Africa, Egypt in particular. US gas production slowed for the first time since 2005. Geopolitical events, such as the attack on the In Amenas plant in Algeria and the war in Syria, accounted for less of a decline than economic recovery and competition from coal and renewables.

On the positive side, demand is projected to double in road transport to 93 Bcm by 2019, the main risk being the price relationship between oil and gas. Gas for shipping, the subject of a special section in the report, is "particularly promising for the post-2020 period. Here again the price difference between LNG and marine diesel oil could be crucial. China could be among the first to develop LNG use for inland waterway transport due to pressure to reduce emissions from diesel on rivers, such as the Yangtze and Pearl."

--William Powell, william.powell@platts.com
--Edited by Annie Siebert, ann.siebert@platts.com

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