LNG Markets Less Flexible than Necessary: IEA

While the rise of the liquefied natural gas market has accelerated the globalization of natural gas, the energy security implications of this transformation have attracted much less attention, says the International Energy Agency.

There is no doubt that global gas markets are well supplied today, the November 24 report said, adding that “while this is positive for global gas security, the new analysis from the first Global Gas Security Review, released today in Tokyo, warns that LNG markets are less flexible than is commonly believed.”

A growing share of LNG capacity is offline – mostly because of a lack of enough gas to feed into the system but also because of security and technical problems – meaning the market has less extra capacity than assumed. “Between 2011 and 2016, the level of unusable export capacity has doubled, disabling about 65bn m³, which is equal to the combined exports of Malaysia and Indonesia, the world’s third- and fifth-largest exporters. A period of low oil and gas prices could further worsen the situation.”

However, the report finds that LNG contract structures are becoming less rigid, increasing market liquidity. In 2015, about 40% of LNG contracts had fixed destination terms, down from 60% for contracts signed up to the year 2014, IEA reported.

While shorter term contracts are gradually becoming more common, buyers are also accepting longer contracts in exchange for increased flexibility in the final destination in order to better respond to market conditions. Flexible contractual structures are important for gas security as they enable to aggregate gas volumes at a lower cost from various regions.  

LNG’s share of the global gas market is set to increase in the coming years. In fact, LNG supplies have grown at a faster pace than total gas consumption.

“The growth in the global gas trade, along with the diversification of supply sources, is improving the security of supply,” said Fatih Birol, the executive director of the International Energy Agency. “But there is still a need to be vigilant on gas security as the changing nature of the market means that regional demand and supply shocks may now be felt in more distant places than ever before.”

IEA CEO Fatih Birol

(Credit: IEA)

Before, IEA reported in World Energy Outlook that global gas demand is expected to increase 50% by 2040: “A 1.5% annual rate of growth in natural gas demand to 2040 is healthy compared with the other fossil fuels, but markets, business models and pricing arrangements are all in flux. A more flexible global market, linked by a doubling of trade in LNG, supports an expanded role for gas in the global mix.”

According to BP’s estimations, about 3,538.6bn m³ of gas were produced globally in 2015. Global gas trade’s details indicate that some 704.1bn m³ was done through pipeline and 338.3bn m³ as LNG. 

Iran desk