IEA forecast global gas demand decline despite lower gas prices

*Gas storage and export.

*Gas storage and export.

Oscarline Onwuemenyi

09 June 2016, Sweetcrude, Abuja – The International Energy Association (EIA) has forecast that global gas demand will continue to dip despite lower gas prices.

This medium-term report forecasts demand to reach 3.9 trillion cubic metres in 2021, increasing at an average annual rate of 1.5%, equivalent to an incremental 340 bcm between 2015 and 2021.

According to a report released recently, weak demand, low prices and a sharp cutback in investments result in slower growth in global gas production over the time horizon of the report.

It noted that in the United States, production is expected to remain relatively flat across 2016 and 2017, pressured by a fall in output of associated gas and much slower growth elsewhere.

“Given the drastic fall in both oil and gas prices, stagnation in output must be looked at as a remarkable achievement and a testament to the technological and financial resilience of the US shale industry,” the report noted.

The IEA said it expects that the oil market will be close to balance in the second half of 2016, and in 2017 it will be in balance. This should help gas production growth resume, as gradually recovering oil prices improve the economics of associated/wet gas.

It added that large cost reductions achieved during the downturn will allow drilling activity to come back at lower prices than before. “Overall, between 2015 and 2021, US gas production is forecast to increase by more than 100 billion cubic metres (bcm), accounting for one-third of global incremental production.”

Following a stagnation in 2014, global gas demand is estimated to have returned to growth in 2015. Expansion has remained well below the historical average, however: since 2012, global gas demand has increased by just 1.0% a year, much slower than the ten-year average of 2.2%.

“This report forecasts demand to reach 3.9 trillion cubic metres in 2021, increasing at an average annual rate of 1.5%, equivalent to an incremental 340 bcm between 2015 and 2021. Slower primary energy demands growth and the decline in the energy intensity of the world
economy are lessening demand growth for all fossil fuels, including gas,” it added.

According to the report, the energy transformation in China and subdued economic growth in advanced economies are creating headwinds against energy demand in general. Low fossil fuel prices have so far failed to compensate for them.

“Slowing primary energy demand growth means that the share of gas in the world’s energy mix will still increase marginally over the next five years, despite slower global gas demand growth. Particularly in the power sector, there are factors that are constraining the ability of gas to expand more quickly in spite of low prices.

“In Asia – where the fall in gas prices has been the most dramatic – gas demand growth has weakened considerably. The absence of a direct link between demand and prices suggests that other factors have offset the impact of cheap gas.

As the IEA warned in the Medium-Term Gas Market Report 2015, it is difficult for gas to compete in a world of very cheap coal, falling costs and continued policy support of renewables.

It noted that “While low fossil fuel prices raise the risk of weakening policy support for renewables, there is little evidence that this is occurring thus far. As coal remains cheaper to
dispatch and renewable deployment are little affected by the drop in fossil fuel prices, gas demand has remained weak.”

It added that in the United States, the extension of federal incentives for solar and the wind in 2015 will ensure their continued strong deployment over the remainder of the decade. In a development that echoes the European experience, US thermal generation is expected to decline over the forecast period as a large increase in generation from low-carbon sources outpaces modest growth in a total generation.

Total US electricity generation is forecast to increase by around 150 terawatt-hours (TWh) between 2015 and 2021, half that recorded over the six-year period leading up to the financial crisis in 2008.

With gas prices unlikely to fall much further from the very low level of 2015 – and thus largely exhausting coal-to-gas switching potential – increases in gas-fired generation from 2015 levels will be limited to the need to replace some of the coal capacity that retires. As a result, the IEA expects US gas-fired generation to stagnate, with risks skewed to the downside.

The report noted that over the past two years, weakening fundamentals and much lower oil prices have resulted not only in lower gas prices but also in strong convergence across regional benchmarks. In the first five months of 2016, the average differential between
Asian LNG spot prices and US price was just USD 2.5/MBtu – a far cry from the average spread of around USD 11/MBtu that had prevailed between 2011 and 2014.

It concluded that “Well-supplied gas markets are set to keep global spot prices under pressure over the next few years while the emergence of large quantities of flexible LNG supplies from the United States is set to maintain a close link between North American prices and spot gas prices in other regions.

“In the United States, prices are likely to recover from their 2015 lows as domestic demand needs and a steep ramp-up in exports will require continued robust production growth. In Asia gas prices will remain influenced by the oil price level. Yet, a period of oversupply coupled with increasingly flexible LNG markets is expected to gradually lessen such linkage.”

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