medium-term gas market report 2013

Medium-Term Market Report 2013

Market Trends and Projections to 2018

GAS

Please note that this PDF is subject to specific restrictions that limit its use and distribution. The terms and conditions are available online at http://www.iea.org/termsandconditionsuseandcopyright/

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GAS

Global growth in natural gas use slowed measurably in 2012, although it still exceeded that of oil and total energy use. Among the headwinds facing gas are continuing weak demand in Europe, resilience of coal in North America as well as persistent bottlenecks and disruptions in the LNG value chain that in 2012 caused an exceptional global decline of LNG supply. At the same time, Asian demand for gas remains red-hot, and gas is beginning to gain traction as a transport fuel.

The IEA new Medium-Term Gas Market Report provides a detailed analysis of demand, upstream investment and trade developments through 2018 that will shape the gas industry and the role of gas in the global energy system. Its special sections investigate the economic viability of gas-fired power generation in Europe, the prospects for an LNG trading hub in Asia as well as the potentially transformational role of natural gas in transport. Amid a continuous regional divergence between North American abundance, European weakness and Asian thirst for LNG, the 2013 Medium Term Gas Market Report will investigate the key questions that the gas industry faces. These include the prospect of the United States becoming a major gas exporter, the challenges of securing enough gas to meet Chinas growth, and the ability of Russian gas spurred both by weak EU demand and resurgent domestic production to find its manifest destiny in Asia.

100 (61 2013 08 1P1) ISSN 2307-0277ISBN: 978 92 64 19116 7

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INTERNATIONAL ENERGY AGENCY

The International Energy Agency (IEA), an autonomous agency, was established in November 1974. Its primary mandate was and is two-fold: to promote energy security amongst its member

countries through collective response to physical disruptions in oil supply, and provide authoritative research and analysis on ways to ensure reliable, affordable and clean energy for its 28 member countries and beyond. The IEA carries out a comprehensive programme of energy co-operation among its member countries, each of which is obliged to hold oil stocks equivalent to 90 days of its net imports. The Agencys aims include the following objectives:

n Secure member countries access to reliable and ample supplies of all forms of energy; in particular, through maintaining effective emergency response capabilities in case of oil supply disruptions.

n Promote sustainable energy policies that spur economic growth and environmental protection in a global context particularly in terms of reducing greenhouse-gas emissions that contribute to climate change.

n Improve transparency of international markets through collection and analysis of energy data.

n Support global collaboration on energy technology to secure future energy supplies and mitigate their environmental impact, including through improved energy

efficiency and development and deployment of low-carbon technologies.

n Find solutions to global energy challenges through engagement and dialogue with non-member countries, industry, international

organisations and other stakeholders.IEA member countries:

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Please note that this publication is subject to specific restrictions that limit its use and distribution.

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OECD/IEA, 2013International Energy Agency

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FOREWORD

MEDIUM-TERM GAS MARKET REPORT 2013 3

FOREWORD In 2011, the International Energy Agency (IEA) introduced the notion of natural gas entering its Golden Age, but this was put forward as a query ending with a question mark. Since the publication of the special report, Are We Entering a Golden Age of Gas?, global natural gas consumption has grown by an astounding 124 billion cubic metres (bcm), more than the current annual production of Norway. Ongoing technological progress kept the output of North American unconventional gas on an upward incline, with improved cost efficiency and a reduced environmental footprint. Last but not least, significant discoveries in East Africa confirmed the continuing importance and bright prospects of conventional gas. The question mark is no longer necessary. Gas remains the fuel of contradictions. Large-scale gas flaring continues to take place in countries plagued by energy poverty, while runaway domestic demand at highly subsidised prices constrains the operations of very profitable export terminals. Intensive shale gas drilling occurs in one region while moratoria take effect in others; intensive commodity futures trading coincides with state-level, bilateral long-term deals. Gas remains stubbornly resistant to globalisation: despite the common geological origins of gas and increasing interregional trade, downstream markets, industry and regulatory structure retain their region-specific nature. North America leads the rapid expansion of gas. The United States has made a large contribution, by a wide margin, to the global growth of gas production. Although the projection horizon to 2018 will witness substantial exploration and the start of commercial production of shale gas in China and Poland, the further growth of shale gas in the United States will dwarf unconventional developments outside North America. At the same time, the United States may become a credible liquefied natural gas (LNG) exporter, providing much-needed relief to tight LNG markets that continue to be hampered by supply bottlenecks and cost overruns. Based on flexible North American supply, better access to gas infrastructure and more market-oriented policies, the medium-term horizon will see the beginning of hub trading in Asia. This will couple the growing physical importance of Asia as a demand centre with a more developed market framework. Yet, challenges and constraints remain. Compared to the previous edition in 2012, the Medium-Term Gas Market Report 2013 reduces the five-year demand projection by 75 bcm. European demand and Middle Eastern production are indicative of the obstacles that gas has to overcome as it expands its role in the global energy system. In Europe, persistent macroeconomic weakness, low carbon prices and non-market-based renewable policies squeeze gas between cheap coal and growing renewables. European oil demand being well past its peak is a familiar idea, but current developments raise the possibility of such peak demand for gas having occurred as well, in 2007. While gas is abundant in the Middle East, a host of issues from price regulation to security can weigh on production growth. Nevertheless, the growth of gas in the Middle East plays a measurable role in slowing the growth of domestic oil demand of the region, especially in the power sector. As gas threatens the last redoubts of oil-fired power generation, we witness the beginning of its challenge to oils grip on the transportation sector. The technology is not new, and requires only minor modifications on internal combustion engines. What is new is the abundant supply of gas

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FOREWORD

4 MEDIUM-TERM GAS MARKET REPORT 2013

coupled with the rollout of distribution and refilling infrastructure. Driven by the United States and China, the expansion of gas as a transport fuel has a bigger impact on reducing the medium-term growth of oil demand than both biofuels and electric cars combined. No energy source can increase its global importance without expanding into China. This is true for gas in transport and gas in general. As gas expands in China, air pollution concerns will emerge as a key policy priority in the largest energy user in the world economy. China has domestic upstream growth that would be large by any measure other than the scale of the Chinese energy system. Due to its sheer magnitude, the expanding role of gas turns China into a major importer. Despite the respectable growth of domestic upstream which in the medium term is more based on tight gas and coalbed methane than shale, China absorbs all the production increase from Central Asia and one-third of the global increase of LNG supply. The medium-term horizon will lay the foundations for further growth of gas in the longer term. There is certainly no shortage of geological resources and some of them will already see large investments, although not necessarily meaningful production in the medium term. Gas certainly has the potential to make an increasing contribution to energy security and sustainability. The most important condition is efficient, transparent and trusted markets. Although the situation is improving in this respect, this is still a half-finished journey. The IEA hopes that this Medium-Term Gas Market Report 2013 and its sister publications on the other primary fuels will provide useful information for all stakeholders and contribute to enhanced transparency and efficiency of the gas market. This publication is produced under my authority as Executive Director of the IEA. Maria van der Hoeven Executive Director International Energy Agency

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ACKNOWLEDGEMENTS


ACKNOWLEDGEMENTS The Medium-Term Gas Market Report 2013 was prepared by the Gas, Coal and Power Division (GCP) of the International Energy Agency (IEA). The analysis was led and co-ordinated by Anne-Sophie Corbeau, Senior Gas Analyst, with significant contributions from the GCP gas team: Ichiro Fukuda, Rodrigo Pinto Scholtbach and Thijs van Hittersum. Significant contributions were made from other colleagues, particularly Marc-Antoine Eyl-Mazzega and Laszlo Varro. Valuable comments and feedback were received within the IEA, from Keisuke Sadamori, Manuel Baritaud, Chris Besson, Michael Cohen, Franois Cuenot, Ian Cronshaw, Carlos Fernandez Alvarez, Tim Gould, Diane Munro, Christopher Segar and Tali Trigg. Timely and comprehensive data from Pierre Boileau, Emmanouil Christinakis, Hong Pum Chung, Agnes Dagny, Ana Luisa Sao-Marcos, Claire Morel, Gianluca Tonolo, Tianlai Xu and Georgios Zazias were fundamental to the report. A special thank you goes to Janet Pape and Erin Crum for editing the report. The IEA Communication and Information Office (CIO), particularly Muriel Custodio, Rebecca Gaghen, Greg Frost, Angela Gosmann, Cheryl Haines and Bertrand Sadin, provided essential support towards the reports production and launch. The review was made possible by assistance from GasTerra B.V. and Tokyo Gas.

