Medium-Term Gas Market Report 2013 - IEA

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EXECUTIVE SUMMARY Incremental supply is dominated by OECD Americas, the FSU region and OECD Asia Oceania The OECD Americas, OECD Asia Oceania and FSU/non-OECD Europe regions are set to provide 55% of incremental gas supply over the period 2012-18. That these OECD regions will be able to bring such volumes of additional gas supply to global markets marks a breakaway from the trend of the last decade, when non-OECD regions represented 90% of additional supply. The evolution of production in OECD Americas will depend on additional gas demand, the relationship between oil and gas prices for wet gas, and potential LNG exports, while OECD Asia Oceania and FSU/non-OECD Europe regions will rely primarily on exports. In the case of Asia Oceania, the timeliness of new Australian LNG export projects is important for their incremental supply. For the FSU/non-OECD Europe region, import needs from Europe and China, combined with the competitiveness and availability of alternative supply sources in those two regions are the main factors. This does not alter the region’s potential to bring significant volumes of gas to the markets, through both traditional and rising Russian independent producers. While China becomes the fourth-largest gas producer, production among other non-OECD countries in Asia, the Middle East, Africa and Latin America struggles to increase due to various concerns, including low regulated gas prices, political instability and regulatory uncertainty. In the Middle East, additional production fails to meet incremental domestic consumption. Oil and gas companies have been focusing particularly on East Africa and the Eastern Mediterranean. But significant development in those two regions is not expected to take place before 2018. Geopolitical challenges in the Eastern Mediterranean, the need to balance exports with domestic requirements, potential changes in fiscal policies, the need to develop a regulatory framework and, finally, the costs of developing new infrastructure are the most significant issues that could defer production beyond 2020. Shale gas continues to capture the attention of companies and governments alike, but no major development is expected to take place outside North America and possibly China by 2018. Over the forecast period, most unconventional gas developments will be in coalbed methane and tight gas. Activities will nevertheless continue on unconventional gas exploration, in particular shale gas – many countries are assessing the potential for unconventional gas and debating whether specific environmental regulation is required and whether such production should be allowed, encouraged or promoted through specific incentives, hence preparing the ground for unconventional gas production to potentially take off by 2020 outside North America. Unprecedented tightness in global markets should lessen by 2015-16 After a declining LNG trade in 2012, LNG markets are set to face unprecedented tightness over 2013/14, as little additional supply capacity is expected to come on line and many existing LNG facilities continue to face declining supplies. The situation improves from 2015 onwards, when a new wave of LNG supply is set to arrive, largely from Australia, despite cost overruns and delays. There is no question of how thirsty markets are for this LNG, given that the bulk of this supply has already been spoken for under long-term contracts by Asian offtakers, mostly based on oil-indexed contracts. These projects will need high gas prices due to their steep costs, the US Sabine Pass project being the exception. Looking beyond 2018, there is intense competition among the 900 bcm per year of LNG projects currently at the planning stage, notably in North America, East Africa and Australia, each of which will bring some 100 bcm per year to global gas markets. While some projects in Australia and the United States have already signed a few long-term contracts, they face various 6 MEDIUM-TERM GAS MARKET REPORT 2013 © OECD/IEA, 2013
EXECUTIVE SUMMARY challenges: uncertainties on approvals by the Department of Energy (DOE) and Federal Energy Regulatory Commission (FERC) in the United States, and a steep rise in capital costs in Australia. Meanwhile, East African projects appear much less advanced. Interregional gas trade is set to expand by 30% over 2012-18, largely driven by the 100 bcm increase in LNG trade. Pipeline trade expands at a slightly slower pace. Additional LNG supply originates in Australia and, to a lesser extent, the United States, while LNG supply from many Middle Eastern, Latin American and Asian LNG exporters declines. The FSU/non-OECD Europe region brings additional pipeline supplies to the rest of Europe and China, but Europe remains by far the largest importing region. China becomes the second-largest net importer and OECD Asia Oceania the third-largest net importer. Non-OECD Asia’s net exports diminish significantly so that the region is only a few billion cubic metres away from becoming a net importer. A sustained price divergence is putting oil indexation under pressure As regional market prices are at unprecedented levels of divergence, oil indexation is coming under increased pressure. The spread between US Henry Hub (HH) gas prices and Japanese imports reached a record average price difference of USD 16 per million British thermal units in mid-2012. US gas prices reflect the region’s supply and demand fundamentals and its sustained high oil prices, triggering increasing associated gas production, while many European buyers have renegotiated the pricing formulas in their long-term contracts and introduced a higher share of hub indexation. This has not been the case in Asia, where most long-term contracts continue to be linked to oil prices. Looking forward, oil indexation is being increasingly challenged in Asia (and continues to be in Europe) given the burden imposed on these countries’ economies. However, the fact that most LNG coming on line by 2015 is linked to oil prices implies that oil indexation is likely to continue to dominate. Two factors are nevertheless putting pressure on LNG and pipeline suppliers are insisting on oil indexation for projects still at the planning stage: 1) US LNG projects that have signed longterm contracts pegged on HH prices; and 2) rising interest among Asian countries in developing an Asian natural gas trading hub. Singapore is seen as the most likely country for such a hub, but other regional trading hubs could be developed afterwards building on this initial development, as was the case in Europe earlier this decade. There are nevertheless a number of prerequisites to fulfil, such as putting in place third-party access to infrastructure, liberalising wholesale gas prices and possibly the power sector (an important and growing user of natural gas), and having an arms-length relationship with the government. This requires sufficient flexible LNG available on global gas markets. Under current conditions, Asian buyers are reluctant to commit to LNG or pipeline supplies based on oil indexation. © OECD/IEA, 2013 MEDIUM-TERM GAS MARKET REPORT 2013 7
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Medium-Term Gas Market Report 2013 - IEA

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