Energy Finance

Reduced gas demand and oversupply are leading to a strategic change for suppliers and a tougher long-term pricing outlook, according to Neil Thomas, head of gas research for Scottish consulting firm Wood Mackenzie.

The fundamentals of the gas industry have shifted due to significant changes in the macro environment, he said, citing analysis from Wood Mackenzie’s Global Gas Service. As a result, Wood Mac’s global gas demand outlook is 200 billion cubic meters per year less in 2015 than it was in first quarter 2008 (before the economic crisis). The firm’s long-term forecast for global gas demand from 2008 to 2020 includes a compound annual growth rate of 2.4%. The Asia-Pacific region has the strongest demand growth at 4.5%.

“The new reality for the global gas industry is reduced demand and oversupply, the effects of which will be felt in the medium and long term,” he said. “The reduced demand outlook is being realized at the same time as significant additional supply is coming to the market, including considerable unconventional gas from onshore North American producers, something not anticipated just a few years ago.”

Wood Mackenzie’s findings revealed that major suppliers such as Russia and Qatar will need to adjust their export strategies to the new external environment as a result of faltering demand. Russia’s challenge will be to develop their “massive potential gas supply” and “diversifying markets away from Europe,” he said. Also, it will require capital-intensive infrastructure development, including new liquefaction facilities and new pipelines to China. However, the pipelines could face competition for capital from some current European-pipeline plans.

Meanwhile, with Atlantic spot gas prices depressed, Qatar may seek to re-route much of its LNG earmarked for the Atlantic to the Pacific instead, he said. This additional supply competition in the Pacific could be “bad news” for new Australian LNG projects seeking markets and could further deteriorate Pacific LNG pricing levels.

According to WoodMac’s analysis, China is in the best position to take advantage of the changing dynamics as it gains renewed import options from Central Asia and Russia.

Globally, gas markets are no longer operating in isolation and interconnectivity is a feature of the “new, truly global gas industry,” he said.

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