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TABLE OF CONTENTS


TABLE OF CONTENTS

Foreword ..................................................................................................................................... 3

Acknowledgements ...................................................................................................................... 5

Executive Summary .................................................................................................................... 11

Demand ..................................................................................................................................... 16

Summary ............................................................................................................................................... 16

Recent trends ........................................................................................................................................ 17 World gas demand ............................................................................................................................ 17 OECD .................................................................................................................................................. 17 Non-OECD .......................................................................................................................................... 23

Medium-term demand forecasts .......................................................................................................... 25 Assumptions ...................................................................................................................................... 25 World gas demand ............................................................................................................................ 26 OECD regions ..................................................................................................................................... 27 Non-OECD region .............................................................................................................................. 41

Gas in transport: do we dare? ............................................................................................................... 50 As of 2013, gas in transport is still a niche market ............................................................................ 50 Why this time may be right ............................................................................................................... 52 Which technology and which market? .............................................................................................. 53 But still some hurdles to overcome .................................................................................................. 55 Can the car industry deliver?............................................................................................................. 56 In the United States, the LNG trucks could soon lead the race ........................................................ 57 China bets on natural gas in the transport sector ............................................................................. 61 The European industry looks for some new demand sources .......................................................... 62

References ............................................................................................................................................. 63

Supply ........................................................................................................................................ 65

Summary ............................................................................................................................................... 65

Recent trends ........................................................................................................................................ 66 World gas supply grew by 2.1% in 2012 ............................................................................................ 66 OECD: despite low prices, US gas production continues to grow ..................................................... 66 Non-OECD supply growth is driven by the Middle East .................................................................... 68 Global unconventional gas developments ........................................................................................ 69

Medium-term supply forecasts ............................................................................................................. 70 Assumptions and methodology......................................................................................................... 70 World gas supply ............................................................................................................................... 70 North America: will the unabated growth of US gas production continue? ..................................... 73 Europe tries to slow dwindling gas production ................................................................................. 80 Can East Mediterranean gas change the regions politics? .............................................................. 84 Africa: output from largest producers stall ....................................................................................... 89 East African gas: not quite ready for a 2018 start ............................................................................. 94

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Middle Eastern gas production slows down ..................................................................................... 97 Russia: a strong production growth potential ................................................................................. 102 The Caspian region looks at future exports .................................................................................... 108 China becomes the fourth-largest gas producer ............................................................................. 111 Asian countries strive to increase gas production .......................................................................... 113 Latin America does not quite solve its gas shortages ..................................................................... 115

References ........................................................................................................................................... 118

Trade ........................................................................................................................................ 120

Summary .............................................................................................................................................. 120

Recent trends in global trade: all eyes are on the Asian markets ....................................................... 121 LNG trade in pause mode in 2012 ............................................................................................... 123 Interregional pipeline trade: most new developments are in Asia ................................................. 131 Import infrastructure developments .............................................................................................. 133

Global gas trade: brace yourself for tight markets until 2015 ............................................................ 133 It is a tight, tight world .................................................................................................................... 133 Regional trade developments ......................................................................................................... 136

How much additional LNG export capacity is needed? ...................................................................... 138 Committed LNG projects: stagnation until the next wave arrives after 2015 ................................ 139 New committed projects will be more expensive ........................................................................... 141 Looking beyond 2018 ...................................................................................................................... 142

Investments in pipelines and LNG regasification terminals ................................................................ 156 Europe: wait-and-see attitude after a substantial drop in demand ............................................... 157 Non-OECD Asia (including China) .................................................................................................... 159 OECD Asia Oceania .......................................................................................................................... 161 The Middle East and Africa.............................................................................................................. 163 Latin America ................................................................................................................................... 163

Pricing environment ............................................................................................................................ 163 Asian price developments ............................................................................................................... 164 European price developments ........................................................................................................ 166 US price developments ................................................................................................................... 168

Trading developments ......................................................................................................................... 169 European hubs; NBP and TTF in the lead ........................................................................................ 169 Developing a natural gas trading hub in Asia .................................................................................. 173

References ........................................................................................................................................... 175

The Essentials ............................................................................................................................ 177

Gas Contacts ............................................................................................................................. 183

LIST OF FIGURES Figure 1 Europe seasonally adjusted gas demand .............................................................................. 18 Figure 2 HDD in selected countries ..................................................................................................... 20 Figure 3 Indices of production from manufacturing industry (2005 = 100) ....................................... 21 Figure 4 Variations in power generation by region, 2012 versus 2011 .............................................. 23

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Figure 5 Incremental generation by source and by region, 2012-18 ................................................. 29 Figure 6 Oil-, gas- and coal-fired generation in the OECD region, 2000-18........................................ 30 Figure 7 OECD American gas demand, 2000-18 ................................................................................. 31 Figure 8 US generation from coal- and gas-fired plants and renewable energies, 2000-18 .............. 31 Figure 9 OECD Asia Oceania gas demand, 2000-18 ............................................................................ 32 Figure 10 European gas demand, 2000-18 ........................................................................................... 33 Figure 11 Generation in TWh by source in 2000 versus 2010, OECD Europe ....................................... 34 Figure 12 Monthly quantity of power produced by coal and gas in Germany, Spain and the United Kingdom, Jan 2004-Jan 2013 ....................................................................... 35 Figure 13 Carbon price and production costs of gas- and coal-fired generation, Jan 2008-Jan 2013 .. 36 Figure 14 Energy-only market during non-scarcity and scarcity hours ................................................. 38 Figure 15 Chinas sectoral gas demand, 2000-18.................................................................................. 43 Figure 16 Asian sectoral gas demand, 2000-18 .................................................................................... 45 Figure 17 Asian gas demand by country, 2000-18 .................................................................................. 45 Figure 18 Middle Eastern sectoral gas demand, 2000-18 ..................................................................... 46 Figure 19 Middle Eastern gas demand by country, 2000-18 ................................................................ 46 Figure 20 African sectoral gas demand, 2000-18 .................................................................................. 48 Figure 21 African gas demand by country, 2000-18 ............................................................................... 48 Figure 22 FSU and non-OECD Europe sectoral gas demand, 2000-18 .................................................. 48 Figure 23 FSU and non-OECD Europe gas demand by country, by country, 2000-18 ............................ 48 Figure 24 Latin American sectoral gas demand, 2000-18 ..................................................................... 49 Figure 25 Latin American gas demand by country, 2000-18................................................................... 49 Figure 26 Evolution of the number of NGVs ......................................................................................... 50 Figure 27 Number of NGVs per station and share of light-duty vehicles in the total number of NGVs .. 51 Figure 28 Evolution of gas demand in the transport sector, 2000-18 .................................................. 52 Figure 29 Share of diesel cars in registration of new cars in Western Europe ..................................... 57 Figure 30 Maximum LNG price to get a ROI of two or four years ......................................................... 59 Figure 31 Oil and gas rigs in the United States ..................................................................................... 67 Figure 32 US production and developments ........................................................................................ 79 Figure 33 African gas production, 2000-18 ........................................................................................... 90 Figure 34 Middle Eastern gas production, 2000-18 .............................................................................. 98 Figure 35 Russias gas balance 2007-12 .............................................................................................. 103 Figure 36 Evolution of gas production by non-Gazprom producers, 2005-12 .................................... 108 Figure 37 Asian gas production, 2000-18 ............................................................................................ 114 Figure 38 Latin American gas production, 2000-18 ............................................................................ 116 Figure 39 LNG re-exports, 2009-12 ..................................................................................................... 123 Figure 40 LNG exports of the top seven LNG producers, 2010-12 ..................................................... 125 Figure 41 Incremental LNG exports and LNG costs to Japan, 2012 versus 2011 ................................ 126 Figure 42 LNG tanker daily rate, Jan 2011-May 2013 ......................................................................... 126 Figure 43 Qatars liquefaction capacity and concluded SPAs, 2010-18 .............................................. 128 Figure 44 Contracted volumes and capacity of the liquefaction projects under construction, 2013-18 . 129 Figure 45 US pipeline imports and exports, 2007-12 .......................................................................... 132 Figure 46 Yearly LNG import capacity additions (as of May 2013), 2000-13 ...................................... 133 Figure 47 Evolution of interregional trade, 2012-18........................................................................... 134 Figure 48 Evolution of LNG exports, 2012-18 ..................................................................................... 135 Figure 49 Evolution of LNG imports, 2012-18 ..................................................................................... 136

