Natural Gas Market Review 2007

(Paris) — 3 May 2007

“Natural gas is becoming an increasingly global commodity; developments in previously separate regional gas markets can no longer be considered in isolation,” Claude Mandil, Executive Director of the International Energy Agency (IEA), said today in Paris at the launch of the second annual Natural Gas Market Review.

The dramatic growth of liquefied natural gas (LNG) output is linking markets to an extent thought impossible a few years ago. IEA countries are becoming more dependent on inter-regional gas trade, with this trend most marked in Europe. “While the North American region has traditionally been concerned with pipeline gas, and the Pacific market with LNG, no country can now afford to ignore the global picture,” Mr. Mandil stressed.

“While the 2006 Review expressed concern about insufficient investment, we are even more worried this year and see it as the major threat to secure, affordable global gas supplies over the medium to longer term,” warned Mr. Mandil. Cost increases and delays are hitting investment hard in many places, and this phenomenon is not limited to a specific producing region. To address this, IEA member governments need to streamline regulation, improve market functioning, through for example greater transparency, and increase domestic production. Non-IEA countries should improve transparency of reserves, investments and production capacity.

“In addition, IEA member governments need to use gas more efficiently, and to diversify their supply sources and routes. They need to elaborate short-term emergency policies for gas. Such policies may, in certain circumstances and countries, include strategic storage but this is not the ‘silver bullet’ for gas security in all countries and regions,” recommended Mr. Mandil. Rather, countries should adopt a suite of cost-effective approaches to gas security. This could include more sophisticated demand side responses, such as interruptible contracts, fuel switching, and where markets fail, direct rationing to ensure supply to the most vulnerable consumers. Growing globalisation in gas markets makes it increasingly necessary to check the international interdependency of such policies and ensure that national measures have no negative impact on wider oil and electricity markets.

Mr. Mandil observed: “For the next decade, gas-fired power remains the fuel of choice in many IEA countries and regions.” While large numbers of new coal-fired and nuclear plants are planned, construction needs to start soon if these are to be operational before 2015. Renewables including hydro have significant potential, but cannot fill the gap in this timeframe.

As a result, the growing links between gas and electricity markets need to be recognised by everyone, as gas-fired power now sets the price and provides security to power supplies. “Cheap and secure electricity is better ensured with cheap and secure gas,” said Mr. Mandil.

Another result is that gas demand will increase steadily in the coming years. “The Northern Hemisphere winter has been very mild, temporarily reducing gas demand and disguising the underlying tightness of the market. But gas remains vulnerable and expensive,” said Mr. Mandil.