IEA Says Developed World Gas Demand Won’t Recover Until 2012

http://www.businessweek.com/news/2010-06-23/iea-says-developed-world-gas-demand-won-t-recover-until-2012.html

By Ben Farey

(Bloomberg) -- Natural-gas demand in the developed economies, sapped by the global recession, won’t return to 2008 levels for two years, the International Energy Agency said.

“The most daunting question faced by the gas industry is the duration of the gas glut,” the IEA said in its Medium-Term Oil & Gas Markets 2010 report, published today.

The adviser to developed world nations in the Organization of Economic Cooperation and Development said supplies are unlikely to tighten in the Atlantic Basin and Europe before 2015 even as European gas output is declining.

Surplus production capacity last year was estimated at 200 billion cubic meters, according to the report. That’s more than twice the annual demand in the U.K., Europe’s biggest market for the fuel. Producers in the former Soviet Union, Canada, Algeria and Nigeria curtailed production in 2009, the IEA said.

North American and Pacific regional members of the OECD will have the strongest recovery after world gas demand fell an “unprecedented” 3 percent last year, the biggest drop since the 1970s.

A more “sluggish” increase in gas use is expected in Europe, the IEA said. By 2013 European gas demand will be back at 2007 levels. Still, that’s below the level of demand in the first half of 2008, according to the agency.

“OECD gas demand will recover slowly, with an expected return to 2008 levels by about 2012 but with large regional variations,” according to the report.

OECD Demand

By 2013, OECD gas demand is expected to rise 2 percent above 2008 levels to 1.6 trillion cubic meters a year, according to the report. The main driver will be the pace of the economic recovery after the worst recession since the Great Depression cut gas demand in OECD regions by an average of 3.3 percent.

The growth of gas demand for power generation is also a key factor after electricity use dropped 4 percent in the OECD region in 2009, the IEA said. Electricity will be the “primary driver” for gas demand growth, it said.

“The current low gas prices and improved prospects of global gas supply, plus the very strong business advantages of gas-fired power, continue to drive strong interest in investment in gas-fired power plants in the OECD region,” the IEA said.

The agency said there are two supply side “revolutions” as liquefied natural gas supply is forecast to jump 50 percent in the four years through 2013 and unconventional gas production rises in North America.

U.S. Shale

Rising rig counts in the U.S. may “drive production further up in 2010,” the IEA said.

Some shale gas plays are now profitable at $2.50 a million British thermal units, it said.

“There is a strong belief among the U.S. gas industry that the most economic unconventional gas can reach lower prices than conventional gas plays, the question is how much unconventional gas can be produced at these low prices,” the IEA said.

Improved productivity at unconventional gas fields, falling costs and the delivery of gas sold at high futures prices in early 2008 may exacerbate the oversupply, the IEA said.

China’s gas demand is growing at about 10 percent a year and may reach 150 billion cubic meters a year by 2015, the report said.

--Editors: Rob Verdonck, John Buckley.

Ben Farey in London at +44 20 7673 2369 or bfarey@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net