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Figure 50 Level of new LNG contracted by supplier ........................................................................... 139 Figure 51 LNG projects under construction (as of May 2013), 2000-13 ............................................. 140 Figure 52 Construction costs (USD/tonne of LNG) of LNG projects .................................................... 142 Figure 53 The competitiveness of US LNG exports ............................................................................. 145 Figure 54 Gas price developments in the three main regional markets, Jan 2003-Jan 2013 ............. 164 Figure 55 Asian energy price developments, Jan 2003-Jan 2013 ....................................................... 165 Figure 56 Japanese LNG prices versus LNG prices in the Atlantic Basin, Jan 2009-Jan 2013 ............. 166 Figure 57 European energy price developments, Jan 2003-Jan 2013 ................................................ 167 Figure 58 TTF summer winter spread and (30-day) annualised day-ahead volatility, Oct 2009-Apr 2013 .. 168 Figure 59 US energy price developments, Jan 2003-Jan 2013 ............................................................ 169 Figure 60 Churn ratios of European trading hubs based on nominated volumes versus physical delivered volumes, Jan 2011-Oct 2012 ....................................................... 170 Figure 61 Churn ratios of European trading hubs based on OTC deals as captured by ICIS Heren and physical delivered volumes, Jan 2011-Oct 2012 .................................... 171 Figure 62 Creating a competitive wholesale natural gas market in a nutshell ................................... 174

LIST OF MAPS Map 1 Unconventional gas developments (2012) .............................................................................. 69 Map 2 US shale gas plays .................................................................................................................... 73 Map 3 The Polarled gas pipeline ......................................................................................................... 82 Map 4 Israels offshore discoveries .................................................................................................... 88 Map 5 Algerian oil and gas fields ........................................................................................................ 91 Map 6 Mozambiques gas discoveries and planned infrastructure .................................................... 96 Map 7 Iraqs petroleum and gas resources ...................................................................................... 101 Map 8 LNG flows in 2012 (bcm) ........................................................................................................ 124 Map 9 Interregional trade in 2018 (bcm) ......................................................................................... 137 Map 10 Proposed Alaska gas pipeline and LNG project ..................................................................... 148 Map 11 Developing Canadian LNG exports ........................................................................................ 150 Map 12 Asian LNG export and import facilities .................................................................................. 152

LIST OF TABLES Table 1 World gas demand by region (bcm), 2000-12 ....................................................................... 17 Table 2 OECD gas demand by country (bcm), 2011-12 ...................................................................... 19 Table 3 GDP growth in the main regions, 2012-18............................................................................. 26 Table 4 Gas demand, 2010-18 (bcm) .................................................................................................. 27 Table 5 OECD demand by sector (bcm), 2010-18 ............................................................................... 28 Table 6 Surplus of unused allowances, European Union (Mt) ........................................................... 40 Table 7 Carbon prices needed to equal production costs for different coal- and gas-fired power plants .......................................................................................................................... 41 Table 8 Non-OECD demand by sector (bcm), 2010-18 ....................................................................... 41 Table 9 China FYP capacity targets in the power sector (GW) ........................................................... 42 Table 10 Characteristics of a few recent NGVs ..................................................................................... 56 Table 11 Domestic gas production by region (bcm) ............................................................................. 66 Table 12 Domestic gas production by region, 2010-18 (bcm) .............................................................. 71

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Table 13 Algerias new fields, post-2014 .............................................................................................. 91 Table 14 Azerbaijans gas fields .......................................................................................................... 109 Table 15 Imports by region, 2012 compared with 2011 (bcm)........................................................... 121 Table 16 Short- and long-term SPAs concluded in 2012 ..................................................................... 128 Table 17 Sales and tolling agreement with projects in the United States .......................................... 130 Table 18 LNG projects under construction (as of May 2013) ............................................................. 139 Table 19 Applications received by the US DOE to export domestically produced LNG (as of early May 2013) ........................................................................................................... 144 Table 20 Potential Canadian LNG projects (as of May 2013) .............................................................. 149 Table 21 Potential Australian and Asian LNG projects (as of May 2013) ............................................ 151 Table 22 Potential Russian LNG export projects (as of May 2013) ..................................................... 154 Table 23 Potential African and Middle Eastern LNG projects (as of May 2013) ................................. 155 Table 24 LNG regasification capacity (bcm per year) by region (as of May 2013) ............................. 156 Table 25 LNG regasification terminals under construction in Europe (as of May 2013) .................... 158 Table 26 LNG import terminals under construction in non-OECD Asia (as of May 2013) .................. 160 Table 27 LNG import terminals under construction in OECD Asia Oceania (as of May 2013) ............ 162 Table 28 Nominated (net traded) and physical volumes on European hubs (bcm), 2003-12 ............ 170 Table 29 Physically delivered volumes at national hubs as percentage of gross inland consumption, 2003-12 ................................................................................................................................ 172 Table 30 World gas demand by region and key country, 2000-18 ..................................................... 177 Table 31 World sectoral gas demand by region, 2000-18 .................................................................. 178 Table 32 World gas production by region and key country, 2000-18 ................................................. 179 Table 33 Fuel prices (USD/MBtu), 2003-12 ......................................................................................... 180 Table 34 Relative fuel prices (HH 2003/WTI 2003/US APP 2003 = 1), 2003-12 .................................. 180 Table 35 LNG liquefaction (bcm per year, existing, under construction, projects) ............................ 181 Table 36 LNG regasification (bcm per year, existing, under construction, projects) .......................... 182

LIST OF BOXES Box 1 Rigs and railways, sectors not to be ignored ............................................................................ 55 Box 2 LNG could be the next bunker fuel ........................................................................................... 63 Box 3 The rise of the Marcellus shale gas play ................................................................................... 75 Box 4 Poland: after two years of exploration, dreamland or gasland? .............................................. 83 Box 5 In Amenas: an isolated event or the taste of things to come? ................................................. 92 Box 6 Coal-based synthetic natural gas in China: a game changer or a niche? ................................ 112 Box 7 The United States already a significant gas exporter ........................................................... 132 Box 8 Could Alaskan LNG move faster than other low-48 LNG projects? ........................................ 147 Box 9 Will Azeri gas stop at Turkey or move onwards to Europe? ................................................... 158 Box 10 Properly measuring traded volumes and churn ratios............................................................ 171

