Global gas surplus may reach 15%

Worldwide demand for natural gas will drop for the first time in the history of international gas markets

London, 11 June 2008 - strongly negative forecasts for industrial output in developed countries will reduce global demand in 2009 and possibly 2010 for natural gas for the first time in the gas industry’s history, and potentially set the market back for many years. This is one of the findings from a new Booz & Company report, An Unprecedented Market: How the Recession is Changing the Global Gas Market. Demand destruction and new gas export developments already underway coming on stream could combine to move the gas market into a position of oversupply of between 5 to 15%.
Global gas markets will be set back by up to a decade
Since the development of international gas markets in the 1960s gas has been a highly desired fuel, with sales volumes rising at an average rate of 4% annually between 1965 and 2007. Before the recession hit, analysts predicted world gas demand to grow steadily by an average of 2% per annum for the foreseeable future, almost double the demand for oil.
“As demand for gas correlates closely with industrial output in developed economies, it is no surprise that with the current recession, there should be a hit to natural gas demand growth. I think what has surprised people is how severe that has been – it is anunprecedented scenario where natural gas demand decreases, and this will cause the industry to re-assess projects and developments for many years to come,” commented Jake Leslie Melville, an energy partner at Booz & Company in London.
The drop in demand is being led by energy-intensive industries. According to analysts, automobile manufacturing could fall by as much as 25% in 2009; output in the chemical industry will drop at a similar pace; likewise output in the steel industry is declining by 30% in Europe and North America.
Surplus to continue well into the next decade
The implications for suppliers and buyers could be considerable. Due to the new demand uncertainty and reduced access to project financing, a substantial number of new gas infrastructure development projects have been cancelled or delayed until demand growth returns. For example, liquefaction projects in Russia and Bolivia have been shelved, while projects in Iran, Nigeria, Australia, Egypt and Trinidad and Tobago are on hold pending final investment decision.
However, based on the pre-recession growth outlook, a number of gas export infrastructure projects are already approved and currently under construction, such as additional liquefaction plants, export pipelines and increased production of gas from unconventional sources in North America. Taking these developments together, Booz & Company expects worldwide natural gas supply-demand balance to be in surplus of 5 to 15%—a surplus expected to continue well into the next decade—and not seen before in this market.
Incentive for large exporters to cooperate
To reduce the market risks of oversupply—such as pressure on prices and potentially even changes in pricing structures such as decoupling from oil prices—the leading gas exporters such as Russia, Norway, Algeria and Qatar have a strong incentive to cooperate to manage market quality. In addition to reduced demand, profitability will be at risk if buyers seek to renegotiate contracts.
The large NOCs (National Oil & Gas Companies) such as Gazprom in Russia, Statoil in Norway, and Sonatrach in Algeria and Qatar should assess the implications of reducing production, and align their project portfolios with the new market realities. They can also take advantage from potential reductions in 3rd Party costs for equipment, steel, contractors, rig rates etc. Other options to consider are geographical swaps with other players to optimise logistical costs and expansion of capabilities by taking over specialised companies taking advantage of lower company valuations. Meanwhile, the IOCs (International Oil & Gas Companies) can leverage the fact that they typically have international portfolios of gas projects, and thus can benefit from economies that bounce back quickest.
Buyers might partner to access new sources and take advantage of lower pricing
For gas importers and buyers, opportunities may arise to renegotiate prices and other contract conditions, as well as in benefiting from increased supply on spot markets. Nevertheless they should be cautious not to damage their relationships with the NOCs as they will need these alliances in the long term. Buyers should also review their gas supply portfolios, and consider the merits of partnering with other importers to secure new sources of gas, share risk and take advantage of the current lower asset valuations, for example by taking equity stakes in upstream fields.
Value of LNG projects will shift from volume to access
The main risk for infrastructure companies is reduced project profitability and reduced access to project financing. Customers looking for capacity in new LNG infrastructure or pipeline assets may delay their decisions in the current uncertain environment, placing risks on timing and financing for infrastructure projects. In addition, business models may change as the value in LNG re-gasification may shift from “volume-plays”, where companies seek to contract out all capacity long-term, to“access-plays”, where players hold capacity available in multiple locations to be able to take advantage of potential geographical arbitrage opportunities. At the same time infrastructure companies should take advantage of falling prices for materials, labour and construction services to push down project costs.