IEA (2022), World Energy Outlook 2022, IEA, Paris https://www.iea.org/reports/world-energy-outlook-2022, License: CC BY 4.0 (report); CC BY NC SA 4.0 (Annex A)
Outlook for gaseous fuels
Global demand for natural gas held up better than demand for other fossil fuels during the first year of the Covid-19 pandemic, and then increased by 5% in 2021, double its average growth rate over the past decade. A dearth of new projects, weather-related increases in demand, LNG outages and reduced Russian exports tightened the global gas supply balance from mid-2021 and put upward pressure on prices, especially in Europe where the Title Transfer Facility (TTF) benchmark rose from less than USD 10 per million British thermal units (MBtu) in the first-half of 2021 to over 30 USD/MBtu by December 2021.
Russia’s invasion of Ukraine in February 2022 had a huge impact on an already fragile global gas balance. European Union efforts to fill gas storage ahead of the winter have run up against Russia’s strategic withholding of gas supply and the prospect of possible supply shortages bringing high levels of market volatility and exceptionally high prices. Europe’s TTF benchmark price saw peaks exceeding USD 90/MBtu in 2022, even as the European Union and its partners debate ways to reduce reliance on Russian gas and curtail its revenue from energy sales. The strains on gas supply have also led to energy shortages in several parts of the developing world that rely on imported gas, notably Pakistan and Bangladesh. Major growth markets for gas such as India and China have meanwhile sharply reduced their LNG imports in 2022.
- The traditional arguments in favour of natural gas have focused on its role as a reliable partner for the clean energy transition and its ability to step in to fill the gap left by declining coal and oil. These are currently being tested by the global repercussions of Russia’s actions in Europe. In the midst of a global energy crisis, fundamental questions are now being asked about natural gas: how can supply be assured, now and in the future, and at what price?
- The depth and intensity of today’s crisis have led to concerns about the future cost and availability of natural gas which have damaged confidence in its reliability and put a major dent in the idea of it serving as a transition fuel. As a result, the era of rapid global growth in natural gas demand is drawing to a close. In the Stated Policies Scenario (STEPS), demand rises by less than 5% between 2021 and 2030, compared with a 20% rise between 2011 and 2020. It then remains flat from 2030 at around 4 400 billion cubic metres (bcm) through to 2050, with growth in emerging market and developing economies offset by declines in advanced economies. In the Announced Pledges Scenario (APS), demand soon peaks and is 10% lower than 2021 levels by 2030. In the Net Zero Emissions by 2050 (NZE) Scenario, demand falls by 20% to 2030, and is 75% lower than today by 2050.
- Global natural gas demand in 2050 in this year’s version of the STEPS is 750 bcm lower than projected in last year’s version. Half of this downward revision comes from more rapid moves away from unabated natural gas consumption in advanced economies. The United States alone accounts for one-third of the total downward revision: its recent Inflation Reduction Act is set to speed up the deployment of renewables in the power sector and to provide stronger support for efficiency and heat pumps in buildings. The other major downward revision comes from price-sensitive emerging market and developing economies, where high natural gas prices mean that prospects for coal-to-gas switching are now more muted.
- Russian pipeline gas exports to the European Union halved over the last year to an estimated total of 75 bcm in 2022. They decline by an additional 60 bcm in the STEPS by 2030, and fall to zero in the APS. Additional liquefied natural gas (LNG) and non-Russian pipeline gas play important roles in making up the shortfall in both scenarios, but the APS sees a stronger surge in wind and solar capacity additions and a bigger push to retrofit buildings and install heat pumps: these help to bring European Union natural gas demand down by 40%, or 180 bcm, between 2021 and 2030. The annual investment cost of USD 65 billion is offset over time by lower gas import costs.
- Europe’s drive to reduce reliance on Russian imports and a dearth of new gas export projects mean that natural gas prices in importing regions remain high over the next few years in the STEPS and APS, especially in Europe. In the NZE Scenario, rapid demand reductions in all regions ease the strains on global supplies, and gas import prices fall quickly. Prices come down more gradually in the STEPS and APS from the mid-2020s as gas demand flattens and new supply projects currently under construction come onstream. Declines in domestic demand in the United States open opportunities for higher LNG exports; in both the STEPS and APS, the United States soon overtakes Russia to become the world’s largest natural gas exporter.
- Natural gas demand growth in China slows considerably in the STEPS, falling to 2% per year between 2021 and 2030, compared with an average growth rate of 12% per year between 2010 and 2021. Large volumes of LNG have been contracted for the next fifteen years: together with expected supply from existing pipelines and new domestic projects, these more than cover China’s demand requirements in the STEPS to 2035.
- High gas prices have dampened prospects for coal-to-gas switching, but they have not extinguished them. In emerging and developing markets in Asia, long-term gas import contracts with prices indexed to oil offer partial protection to consumers from high and volatile gas prices, and in some cases this is buttressed by domestic subsidies. A growing population and robust economic development provide a strong foundation for growth: gas demand in the APS in these emerging markets in Asia rises by 20% to 120 bcm in 2030. Around 70% of this growth is met by imported LNG.
- Rising natural gas demand in parts of Asia alongside European Union efforts to import non-Russian gas underpin LNG demand growth in all scenarios until the mid-2020s, but there are sharp divergences thereafter. In the STEPS, an additional 240 bcm per year of export capacity is needed by 2050 over and above projects already under construction. In the APS, only projects currently under construction are required. In the NZE Scenario, a sharp decrease in natural gas demand globally means that even these projects are in many cases no longer necessary. This highlights a key dilemma for investors considering large, capital-intensive LNG projects: how to reconcile strong near-term demand growth with uncertain but possibly declining longer term demand.
- There are no easy options for Russia in its search for new markets for the gas it was exporting to Europe. Sanctions undercut the prospects for large new Russian LNG projects, and long distances to alternative markets make new pipeline links difficult. In the APS, Russia’s share of internationally traded gas, which stood at 30% in 2021, falls by 2030 to less than 15%, and its net income from gas exports (revenue minus costs) falls from USD 75 billion in 2021 to USD 25 billion in 2030.
- Prospects for low-emissions gases look bright. In the APS, low-emissions hydrogen production rises from low levels today to over 30 million tonnes (Mt) per year in 2030. This is equivalent to over 100 bcm of natural gas. The APS also sees a rise in biomethane production that reflects the ambitious targets now being established. Governments have a key co-ordinating role to play in the growth of low-emissions gases, in particular in setting standards and ensuring reliable, long-term demand. At the moment, the 24 Mt per year of projects seeking to export hydrogen or hydrogen-based fuels are running ahead of plans for the corresponding import infrastructure.