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EXECUTIVE SUMMARY


EXECUTIVE SUMMARY 2012: moderate supply and demand growth, but drop in global interregional trade Natural gas had a mixed year in 2012. While growth in demand (2.0%) was lower than the past decades average (2.8% per year), considering the slower growth of the worlds economy, it was relatively high. The share of natural gas in the global energy mix continued to expand: demand grew at a higher pace than oil (1.0%), although slower than global renewable electricity generation (9.7%). This demand picture reflects increasingly diverging trends among non-Organisation for Economic Co-operation and Development (OECD) regions and OECD regions alike. Growth in demand among non-OECD regions continued to outpace that of other regions, primarily because of China, where gas consumption grew by 13% in 2012. Even though this rate represents a slowdown compared with previous years, China is now only a few billion cubic metres away from catching up with the worlds third-largest gas user, Iran. Chinas contribution alone represented 40% of additional consumption among non-OECD regions. In contrast, the Former Soviet Union (FSU)/non-OECD Europe was the only non-OECD region where gas consumption receded. Demand patterns also differ widely among OECD regions: OECD gas demand gained a modest 1.6% in 2012, lower again this year than the worlds average growth. While demand growth in OECD Americas and OECD Asia Oceania was well above the global average, demand in OECD Europe fell by 1.6%. Considering the mild weather felt throughout Europe in 2011 which returned to normal in 2012, this additional loss, entirely driven by the industrial and power generation sectors, is even more indicative of structural weakness in the power and industry sectors than the 8.2% loss in 2011. The supply picture in 2012 underlined significant contrasts among regions, as the United States contributed single-handedly to almost half of the incremental gas supply. The second-largest increase came from Norway, followed by Turkmenistan, Saudi Arabia, Qatar, and China. Growth in Saudi Arabia, Qatar and China corresponded to new field developments, whereas production in Norway was partially driven by demand in Europe, its main export market, and similarly in Turkmenistan, where production was partially driven by China. In contrast, Russian gas production fell substantially, driven by a combination of lower domestic demand and a reduced call for expensive Russian gas from importing countries. The production picture also reflected the struggle of many countries to increase their gas production, mostly due to upstream issues, delays in field development or regulated domestic gas prices being too low to trigger the development of new fields. This was notably the case in Africa (Algeria, Egypt), the Middle East (Bahrain), Latin America (Argentina) and Asia (Indonesia, India). A surprising outcome in 2012 was lower interregional trade, driven notably by a 2% drop in the global liquefied natural gas (LNG) trade, while pipeline imports to Europe and the Middle East receded as well. The decline in LNG trade was caused by an unexpected fall in supply. While global LNG capacity increased with a new LNG plant in Australia, this new plant was insufficient to compensate for declining global capacity utilisation: a combination of declining mature fields, difficulties in developing new production and rapidly increasing domestic demand, constrained by exports from Asias historical suppliers (notably Indonesia), as well as Algeria, Egypt, Oman and the United Arab Emirates. Additionally, pipeline bombings in Yemen significantly impacted global LNG exports. Many of these trends will continue to be a major feature of global LNG markets over the medium term.

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EXECUTIVE SUMMARY


Less surprising in 2012 was the shift of the global gas trade towards hungry Asian markets.1 These markets attracted increasingly higher volumes of LNG (+18 billion cubic metres [bcm]), which diverted LNG from Europe, while increasing amounts of pipeline gas were imported from Central Asia (+9 bcm). As of 2012, Asia represented 46% of global interregional gas trade, up from 40% the year before. With this increase, Asia overtook OECD Europe, previously the largest importing region, which now accounts for 45% of global gas imports. While Europe remained by far the largest pipeline gas importer, Asia imports almost four times more LNG than Europe. This reflected higher demand from historical LNG importers such as Japan, Korea and Chinese Taipei, and the import needs of the regions largest energy users, China and India. The shift in demand also underlined the emergence of new LNG importing countries, such as Thailand and Indonesia, which will soon be joined by Malaysia and Singapore. World gas demand rises by 15.6%, but grows at a slower rate than coal Over 2012-18, world gas demand is expected to increase by 15.6% (2.4% per year), to reach 3 962 bcm. This increase of 535 bcm is equivalent to current Middle Eastern gas production, or 1.7 times that of the current global LNG trade. If this incremental consumption were to be met by LNG supply, this would require an investment of over USD 1 000 billion. Demand growth is lower than what was forecast in the previous edition, the Medium-Term Gas Market Report 2012 (17.1%). This also implies that gas demand will grow at a slightly slower rate than coal (2.6% per year), but still faster than oil (0.7% per year) (IEA, 2012a; IEA, 2013a). While China remains the fastest-growing country, in absolute volumes, OECD Americas and the Middle East follow with incremental gas consumption of 84 bcm. Other non-OECD regions continue to see strong demand growth, despite some local gas shortages, with the exception of the FSU/non-OECD Europe gas market, which grows modestly at 0.8% per year. Looking forward, the outlook for natural gas among OECD regions is expected to vary dramatically, ranging from booming demand in OECD Americas (particularly in the United States) to anaemic growth in OECD Europe, where consumption rises by a mere 12 bcm to reach 525 bcm by 2018. European demand would therefore be some 20 bcm below the average pre-global economic crisis (2005-08) demand level. This represents a significant downward revision from last years forecasts (561 bcm by 2017), due almost entirely to low economic growth and more conservative expectations in the power generation sector. Since renewable electricity production outpaces total additional generation needs by 13% over 2012-18, combustible fuels are left with a decreasing residual load, despite the shutdown of nuclear facilities among certain countries. Over the next two years, an unfavourable gas, coal and carbon price relationship will contribute to a further drop in European gas demand to 500 bcm in 2013 (from 513 bcm in 2012). Forward prices indicate a price relationship improving in favour of gas in the second half of the decade, which will lead to a recovery. Nevertheless, gas-fired power generation remains at around 100 terawatt hours below its peak of 2008. OECD Americas presents a much more positive outlook, even though gas prices are assumed to slightly increase. Growth in demand in the United States is seen in all sectors, with the power generation sector alone accounting for half of overall growth. Generation from gas-fired power plants will nevertheless drop in 2013, after an exceptional drop in gas prices was seen in 2012. This enables coal-fired generation to recover in the short term. Additional gains from gas-fired generation

1 In this context, Asia includes markets as widely different as the mature OECD Asia Oceania LNG importers (Japan and Korea), China and the other non-OECD Asian countries.

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will therefore be driven by increasing power demand. The residential/commercial sector, however, shows an underlying declining trend that is only compensated for by the fact that 2012 was exceptionally mild. In Asia Oceania, the major uncertainty is the future of nuclear energy in Japan. Assuming that a partial return of nuclear power plants leads to a decrease of expensive and inefficient oil-fired generation, gas-fired generation will show only modest gains in the medium term. Australias gas consumption rises sharply following the introduction of a carbon price and LNG liquefaction plants from 2015, while Israel benefits from the development of its domestic gas fields. Gas use in road transport to take off The road transport sector is foreseen to be a new factor of demand growth as gas expands as a transport fuel. In the past, consumption of gas in the transport sector was seen among non-OECD regions in Asia and Latin America, as well as China, Iran and Egypt motivated by oil import dependency, utilisation of domestic gas and urban air quality. However, the shale gas revolution has triggered strong investor interest in natural gas as a transport fuel in the United States. Gas use in road transport represented 1.4% of global gas demand in 2012, but this share should rise to 2.5% by 2018 as consumption grows to around 50 bcm in the same period (9.4% of additional gas demand). This covers around 10% of the incremental energy needs of the transport sector, more than electric cars. China is dwarfing developments in other regions as its consumption triples to 39 bcm, due to the combination of the need to develop cleaner transport vehicles, attractive gas prices versus oil and the wish to reduce oil dependency through alternative vehicles technologies. Strong demand growth is also seen in other Asian countries as well. In the United States, the expanding use of gas in transport is supported by the divergence between gas and oil prices, as well as policy incentives. Especially promising in the United States is the conversion of long-haul heavy trucks from diesel fuel to LNG. In contrast, despite limited growth in Europe, the industry is looking to develop new markets to compensate for the bleak picture in other sectors. In each region, each part of the gas value chain needs to be developed simultaneously in order to solve the chicken-and-egg problem of having a sufficient number of filling stations and natural gas vehicles (NGVs). This implies developing sufficient gas supply and building liquefaction plants to feed LNG heavy-duty vehicles, as well as LNG or/and compressed natural gas refilling stations. The economics should be attractive for all parts of the gas value chain, in particular owners of fleets of cars or trucks. Use of LNG as a trucking fuel seems to answer many concerns, in particular the chicken-and-egg issue, as fleet owners can team up with LNG retailers and a positive return on investments can be reached within a few years. The car industry should be able to deliver a sufficient number of vehicles by introducing NGVs in their product range, and by working on decreasing the price premium over alternative gasoline or diesel vehicles, provided that economics and policy incentives generate demand for such vehicles. Necessary conditions include: the harmonisation of standards and rules; proper training of personnel involved in trucking; handling NGVs and filling stations; and retrofitting vehicles into NGVs. Other uses of gas in the transport sector are also under investigation, but are significantly less advanced than road transport. Gas use by bunkers remains a longer-term issue, more likely to take off if and when new emissions regulations kick in globally. There is also mounting interest in gas use in the rail sector, notably in regions such as North America and Asia, where locomotives use diesel.

