December 2017 Exclusive Story
Operators Lock In 2018 Oil Hedges
PARIS–The global natural gas market is undergoing a major transformation driven by new supplies coming from the United States to meet growing demand in developing economies, according to the International Energy Agency’s Gas 2017 report.
World gas demand is expected to grow by 1.6 percent annually over the next five years, with consumption reaching almost 4 trillion cubic meters (141 trillion cubic feet) by 2022, up more than 16 percent from 2016. Demand from the industrial sector in developing economies will become the main engine of gas consumption growth, surpassing power generation, IEA projects.
“The United States–the world’s largest gas consumer and producer–will account for 40 percent of the world’s (new) gas production, thanks to the remarkable growth in its domestic shale industry,” the agency says in the report, which was released in mid-July. “By 2022, U.S. production will be more than one-fifth of global gas output. Production from the Marcellus Shale, one of the world’s largest fields, will increase by 45 percent, even at current lower price levels as producers increase efficiency and produce more gas with fewer rigs.”
While U.S. demand for gas is growing, driven by increasing consumption from the industrial sector, more than half of the domestic production increase over the next five years will be liquefied for export outside the North American market. In fact, by 2022, the IEA suggests that the United States could challenge Australia and Qatar as the world’s top exporter of liquefied natural gas.
“The U.S. shale revolution shows no sign of running out of steam and its effects are now amplified by a second revolution of rising LNG supplies,” comments IEA Executive Director Fatih Birol. “Also, the rising number of LNG consuming countries, from 15 in 2005 to 39 this year, shows that LNG attracts many new customers, especially in the emerging world. However, whether these countries remain long-term consumers or opportunistic buyers will depend on price competition.”
Birol adds, “The environmental advantages of natural gas, particularly when replacing coal, also deserve more attention from policy makers.”
Catalyst For Change
U.S. LNG will be a catalyst for change in the international gas market, diversifying supply, challenging traditional business models and suppliers, and transforming global gas security, the report claims. A new wave of liquefaction capacity is coming on line at a time when the LNG market is already well supplied, which is attracting new LNG-consuming countries such as Pakistan, Thailand and Jordan.
At the same time, the ample availability of LNG also is creating new competition with pipeline gas supplies, which could benefit consumers. “This intense competition is loosening pricing and contractual rigidities that have traditionally characterized long-distance gas trade,” the report reads. “The change will be accelerated by the expansion of U.S. exports, which are not tied to any particular destination and will play a major role in increasing the liquidity and flexibility of LNG trade.”
Europe could see growing competition between LNG imports and pipeline gas as domestic production declines, creating extra uncertainty on the sources of future supply. “Even in a well-supplied market, recent events remind us that gas security remains a critical issue.” Birol says, referencing the recent political standoff involving Qatar, which currently supplies 30 percent of the world’s LNG.
IEA projects that almost 90 percent of the anticipated growth in demand over the next five years will come from developing economies, led by China. Industrial demand will be the main engine of demand, accounting for half of total forecast growth in consumption. Expanding usage in the chemical sector, strong demand for fertilizers in countries such as India and Indonesia, and coal replacement in a host of smaller industrial applications mean that industrial gas demand is on pace to grow by 3 percent annually through 2022. Meantime, demand in power generation is expected to continue to expand, but at a much more modest rate of less than 1 percent a year.
Taking The Lead
While gas markets are approaching saturation in some parts of the developed world, consumption is forecast to continue to grow in the United States. Coal-to-gas switching, the main catalyst of demand growth in recent years, will slow significantly because of expected increases in U.S. gas prices going forward. IEA predicts. Therefore, most U.S. growth will occur in the industrial sector. Together with Canada and Mexico, North American demand will surpass 35 Tcf by 2022, representing one-fourth of total global gas consumption, the report concludes.
As the shale revolution gets a second wind, IEA says it expects the United States to take the lead in global supply growth, increasing production output more than any other country over the next five years.
“While overall U.S. production fell in 2016, output from the Marcellus continued to grow, underscoring the ability of U.S. gas drillers to counter the effect of lower prices by improving efficiency and producing more gas with fewer rigs,” the report reads. “The continuing development of the Marcellus and Utica shales is being supported by the extension of pipeline infrastructure from the Appalachian region to ship more gas to markets in the Northeast, Midwest, and Southeast regions of the United States and in Eastern Canada.”
U.S. natural gas output is expected to grow at a rate of 2.9 percent annually over the forecast period, with the United States accounting for 22 percent of the total gas produced worldwide by 2022. About 50 percent of the forecast increase in U.S. production will satisfy domestic demand; the remainder will be liquefied for export as LNG, IEA projects. “By the end of the forecast period, the United States will be well on course to challenge for global leadership among LNG exporters,” the report states.
LNG Trade Flows
The volume and diversity of global LNG trade flows are increasing rapidly with the appearance of new exporting and importing countries. The United States will lead the world in liquefaction capacity additions, IEA projects, adding three times more new capacity than any other country over the next half-decade.
With relatively low LNG prices, exporters are working hard to open new markets, the report says. One sign of this effort is the rapid growth in the number of countries importing LNG, which expanded by 160 percent since 2005, from 15 to 39 in 2017. Another eight countries are expected to add LNG import facilities by 2022, which IEA says will absorb some of the surplus gas on the market. Nonetheless, the growth in LNG demand is not expected to be sufficient to fully rebalance the LNG market by the end of 2022, according to the agency.
“Ample availability of LNG is putting pressure on traditional ways of pricing and marketing natural gas. Oversupply and the decline in the price of oil have brought down natural gas prices in all regions,” the report observes. “The huge price divergences between regions seen as recently as 2013–when prices in Japan and Korea were about six times U.S. wholesale prices–have narrowed considerably. This has limited profitable export opportunities for many players, at least temporarily.”
In the short term, well-supplied markets are maintaining downward pressure on prices and discouraging new upstream investments in LNG. Longer-term risks to gas security could also arise from a shortage of investment in new gas supply and LNG infrastructure, although the U.S. looks well placed to respond once international markets show signs of tightening, IEA says.
“Only two new final investment decisions were taken in 2016 to expand existing or build new LNG facilities, and only one FID has been taken so far in 2017. If major new investments in gas supply struggle to make headway, this would increase the risk of a ‘hard landing’ for gas markets in the 2020s,” the report states. “However, brownfield expansions of existing facilities, notably in the United States, provide a safety valve since they could bring new gas to markets relatively rapidly once the need arises.