IEA Analyses Security of Gas Supply in Open Markets

Open gas markets substantially improve security and reliability of gas supplies, but governments must continue to play an important, albeit different role to make markets work and to ensure that they deliver secure gas supplies and adequate investment,” said Claude Mandil, Executive Director of the International Energy Agency (IEA) at the launch in Paris today of “Security of Gas Supply in Open Markets: LNG and Power at a Turning Point”.

The opening of gas and electricity markets, the increased use of gas for power generation worldwide and the emergence of a global trade in LNG provide an opportunity and a need for new market mechanisms to ensure secure and reliable gas supplies. The new role of governments, which in the past often directly or indirectly managed the sector, is to define rules for the market to work and deliver reliable gas supplies to the final customer, and to define the roles and responsibilities of each player. The concurrent opening of gas and electricity markets in all IEA countries changes the environment for security of gas supply. In open markets, supply and demand can usually be balanced by the market. With market opening, new instruments such as gas hubs, spot and futures markets evolve, allowing gas to be directed to its highest value use.

The challenge for security of supply is to ensure that the market can always achieve this balance and that adequate investment all along the gas chain can be mobilised in a timely way. The unbundling of activities makes it essential to ensure that investment along the gas chain from the wellhead to the final customer is well aligned, as it is not certain that investment decisions in supply and capacity will always coincide along the chain. Gas-fired power generation is fast emerging as a new, global driver of gas demand, representing 70% of the increase in demand in OECD countries over the period 2000-2030. This tremendous increase is due to the environmental qualities of natural gas and its competitiveness in combined cycle gas turbines (CCGTs), which best meet the requirements of an open power sector. Increased links between open gas and power markets offer the chance for more efficient use of both systems. However, the reliability of each system must take into account this interlinkage, in order to avoid simultaneous failure. The growing use of imported gas for the power sector emerges as a new issue for security of supply for electricity and gas systems. While proven worldwide gas reserves have grown faster than gas demand, OECD countries increasingly need to import gas, as the discovery of additional gas reserves in OECD countries has not kept pace with the depletion of gas reserves and the increase in gas demand. All OECD regions are now becoming import dependent, as North America will need substantially increased LNG imports. Also, the UK is moving from self-sufficiency to becoming a large net importer. Growing import dependence calls for a greater awareness of gas policies in supplier countries such as Russia or LNG suppliers and along transit routes. Cost reductions in the LNG chain result in more flexibility and a global reach of LNG trade.

This development enables LNG supplies to be directed to their highest value market, and thereby adds to security of gas supply. However, the concentration of new LNG supplies in non-OECD countries may add a geopolitical dimension to the security of LNG supply. Security of Gas Supply in Open Markets: LNG and Power at a Turning Point is the successor of The IEA Natural Gas Security Study published in 1995. Based on input from the various stakeholders, official information from member governments as well as publicly available information, the study presents a comprehensive overview of the recent status of the gas industry in IEA countries. It analyses the most recent developments of security of gas supply in the three OECD regions in the context of open markets and in view of the new demand and supply trends. Annexes included in a CD-Rom present the views of the main stakeholders (governments, regulators, industry, customers and other organisations).