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Incremental supply is dominated by OECD Americas, the FSU region and OECD Asia Oceania The OECD Americas, OECD Asia Oceania and FSU/non-OECD Europe regions are set to provide 55% of incremental gas supply over the period 2012-18. That these OECD regions will be able to bring such volumes of additional gas supply to global markets marks a breakaway from the trend of the last decade, when non-OECD regions represented 90% of additional supply. The evolution of production in OECD Americas will depend on additional gas demand, the relationship between oil and gas prices for wet gas, and potential LNG exports, while OECD Asia Oceania and FSU/non-OECD Europe regions will rely primarily on exports. In the case of Asia Oceania, the timeliness of new Australian LNG export projects is important for their incremental supply. For the FSU/non-OECD Europe region, import needs from Europe and China, combined with the competitiveness and availability of alternative supply sources in those two regions are the main factors. This does not alter the regions potential to bring significant volumes of gas to the markets, through both traditional and rising Russian independent producers. While China becomes the fourth-largest gas producer, production among other non-OECD countries in Asia, the Middle East, Africa and Latin America struggles to increase due to various concerns, including low regulated gas prices, political instability and regulatory uncertainty. In the Middle East, additional production fails to meet incremental domestic consumption. Oil and gas companies have been focusing particularly on East Africa and the Eastern Mediterranean. But significant development in those two regions is not expected to take place before 2018. Geopolitical challenges in the Eastern Mediterranean, the need to balance exports with domestic requirements, potential changes in fiscal policies, the need to develop a regulatory framework and, finally, the costs of developing new infrastructure are the most significant issues that could defer production beyond 2020. Shale gas continues to capture the attention of companies and governments alike, but no major development is expected to take place outside North America and possibly China by 2018. Over the forecast period, most unconventional gas developments will be in coalbed methane and tight gas. Activities will nevertheless continue on unconventional gas exploration, in particular shale gas many countries are assessing the potential for unconventional gas and debating whether specific environmental regulation is required and whether such production should be allowed, encouraged or promoted through specific incentives, hence preparing the ground for unconventional gas production to potentially take off by 2020 outside North America. Unprecedented tightness in global markets should lessen by 2015-16 After a declining LNG trade in 2012, LNG markets are set to face unprecedented tightness over 2013/14, as little additional supply capacity is expected to come on line and many existing LNG facilities continue to face declining supplies. The situation improves from 2015 onwards, when a new wave of LNG supply is set to arrive, largely from Australia, despite cost overruns and delays. There is no question of how thirsty markets are for this LNG, given that the bulk of this supply has already been spoken for under long-term contracts by Asian offtakers, mostly based on oil-indexed contracts. These projects will need high gas prices due to their steep costs, the US Sabine Pass project being the exception. Looking beyond 2018, there is intense competition among the 900 bcm per year of LNG projects currently at the planning stage, notably in North America, East Africa and Australia, each of which will bring some 100 bcm per year to global gas markets. While some projects in Australia and the United States have already signed a few long-term contracts, they face various

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challenges: uncertainties on approvals by the Department of Energy (DOE) and Federal Energy Regulatory Commission (FERC) in the United States, and a steep rise in capital costs in Australia. Meanwhile, East African projects appear much less advanced. Interregional gas trade is set to expand by 30% over 2012-18, largely driven by the 100 bcm increase in LNG trade. Pipeline trade expands at a slightly slower pace. Additional LNG supply originates in Australia and, to a lesser extent, the United States, while LNG supply from many Middle Eastern, Latin American and Asian LNG exporters declines. The FSU/non-OECD Europe region brings additional pipeline supplies to the rest of Europe and China, but Europe remains by far the largest importing region. China becomes the second-largest net importer and OECD Asia Oceania the third-largest net importer. Non-OECD Asias net exports diminish significantly so that the region is only a few billion cubic metres away from becoming a net importer. A sustained price divergence is putting oil indexation under pressure As regional market prices are at unprecedented levels of divergence, oil indexation is coming under increased pressure. The spread between US Henry Hub (HH) gas prices and Japanese imports reached a record average price difference of USD 16 per million British thermal units in mid-2012. US gas prices reflect the regions supply and demand fundamentals and its sustained high oil prices, triggering increasing associated gas production, while many European buyers have renegotiated the pricing formulas in their long-term contracts and introduced a higher share of hub indexation. This has not been the case in Asia, where most long-term contracts continue to be linked to oil prices. Looking forward, oil indexation is being increasingly challenged in Asia (and continues to be in Europe) given the burden imposed on these countries economies. However, the fact that most LNG coming on line by 2015 is linked to oil prices implies that oil indexation is likely to continue to dominate. Two factors are nevertheless putting pressure on LNG and pipeline suppliers are insisting on oil indexation for projects still at the planning stage: 1) US LNG projects that have signed long-term contracts pegged on HH prices; and 2) rising interest among Asian countries in developing an Asian natural gas trading hub. Singapore is seen as the most likely country for such a hub, but other regional trading hubs could be developed afterwards building on this initial development, as was the case in Europe earlier this decade. There are nevertheless a number of prerequisites to fulfil, such as putting in place third-party access to infrastructure, liberalising wholesale gas prices and possibly the power sector (an important and growing user of natural gas), and having an arms-length relationship with the government. This requires sufficient flexible LNG available on global gas markets. Under current conditions, Asian buyers are reluctant to commit to LNG or pipeline supplies based on oil indexation.

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DEMAND Summary In 2012, world gas demand increased by a modest 2.0%, below the last decades average of

2.8% per year. With a demand level of 3 427 billion cubic metres (bcm), the gap between mature Organisation for Economic Co-operation and Development (OECD) markets and developing non-OECD regions continued to widen as the shares of the OECD regions dropped to 48%. Both OECD Americas and OECD Asia Oceania continue to see strong gas demand growth, while Europes demand is back to 2003 levels. China remains by far the fastest-growing market with 13% growth in 2012, despite slower Chinese demand in comparison to the preceding years. Latin America and the Middle East expanded on the back of increasing gas production and in the case of Latin America, higher liquefied natural gas (LNG) imports. Non-OECD Asian gas demand grew by only 3.2%, which reflects increasing domestic supply and the high price of imports. Former Soviet Union (FSU)/non-OECD Europe was the sole non-OECD region with declining demand.

Over the period 2012-18, global gas demand is expected to increase by 15.6% (2.4% per year) to reach 3 962 bcm, lower than the Medium-Term Gas Market Report 2012 (MTGMR 2012) forecast of 17.1% (2.7% per year). Gas will grow at a slower rate than coal (2.6% per year), but more rapidly than oil (0.7% per year). Non-OECD markets contribute to 76% of the incremental demand. China will be by far the fastest-growing country as its consumption almost doubles to 295 bcm. In volume terms, OECD Americas and the Middle East follow with an additional gas consumption of 84 bcm, while Africa is the second-fastest-growing region at 5.3% per year. Other non-OECD regions continue to see strong growth, despite some local gas shortages, the exception being the FSU/non-OECD Europe, which grow modestly at 0.8% per year.

