Natural gas is an unusual commodity, super-abundant and yet expensive. Whereas proved reserves of natural gas are not much higher than oil reserves (relative to production), this reflects the fact that drillers usually target oil rather than natural gas which is expensive to transport. International gas markets are severely distorted by the history of contract design, specifically price clauses that tied gas prices in international trade to oil prices, based on their relative heat content. Natural gas is expected to play an increasingly larger role in global energy portfolios owing to its increasing abundance via pipelines and, especially liquefied natural gas (LNG), and its lower emissions.
Nearly 80% of the world's total proven natural gas reserves are in ten countries. Russia tops the list, holding about a quarter of world's total gas reserves, followed by Iran and Qatar in the Middle East. The OPEC Bulletin highlighted that the oil & gas industry, especially the upstream faces multiple challenges such as the uncertain prospects for the global economy; managing excessive speculation; geopolitical dynamics; attracting investment, managing advances in technology for efficient exploration and production; and environmental and sustainable development. Further, during the downturns bringing together all the stakeholders to develop comprehensive approaches to address complex issues remains as challenging as before. These challenges will continue in the coming years.
A diverse group of countries worldwide, including Mexico, China, and Egypt, are moving ahead with important gas market reforms, allowing more private participation in the supply, transport, and marketing of gas, and introducing third-party access to gas infrastructure. If implemented rigorously, these reforms can lead to more investments throughout the supply chain and generate more sustainable demand and supply balances. Subsidies on fuels, including gas, are being reduced substantially in many parts of the Middle East, North Africa, Latin America, and Asia; this practice can expose gas to more competitive pressures in relation to other fuels and technologies, but prices that reflect market fundamentals will also lead more efficient consumption and enhance incentives for investment in new supply.
A growing use of gas in the chemical sector, strong demand for fertilizers in countries like India and Indonesia, and the replacement of coal by gas in a host of smaller industrial applications in China mean that industrial gas demand grows by almost 3% per year. Gas use for transportation also grows rapidly, albeit from a much lower base, reaching 140 bcm by 2022 from 120 bcm in 2016. Demand in the main gas-consuming sector – power generation – continues to expand, but at a much more modest rate of less than 1% per year. This is the case in many mature markets where rapid increase in power generation from renewables, combined with modest growth in electricity demand, limits opportunities for thermal generation. In many emerging markets that rely on imported gas, especially those without a price on carbon or strict regulations on air pollution, gas faces very strong competition from coal.
Coal-to-gas switching in US power generation, the main driver of gas demand growth in the recent past, will slow down significantly as gas prices are expected to increase from the USD 2.5/million British thermal units (Henry Hub) average seen in 2016. Most US growth in gas consumption occurs in the industrial sector, where competitiveness continues to be boosted by cheap gas. Together with Canada and Mexico, countries with whom the US gas sector is closely integrated, demand in North America will surpass 1000 bcm by 2022 – one-quarter of global gas consumption.
European gas demand increased for the second year in a row in 2016 and the trend has continued in 2017. Lower gas prices, higher coal prices, coal plant retirements and nuclear outages in France have pushed up gas demand for power generation. In Germany, gas-fired power generation increased substantially, reversing a continuous decrease since 2010. In the United Kingdom, the carbon price floor has supported an 8 bcm increase in gas demand for the power sector between 2016 and 2017. In the coming years, experts say that the demand will remain flat, as growth will be constrained in the power sector by limited electricity demand growth and the continued rise of renewables, and in the industry by sluggish growth in European industrial output.
According to the Gas Market Report 2017, the Middle East will add around 70 bcm to world production as production increases to 650 bcm by 2022. Half of the increase will come from Iran. Russia, the second-largest gas producer in the world after the United States, has plenty of under-utilised production capacity in the Yamal peninsula but will see its gas production grow only at an average rate of 1.5%; with demand in the domestic market stagnant and flat-lining in its main European market, the opportunities for growth come primarily from exporting LNG – via a new project in the Yamal peninsula – and, towards the very end of the forecast period, the anticipated start of pipeline exports to China.
Gas accounts for only 5% of primary energy demand in India, leaving plenty of room for expansion; and strong economic growth leads to higher utilization of gas-based power capacities and increased use in industry, led by fertilizers. This will drive gas demand use to almost 80 bcm by 2022 from 55 bcm in 2016.
India’s domestic gas production has been declining since 2012 in part due to lack of investment in the upstream sector which in turn is partly due to a government administered natural gas pricing system that does incentivize upstream investment. 40% of India’s gas pipeline and distribution infrastructure is only in the two western states of Gujurat and Maharashtra. It is difficult to extend the gas delivery infrastructure in India or build new import terminals due to limited capital markets and significant land acquisition problems as well as the myriad of problems afflicting the expansion of any industrial activity in India.
However, there has been practically no progress on this plan as the onshore pipeline capacity has remained flat at current levels since 2013. There is 11,300 km of pipelines reported to be under construction but only 100 km has been completed. The lack of progress is attributed to legal disputes, land acquisition problems, statutory clearances delays, contract issues and lack of anchor load customers (Oil & Gas Journal, 2015).
To date, India has been unable to create an expansive gas infrastructure across the country, in part due to lack of funding and difficulties in pipeline siting and land acquisition. The government has had a plan to spend $8 billion beginning in 2012 to develop a National Gas Grid which would expand gas pipeline market delivery capacity to 515 MMSCMD by April 2017.
The share of natural gas in India’s energy mix is poised to grow from currently 6.5% to 15% by 2020-21. To achieve this India needs to more than double its current LNG import capacity of 25 million metric tons per annum and expand associated infrastructure. Drop in domestic natural gas production resulted in a rise in LNG import in 2016 and the trend has continued in 2017, and a similar trend is expected in 2018.
Domestic production accounts for more than three-quarters of the country’s total gas consumption. Demand is expected to increase due to higher economic growth, ensure less dependency on imported crude and a desire to use cleaner fuel. Reaching 196.48 million tonnes in 2016 and a further positive increase in 2017, fuel sales recorded the highest growth rate of 10.7% since last 16 years. India’s LNG imports are forecasted to increase at a CAGR of 8.92% during FY08–FY17. The global trends have also affected India’s natural gas consumption and there is a scope for India to further boost its exports and with the right actions, a more flexible and robust sector can emerge.
The author, Alireza Moghadam is Chairman of AMIDT Group