IEA urges overcoming investment uncertainties, cost increases and delays in natural gas markets to maintain security of supply

The last 18 months have been tumultuous not only for the energy sector in general but also for natural gas markets. Gas prices were high and volatile in all regional markets, with demand continuously growing and a dramatic increase of liquefied natural gas (LNG) output, further interlinking markets on a global scale.

The IEA Natural Gas Market Review 2008 – the third edition of this series – assesses these trends and looks into projected changes in the global gas economy over the next five to seven years. It provides in-depth analysis of 40 major gas producing and consuming countries and regions, their policy approaches and outlook.

“High natural gas prices are not only a reflection of higher demand but also a delayed supply response,” said Nobuo Tanaka, Executive Director of the International Energy Agency (IEA), today in Paris at the launch of the Natural Gas Market Review 2008. “Past gas market reviews expressed concern about insufficient investment, and these concerns remain. Investment uncertainties, cost increases and delays continue to be a major problem in most gas markets and are continuing to constitute a threat to long-term security of supply.”

Gas prices in all regional markets continued to climb in 2007 and through the first half of 2008. “In the United States, gas rose to more than USD 7 per million BTU in 2007, and looks set to average around USD 10 this year, even with the recent sharp price falls. The United Kingdom, after a period of low gas prices last year, is now seeing prices well above USD 10, and in the Pacific, spot prices are more than USD 15 for LNG cargoes,” explained Mr. Tanaka. A number of factors, including higher oil prices, weather conditions and supply and demand imbalance, all played a role during the price increases in the past 18 months.

Despite rising gas prices, gas demand for power generation is growing, particularly in IEA member countries but also in a number of major producing and consuming non-OECD countries. High gas prices can and are quickly translating into higher electricity prices. Thus consumers are being hit with high oil, gas and electricity prices in quick succession, states the review.

While increased use of gas-fired power can have beneficial environmental outcomes, it also raises security and affordability issues. “Countries must take care to ensure a diverse power sector, keeping all options on the table, including renewables but also nuclear and coal,” said Mr. Tanaka, noting the need to improve the environmental performance of the latter.

All IEA countries look set to import more gas from distant and expensive gas sources. But, in common with oil markets, the report sees insufficient investment, particularly in the years beyond 2010, together with project delays threatening security of supply. The escalation of engineering, procurement and construction (EPC) costs, the tight engineering market and risks in producing countries were among the main causes for these delays.

“Progress on major pipeline projects, outside the United States is slow,” warned Mr Tanaka. To address this, both IEA member and non-member governments need to streamline regulation; improve market functioning through, for example, greater transparency; and increase domestic production. Improvements to market functioning are especially urgent in Europe, given the region’s growing demand for imported gas.

“Gas markets continue on their way to global integration. Flexible liquefied natural gas LNG (spot and short-term) played a greater role in inter-regional market balancing in 2007 and into 2008,” Mr. Tanaka observed, as LNG trade continues to grow. While this growth may not be as rapid as previously anticipated, LNG is increasingly linking different regional markets, providing resilience and adding security. Greater flexibility in trades and multiple routes and modes of transportation is enabling wider exchanges of gas. Cargoes are shifting away from traditional shipping patterns, moving gas across the Atlantic or Pacific, to where demand is. “Countries must become part of this global network to benefit from the security and diversity offered by LNG,” Mr. Tanaka concluded.