Europe represents the largest downward revision compared with last years forecasts, which is now estimated to reach 525 bcm by 2018 (versus 561 bcm by 2017 in the MTGMR 2012). In the power generation sector, renewable generation exceeds limited demand growth by 13% over 2012-18, which leaves less room for combustible fuels. As an unfavourable price relationship among gas, coal and carbon dioxide (CO2) continues to put pressure on gas in the short term, Europes gas demand bottoms out below 500 bcm in 2013, before recovering as the price relationship improves in favour of gas.

Gas use in the road and maritime transport sector could be a new and important driver of growth throughout the current decade in different regions. The development of road transport is foreseen to take off over the medium term, with an additional 50 bcm consumed by 2018 (9.4% of additional gas demand), but gas use by bunkers remains a longer-term issue. A favourable oil-gas price spread combined with the desire to reduce oil dependency and a more optimistic view of domestic gas supplies is boosting interest in gas use in the transport sector in the United States, notably in LNG trucks. Given the gloomy picture of future European gas demand, gas companies are seeking to develop new markets, while the support of the European Commission (EC) for the use of gas/LNG as transport fuel has been increasing. But the fastest-growing market will be China owing to the need to develop cleaner transport vehicles. In each region, each part of the gas value chain needs to be developed simultaneously in order to solve the classical chicken-and-egg problem, from gas supply, liquefaction plants, refilling stations, owners of fleets of cars or trucks, and the car industry.

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Recent trends World gas demand In 2012, gas demand growth was relatively modest in regards to the previous decades achievements. Global gas consumption was estimated at 3 427 bcm, 69 bcm (2.0%) higher than the previous year. This growth is much higher than that of oil demand (1%). The spread between non-OECD regions and OECD regions continues to widen, as gas demand shifts from mature OECD countries to non-OECD countries where needs in the industrial and power sectors drive gas consumption upward. The economy continues to play a major role in the different regions gas demand; as of early 2013, it is still on a slow track to recovery, with Europe trailing the rest of the world. In 2008, non-OECD demand overtook that of the OECD and the gulf between the two regions continues to widen, with OECD representing 48% of global gas demand as of 2012. The picture within mature OECD regions varies markedly, as both OECD Americas and Asia Oceania continue to see strong gas demand growth, while European gas demand is still declining. A key factor of growth for all regions was the development of domestic production and the ability of importing countries to afford more expensive gas on global gas markets. In particular, prices for spot LNG cargoes reached nearly USD 20 per million British thermal units (MBtu). Many producing countries face gas shortages due to the discrepancy between low domestic gas prices and the cost of developing new gas fields, Russia and Qatar being notable exceptions to this trend.

Table 1 World gas demand by region (bcm), 2000-12

2000 2010 2011 2011/10 (%) 2012* 2012/11 (%) Europe 475 567 521 -8.2 513 -1.6 Americas 794 850 867 2.0 893 2.9 OECD Asia Oceania 131 198 220 11.2 229 4.0 Africa 55 105 107 2.3 113 5.8 Non-OECD Asia (excl. China) 152 283 277 -1.8 286 3.2 China 28 109 132 20.4 149 12.9 FSU/non-OECD Europe 597 681 694 2.0 677 -2.4 Latin America 94 152 149 -2.2 160 7.5 Middle East 179 370 391 5.8 407 4.2 Total 2 505 3 315 3 359 1.3 3 427 2.0

Note: OECD data for 2011 are in line with official submission as of April 2012. Non-OECD data are either preliminary submissions as of April 2012 or sourced from IEA Natural Gas Information 2012.

* Estimate.

Source: unless otherwise indicated, all material in figures and tables is derived from IEA data and analysis.

OECD OECD gas demand rose a modest 1.6% in 2012, lower again this year than global average growth, although growth in both North America and OECD Asia Oceania were above average. Again in 2012, the picture among the three OECD regions varied markedly. For the second consecutive year, gas demand in OECD Europe dropped, this time only by 1.6% to an estimated 513 bcm, which is not as dramatic as the fall in 2011 of 8.2% in absolute terms. However, considering that 2011 was extremely mild and that weather returned to normal for most of 2012, the fact that demand in 2012 fell nonetheless was perhaps more remarkable than the 8.2% loss in 2011. European gas demand therefore approaches the

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510 bcm mark, a level unseen since 2003. Even the global economic crisis in 2009 did not have such negative effects on demand in Europe, which was 9 bcm higher at that time. Meanwhile, gas consumption in OECD Americas gained 2.9% or 25 bcm, while OECD Asia Oceania was the most dynamic with a 4% increase. Unlike Europe, demand in those last two regions has never been so high; consumption increased by two-thirds over the past ten years in OECD Asia Oceania and by 13% in OECD Americas a smaller increase due to the relative maturity of the North American regional gas markets. As of 2012, European gas demand had lost ten years, not only in absolute numbers but also when one looks at the seasonally adjusted trend, which takes away any weather influence (Figure 1). The demand loss in 2012 may have been lower than in 2011, but it is nevertheless more worrisome. In 2011, the milder weather was the biggest driver behind the decline, followed by anaemic economic growth and higher gas prices. Neither the economic nor the pricing environment improved in 2012, resulting in a further drop in demand. In 2012, two sectors were responsible of the demand decline: industry and power generation. Within power generation itself, three factors were at play: low power demand growth, increasing renewables and gas-to-coal switching. One of the most extreme declines in 2012 was in the United Kingdom, where gas demand fell by over 5% and is now back to the 1995 level. Slovakias consumption fell to a level unseen over the past two decades, at only 75% of the year 2000. Three countries had double-digit losses Finland, Sweden and Portugal, although it is worth noting that none of these countries is a major consumer. Among the biggest European consumers, the picture is actually quite varied: the United Kingdom fell to the rank of second-largest gas user behind Germany, where gas demand gained 1% due to the recovery in the residential sector. France posted a surprising 2.6% gain largely driven by increased use by small users, but seasonally adjusted demand was actually down by over 4%. Italy, the Netherlands and Spain saw their consumption declining, largely due to reduced gas use in the power sector. Turkeys gas demand gained 4.5%; higher use in all sectors due to a stronger economy played a key role.

Figure 1 Europe seasonally adjusted gas demand

OECD Americas recorded a positive gas demand growth for the third year in a row, putting the regions gas demand 87 bcm above 2009 levels. However, three out of the four countries in this region showed a demand drop, with the United States overcompensating for their cumulative 5 bcm

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loss with a 30 bcm gain. In particular, Mexicos gas consumption receded by 6.5% due to declining production, forcing Pemex to ration gas supply. Meanwhile, in Asia Oceania, demand rose in all countries but Israel, which was affected by the interruption of Egyptian gas supplies and reduced gas production. Japans needs were boosted by an even lower generation from nuclear power plants along with a colder winter. Australias gas demand increased due to higher availability of gas and a larger switch from coal in the power generation sector.

Table 2 OECD gas demand by country (bcm), 2011-12

2011 2012* % 2011 2012* % Europe 521.1 512.6 -1.6 Slovakia 5.6 5.4 -4.5 Austria 9.4 9.0 -4.5 Slovenia 0.9 0.9 -5.8 Belgium 17.7 17.9 1.2 Spain 33.3 32.2 -3.3 Czech Republic 8.4 8.5 0.9 Sweden 1.3 1.1 -12.8 Denmark 4.2 3.9 -6.7 Switzerland 3.3 3.5 7.9 Estonia 0.6 0.7 7.8 Turkey 44.7 46.7 4.5 Finland 4.1 3.7 -10.2 United Kingdom 82.4 78.0 -5.4 France 42.8 43.9 2.6 Asia Oceania 220.0 228.7 3.5 Germany 86.0 86.9 1.0 Australia** 37.9 39.6 4.6 Greece 4.7 4.3 -8.4 Israel*** 4.9 2.6 -47.9 Hungary 11.6 10.7 -7.2 Japan** 126.4 132.4 4.8 Iceland 0.0 0.0 NA Korea** 46.5 49.5 6.5 Ireland 4.8 4.7 -2.5 New Zealand 4.3 4.6 7.3 Italy 77.9 75.0 -3.7 Americas 867.2 892.7 2.9 Luxembourg 1.2 1.2 2.3 Canada 103.8 103.7 -0.1 Netherlands 47.9 45.8 -4.2 Chile 5.7 5.2 -9.1 Norway 5.9 5.9 0.0 Mexico 66.7 62.4 -6.5 Poland 17.2 18.1 5.5 United States 691.0 721.4 4.4 Portugal 5.2 4.6 -11.3 OECD 1 608.2 1 634.0 1.6

Note: in this report, the percentage points mentioned in tables may not correspond to changes calculated based on yearly numbers due to rounding.

