The Natural Gas Market: Rapidly globalising but triggering concerns on supply

(Amsterdam) — 8 June 2006

“The natural gas industry is changing at a rapid pace. Global natural gas demand is rising but OECD production is plateauing”, said Claude Mandil, Executive Director of the International Energy Agency (IEA), today in Amsterdam, at the launch of a new publication: Natural Gas Market Review 2006: Towards a global gas market. “This evolution means that import dependence of the EU and North America will grow” Mr. Mandil added, stressing the growth in international trade and in particular the rising importance of Liquefied Natural Gas (LNG).

This groundbreaking IEA study gives an in-depth review of the dynamic natural gas market in the period 2000 to 2010, covering recent events such as the Russia/Ukraine dispute, supply disruptions in North America due to hurricanes, high global gas prices and European market failures and looking at their broader implications. It further assesses the rapid changes in the LNG industry, investments in the gas sector and the importance of the power sector for global gas demand.

In the next five years, global gas demand is projected to increase to 3.2 trillion cubic meters, or 2.4% per year. Even if high gas prices persist, a decrease in growth is only likely to be felt after 2010. The LNG industry currently constitutes only 6.5% of the gas market but is set to attract half of the sector’s investments - consequently, “the importance of LNG for OECD countries will double”, Mr. Mandil said. LNG makes it possible to bring gas reserves to markets which are far away, without using pipelines, and is now an economic and competitive means of energy distribution. This is important as the OECD countries together hold only 9% of proven reserves, whereas the Middle East holds 41% and Russia alone 26%.

While Russia is the world’s largest gas producer and exporter, the level and nature of new investments there are causing concern. “Russia has been a reliable supplier of gas to Western Europe for several decades and the IEA believes that Russia has both the willingness and the reserves to continue this role for the decades to come”, Mr. Mandil said. ”Nevertheless, it is not clear where and when investments will be made to reduce the impact of declining production in its major existing fields. Both suppliers and consumers will greatly benefit from increased transparency in the Russian gas sector”.

Investment is a priority in general as the gas supply chain is becoming more and more complex. On the demand side, investment is strong in the power sector with the overwhelming majority of new power plants in the OECD being gas fired. On the supply side, project developers are struggling to keep pace and projects are currently being postponed due to a lack of qualified personnel and high raw materials prices. “This will keep upward pressure on gas prices for the near future” Mr. Mandil stated.

The traditional business model of the gas industry is changing as the flexibility of LNG ships increasingly allows sellers to bring gas to markets with the highest value. The rapidly growing LNG market-share already transfers price signals between markets as distant as Japan, Spain and the US. With the Atlantic LNG market set to equal the Pacific market by 2010, Mr. Mandil confirmed that “there is a definite trend towards a global gas market”.

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