Global gas growth constrained by supply – Cedigaz

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Global growth of the natural gas industry is being increasingly constrained by supply issues, especially in emerging markets, according to a report published last month by the Paris-based international gas association Cedigaz.

First estimates in the “2013 Natural Gas Year in Review” report indicate that gas consumption grew by just 1.3% on 2012 – which compares with average growth over the previous decade of 2.8%/year. Gas production grew by just 0.8%, taking total volume to 3,377 Bcm. It was the second consecutive year of slow growth; growth in 2012 was only 2.3%. The difference between production and consumption was met from storage, especially in the United States.

Cedigaz attributes the slow-down in gas production to “the decline of mature and conventional fields, and an insufficient renewal of reserves”, adding that: “The lack of upstream investment is especially acute in emerging markets, due to a lack of a favourable regulatory and fiscal climate.”

Geopolitical concerns: It doesn’t help that the economic and geopolitical climate remains unstable. “The moderation of natural gas supply and investment has also been increasingly driven by geopolitical challenges,” says Cedigaz. “Deterioration of security, internal conflicts and resulting damage to infrastructures have caused some production outages and supply disruptions in some countries.” Table showing Evolution of International Gas Trade in 2013

In 2013, marketed production fell heavily in several African countries, notably Algeria, Nigeria, Libya and Egypt. With the exception of Europe, where marketed gas production was down 2.4% to 272 Bcm, other regions posted positive production gains. The largest were in the Middle East (3.4%) and the CIS (2.7%). Growth in the CIS meant that production reached an all time high of 815 Bcm, most of that – 627 Bcm – in Russia. A key event in the Middle East in 2013 was the production start-up at the Tamar field in Israel, which at plateau will have a capacity of 10 Bcm/year. Accordingly, gas production in the country more than tripled to an estimated volume of 4.6 Bcm.

Iran's marketed production is “tentatively estimated” at 163 Bcm in 2013, an increase of 1.8% from the previous year. “Production capacity of South Pars is around 93 Bcm/year,” says Cedigaz, “as ten phases are now fully operational. But delays in developing the field have resulted in a growing gas supply shortage. Iran has for years struggled with gas shortages as demand continues to outpace supply, despite attempts to curb consumption by cutting gas price subsidies. The seasonal gas supply shortage dramatically worsened last winter, which was abnormally cold.”

Tightening LNG market: A significant constraint in supply, and a factor in driving gas prices upwards, has been a tightening of the LNG market. World LNG supply flattened in 2013 at a time of booming demand in Asia and, to a lesser extent, Latin America. “In the face of political, regulatory and pricing uncertainties,” says Cedigaz, “investors are being slow to sanction the projects necessary to ensure a global gas balance in this decade.”

Asian demand remains uncertain, however, not least because of the uncertainty over nuclear reactor re-starts in Japan. Shockingly – given how much of Japan’s electricity came from nuclear before the Fukushima accident, some 30% – all of the country’s commercial reactors remain shut down, which has driven up LNG imports.

However, Cedigaz notes that: “Recourse to LNG imports to compensate for the nuclear shortfall was less apparent in 2013, as conservation measures by consumers in a context of high import prices reduced electricity consumption. Japan’s gas demand is now limited by the capacity of both its LNG importing infrastructures and combined-cycle gas power plants.” In 2013, Japan’s LNG imports grew by only 0.2% to 116.4 Bcm.

Nevertheless, Asia’s share of LNG consumption continued its rapid growth, rising from 63% in 2011 to 70% in 2012 and 74% in 2013.

As of the end of 2013, global liquefaction capacity had grown to 391 Bcm/year, while regasification capacity was up to 958 Bcm/year.

International gas trade increased significantly by 2.1% to 1,048 Bcm (see table above), due to the growing dependence of consumer markets on increasingly distant production sources, sometimes located in economically and politically unstable areas. However, the rise was driven only by inter-regional pipeline gas exports from the CIS to Europe (up 15%) and China (up 36%).

“Geopolitical risks are having an ever-growing importance on the international gas scene,” says Cedigaz, “as demonstrated by the current Ukraine crisis.”

Competition from coal: A further factor in slowing gas consumption growth has been increasing competition from coal, especially in power generation. Inside the EU-28, consumption is estimated to have fallen by 1.9% to 460 Bcm, a level “not seen in more than 15 years”. However, Cedigaz notes that: “Although European gas consumption was on the decline, European gas imports via pipelines surged in 2013 to compensate for a continuous fall in LNG imports.”

In the US, rising gas prices compared with 2012 have often made coal more competitive, reducing gas consumption in power generation by 10.5%. Gas production growth in the US is estimated at 0.9% in 2013, the lowest annual growth since 2005. This compares with 5% in 2012 and 7.5% in 2011.

Gas prices in 2013 remained highly regionalised. In the US the average wholesale price at Henry Hub rose from $2.75/MMBtu in 2012 to $3.7/MMBtu. In Japan, the average LNG price remained at a high level at around $16/MBtu, because of indexation to oil.

In Europe, spot-price indexation now accounts for more than 50% of the region’s gas supplies. Interestingly, notes Cedigaz: “In 2013, the average price of imported gas in Germany, mainly based on long-term contracts, showed a clear convergence with the average spot price, which was approximately $11/MMBtu (€27.5/MWh) for the year . . . Given the tensions in the international LNG market, the high spot prices in Asia have had an upward impact on average spot gas prices in Europe.”

By Alex Forbes