* 2012 data are estimates as of May 2013. ** Data on Japan, Korea and Australia are based on fiscal years (from April to March for Japan and Korea, from July to June for Australia). *** The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

Residential/commercial sector

This sector has for a long time been the backbone of OECD gas demand, especially in Europe and North America, and still represented 30% of demand as of 2012. OECD consumption in this sector decreased to 497 bcm in 2011, a level unseen since 2007, which was also a very mild year in Europe. This was an abrupt 5% drop from the historical record reached in 2010 524 bcm. In 2012, OECD residential/ commercial gas demand is estimated to have fallen to 495 bcm, even lower than in 2011. This additional decline was due to the substantial drop in US residential/commercial gas demand, which was not compensated for by the rebound in European gas demand. In Europe, the number of heating degree days (HDDs) was 7% above 2011, after a 15% drop in 2011. This was largely due to the February 2012 cold snap, which enabled gas consumption in many countries to recover. In OECD Americas, US HDDs reached their lowest level in over a decade, a circumstance that was not replicated in Canada, where HDDs were higher in 2012 than in 2011. In OECD Asia Oceania, both Japan and Korea recorded exceptionally colder winters, increasing HDD levels by 3% in Japan and 7% in Korea.

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Consequently, there were diverging residential/commercial gas consumption trends among countries. In 2012, European residential/commercial gas consumption is estimated to have increased by 8% to 208 bcm, as most countries witnessed a recovery after the spectacular drop from 221 bcm in 2010 to 191 bcm in 2011. This recovery was particularly strong in the United Kingdom, Germany and France, three countries with a high share of residential demand. In the United Kingdom, this sector increased by 15%. Frances demand from small users connected to the distribution network increased by 12.9%. Without the effect of lower temperatures, Germanys primary energy would have dropped by almost 1%. The same pattern was observed in Belgium with an 11.5% increase. Surprisingly, the recovery was much smaller in Italy as the transmission system operator (TSO), Snam Rete Gas, reported a 1.3% recovery in the residential/commercial sector, while HDDs were 6% higher. In the Netherlands, gas delivered via the regional grid (predominantly to residential and small commercial users) gained 5.4%. By contrast, residential gas demand increased marginally in the Czech Republic, while the country was one of the few European places where gas demand actually increased in 2012. In the United States, the unusual mild weather in early 2012 translated into a 10% demand drop in the residential/commercial sector, with residential demand alone losing 11%. This removed around 20 bcm from the market as residential/commercial demand dropped by 22 bcm in 2012, but the losses were remarkably concentrated during the first quarter, resulting in a large oversupply situation and prices dropping to below USD 2/MBtu in April 2012 as a result. The loss in the United States largely offset the recovery in Europe and growth in Asia Oceania.

Figure 2 HDD in selected countries

Industry

OECD industrial gas demand is estimated to have slightly declined in 2012 (-1 bcm), with the loss concentrated in Europe (-4 bcm) and Asia Oceania (-1 bcm), while consumption in OECD Americas increased by 4 bcm. Figure 3 shows that a few countries have not yet recovered in terms of production from the manufacturing industry, but others have slowly reached pre-crisis levels or above: among the best performers are Slovakia, Korea, Poland, Turkey and Mexico. Among the large countries, Germany has nearly rebounded to 2007 levels, but this is not quite the case for France, Spain and the United Kingdom. Unsurprisingly, Greece shows the most extensive decrease among OECD

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countries. These indices show that industries in most European countries are still struggling and have not yet recovered, but they remain on an upward trend. They reflect one side of the industrial sector. Another important driver for industrial consumption is wholesale gas prices, which increased slightly by 5% on average in Europe in 2011/12, and increased even more in Japan (13%), but dropped in the United States by over 30%, enhancing a nascent industrial renaissance. It is worth mentioning that wholesale prices do not wholly reflect the final price paid by industrial end-users, as other factors such as transmission costs, taxes and contracts specificities with their suppliers come into play. The US industrial sector experienced a relatively modest upturn in 2012, where gas consumption increased by 2.8%. Considering the very low gas prices enjoyed by the country in 2012, one could have expected a stronger increase. However, looking closely at the evolution of this sectors demand, it appears that US industries returned to their 2004 consumption levels, erasing the effects of years of higher gas prices. Additionally, despite announcements of new factories and industrial demand centres, these take time to get off the ground, which can explain why the effect of persistently low gas prices is also reflected with a time lag.

Figure 3 Indices of production from manufacturing industry (2005 = 100)

Unsurprisingly, Europes industrial gas demand dropped due to the combined effect of high gas prices, low economic growth and gains in energy efficiency. Italys Snam Rete Gas recorded a 2.4% loss in this sector, a drop relatively similar to that of Belgian industrials (3.3%). In France, the consumption from large users connected to the network (predominantly industrials) dropped by 9.2%. But there are a few exceptions to this trend, such as UK industrial gas demand picking up slightly by 4%, a trend which is all the more surprising as UK industrial gas consumption has been on a downward trend for years. Power generation

The main drivers behind diverging paths in natural gas consumption in the power sector were low economic growth, which translated into low increase in power demand, relative gas and coal prices, the absence of any meaningful CO2 price in Europe, and the unabated growth of renewable energy sources. This perfect storm taking place in Europe was even more impressive than the exact opposite

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phenomenon a sharp increase in gas consumption which was taking place in the two other regions, the United States and Japan. In all OECD regions, power generators consumption is estimated to have increased by 4.7% from 586 bcm in 2011. To understand the drivers behind these different trends, it is important to look in detail at the whole power system. In the OECD regions, total electricity supplied receded by 0.4%. Interestingly, the only region where electricity supplied increased was Europe (0.7%), while it dropped by 1% in OECD Americas and 0.7% in Asia Oceania (Figure 4). Turkey alone represented 50% of Europes incremental power generation, and colder weather in Europe also slightly boosted consumption in countries using electric heating. In Europe, renewable power growth was strong, as hydro gained an estimated 11% and other renewable energies (notably wind and solar) rose by 22%. Renewable energies now represent one-quarter of total European generation, and stand for the first time above nuclears share. Even if they represent only half of the combustible fuels generation, this is considerably higher than in Asia Oceania, where they represent less than one-tenth, and Americas, where they represent less than one-fifth. Total renewable energies output declined in these other two regions, as the drop in hydro generation was not compensated for by increases from the other renewable energies. But in each region, there was less room left for combustible fuels and nuclear energy combined. In Europe, despite the drop in nuclear generation (particularly in Germany, Belgium, France and Switzerland), combustible fuels still lost 52 terawatt hours (TWh). The outcome could therefore have been a weaker competitive position of natural gas, if nuclear had been stable in countries other than Germany. In Americas, generation from combustible fuels was relatively stable, (although gas displaced a large amount of coal-fired power; see below), while in Asia Oceania, they largely benefited from the sharp drop in Japans nuclear generation and gained 130 TWh. In Europe, power generators gas consumption dropped sharply in 2012 by around 20 bcm, while this sector was previously expected to drive the regions demand upwards in the long term. This phenomenon is analysed in depth in a following section (Regional focus: saving private European CCGT). This process led to a substantial underutilisation of gas-fired capacity in some parts of Europe. Beyond the points mentioned above, the unfavourable pricing relationship of gas against coal in the absence of any significant CO2 price was the additional factor that accentuated gas demands decline. If the drop in combustible fuels generation had been equally shared between coal and gas, gas demand would have dropped only by 13 bcm, while the UK power sector alone lost 9 bcm and European coal-fired power generation actually increased, driven by Germany, Ireland, the Netherlands, Spain and the United Kingdom. In the United Kingdom, power producers gas consumption dropped by one-third compared with 2011 levels, which puts this sector at levels unseen since the beginning of this century. The slight difference with generation is due to higher average efficiency of the present generation mix. In Italy, the power generation sector, which lost an impressive 11%, was the main driver for Italys 3.7% loss in demand, while Belgian power generators also used 11% less gas than the previous year. Turkey stands out as a country where generation from both gas- and coal-fired plants increased. The increase in US gas-fired plants generation is remarkable both in terms of volumes and relative to 2011. In 2012, coal-fired generation fell by 216 TWh (13%) while gas-fired plants generated an additional 217 TWh (21%), an almost perfect substitution. Gas-fired plants generated 77% of the electricity produced by coal-fired plants, while in 2006, this ratio was 40%. In Mexico, both oil- and coal-fired generation increased at the expense of gas-fired generation due to some gas shortages as production dropped.

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Figure 4 Variations in power generation by region, 2012 versus 2011

Japan had to compensate for the loss of nuclear power plants again in 2012. Since August 2012, only two nuclear units have been operating (Ohi 3 and 4), and as of mid-2013, 44 units representing 39.4 gigawatts (GW) are closed for maintenance. In 2012, nuclear generation in Japan dropped by an impressive 138 TWh. Even if power demand lost 17 TWh, the fact that renewable energies also dropped by 7 TWh did not help, and combustible fuels generation had to increase by 127 TWh to compensate. Oil products and LNG were the main sources of alternative supplies. Fiscal year 2012/13 data can be estimated to show a less impressive drop and a more moderate call on LNG. At the end of 2012, South Korean utilities increased their gas imports in an effort to avert the risk of power cuts following the shutdown of nuclear reactors. Australia recorded an increase in gas-fired plants generation, while coal declined. This is the result of different factors including the impact of the new carbon pricing mechanism on coal-fired generation, the mandatory renewable target (RET) and the increase in peak load demand which tends to favour gas, while base-load demand has fallen due to lower industrial demand (hurt by a more expensive Australian dollar). No new coal-fired power station is currently being considered despite coal being cheaper, while the development of coal-seam gas in Queensland has led to new gas-fired plants, due to a mandatory share for gas required in the power sector in that state. Non-OECD Gas demand in non-OECD countries increased by 2.5% in 2012, even though it dropped in FSU/non-OECD Europe, which is by far the largest non-OECD consumer of natural gas. Demand increased in all other non-OECD regions, despite political instability in a few countries, difficulties in increasing domestic supplies in most regions and LNG prices reaching records on Asian markets. Again in 2012, China was unrivalled in terms of absolute demand growth, reaching an estimated 145 bcm, which means that demand in China (including Hong Kong) reached around 149 bcm, only a few bcm behind Iran, which is still the third-largest gas user. The 13% growth rate was noticeably lower than in 2010 and 2011, but nevertheless meant an incremental 17 bcm was needed. Gas now represents an estimated 5.5% of Chinas primary energy mix, putting it still far behind coal, which

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dwarfs all energy sources at around two-thirds of the countrys energy demand. In the Chinese governments final version of its 12th Five-Year Plan (FYP), the objective is to increase the share of gas to 7.5% by 2015, which could be achieved if the current growth is sustained. At present, only 14% of the population uses gas, but this could increase to 18% by 2015. In Latin America, demand is estimated to have gained around 11 bcm or 7.5%, reaching 160 bcm, a very strong growth compared to other regions. Brazil recorded the largest increase by 5 bcm reaching 32 bcm as the country faced a drought later in 2012, which contrasted with the very high hydro levels observed in 2011 and forced the country to substantially increase its LNG imports, while domestic output and Bolivian imports also increased. Sales to industrials gained 2.4% despite wholesale gas prices ranging between USD 10/MBtu and USD 12/MBtu, while gas use in the transport sector receded for the fourth consecutive year. Power plants gas consumption doubled to represent one-quarter of total gas demand in 2012. Bolivias gas demand also increased substantially, by 4%, even if the size of the market remains tiny at 3.5 bcm. The highest relative increase comes from the industrial (+9%) and transport sector (+8%). In Argentina, the production drop led to higher imports due to a much higher gas demand, especially in the residential/commercial sector where consumption increased by 2.5 bcm. Demand from industries marginally decreased, while power generators consumed 3% more. Gas consumption also increased in most other countries: it was supported by higher LNG imports in Puerto Rico, and by higher production in Colombia and Venezuela. In Africa, gas demand is estimated to have increased from 107 bcm in 2011 to 113 bcm in 2012. Egyptian gas demand is expected to have gained 3.7%, which could be supplied only with lower LNG and pipeline exports due to upstream constraints. Algerias domestic market also relied on supplies from lower LNG exports. There is major uncertainty on how much Libyas domestic demand recovered. Production recovered substantially as illustrated by the much higher exports to Italy, but the absence of detailed information on potential damage to industrial sites and power plants during the war inhibits accurate estimates. Nigerias gas demand is also expected to have slightly recovered to reach 2008 levels. Middle Eastern gas demand rose an additional 4.2%, slightly below the previous years. War in Syria, lower imports from Egypt to Jordan, and lower LNG imports from Dubai and Kuwait weighted on the regions booming gas demand. As highlighted in the MTGMR 2012, many Middle Eastern countries continue to face shortages of supply due to the insufficient growth in domestic gas production. This translated into lower exports in Oman, so that the countrys domestic demand was not affected by struggling production. The only exception was once again in Qatar, where consumption was boosted by the Pearl gas-to-liquids (GTL) projects rising plateau. The facility consumes 16.5 bcm per year and represents a huge incremental demand for a country that consumed only 28 bcm in 2010. Additionally, other sectors gas demand continues to increase. A key unknown is by how much Iranian gas demand may have increased in 2012, given that little data are available on Iranian production and Turkmen imports. The failure to continue the planned reduction of domestic gas subsidies will result in higher residential gas consumption than would otherwise be the case. Non-OECD Asias gas consumption is estimated to have increased by 3.2% or 9 bcm, slightly above the worlds average. A few countries such as India are still facing supply issues due to the fall of domestic production, which had to be compensated for by higher LNG imports. Demand is also expected to have increased by 1.5% in Indonesia as the country gave priority to its domestic market

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versus LNG exports, and by 12.5% in Thailand where an increase in production combined with LNG imports supported higher demand. Chinese Taipei also imported additional volumes of LNG, enabling it to raise its consumption by 8%. Bangladesh and Pakistan continue to rely solely on their domestic gas production. Gas output grew in both countries, giving some relief to gas consumers, even though this increase remains insufficient to meet demand. FSU/non-OECD Europe was the only non-OECD region to face a drop in demand (-2.4%), largely driven by Russia, which represents two-thirds of the regions gas demand. Russian consumption declined by an estimated 2.9% in 2012. Demand was also down in most non-OECD European countries as the result of the economic crisis in Europe. Meanwhile, Turkmenistan, Kazakhstan and Uzbekistan had almost flat gas consumption, while Azerbaijan recorded an increase due to higher gas production feeding the domestic market rather than exports. Meanwhile, Ukraine reported a 4 bcm drop in its consumption as the country tries to reduce its deficit by importing less Russian gas. Medium-term demand forecasts Assumptions As in the previous year, the economy remains a major uncertainty concerning our energy demand forecasts. Like the other medium-term reports, our economic forecasts are based on International Monetary Fund (IMF) gross domestic product (GDP) forecasts from late 2012. The MTGMR 2012 used IMFs World Economic Outlook of January 2012. IMFs subsequent updates regarding the future state of the global economy show a further deterioration, and growth projections have been marked down. Near-term real growth for 2013 has been downgraded from 3.9% to 3.6%. The gap between advanced and emerging economies continues to widen as advanced economies show modest growth rates, recovering to 2.2% in 2014, while emerging economies are set to e

medium-term gas market report 2013

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