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    Cedigaz: Global Demand Rises, Investments Lag

Summary

Gas, coal and renewable energy were all in competition again last year as the global economy has improved. Gas demand rose 3% in the first three quarters of 2017, compared to the same period in 2016, thanks to China and Europe.

by: William Powell

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Cedigaz: Global Demand Rises, Investments Lag

Global gas demand rose by 3% in the first three quarters of 2017, compared with the same period in 2016, thanks to China and Europe, according to Paris-based research institute Cedigaz.

In analysis published January 26, however, Cedigaz said that investments made upstream and in liquefaction infrastructure have been insufficient in recent years, with Coral the only LNG export venture to take a final investment decision last year. This reflected uncertainties about future gas demand, which is conditioned by competition from renewable energies, and in some countries by coal competition for power generation, it added.

Given the ramp-up of the expected LNG supply in 2018 and 2019, there are many questions about how quickly the market can rebalance. Reduced investment could result in a supply shortfall from 2023 (Cedigaz Outlook). The 2017 year shows that the market is rebalancing under the effect of very strong demand in Asia. Thus, the market could rebalance at a faster pace than expected if Asian demand, driven by China, continues to soar. Moreover, recent developments in the LNG market have led to an increase in spot liquidity and trading.

Coal grew similarly to gas, driven by Asian countries and China in particular, after three years of decline, Cedigaz found. This increase is linked to an acceleration in electricity demand.

For the third year in a row, European gas consumption recorded strong growth in 2017, provisionally estimated at 5%, after a steady decline over the period 2010-2014. Many factors were at play: coal-to-gas switching in power generation as gas competitiveness versus coal improved; the replacement of some coal-fired power plants: a steady trend in the heating sector; the gradual economic recovery; a reduction in hydropower; French nuclear problems; and a greater use of gas in transport.

China saw the largest increase in gas use, in absolute terms. Cedigaz preliminary estimates show a record growth of 18% (or an extra 35bn m³) in 2017, twice the average annual growth rate seen in 2010-2016.

In 2017, some consumption trends have reversed in big markets. In the US, the share of natural gas in electricity generation fell as prices rose, while renewables have grown. Russia’s gas consumption has rebounded mainly due to heating needs and the revival of industrial activity. In South Korea and Taiwan, gas demand rose to offset a drop in nuclear energy.

World gas production rose 4% in the first three quarters of 2017, according to Cedigaz provisional estimates, as the US became a net exporter. In Russia, natural gas production rose sharply in 2017, at an estimated rate of 8%, to support strong growth in exports and domestic demand.

In Iran, production growth is driven by the ramp up of South pars phases and this development is primarily dedicated to the domestic market. There was also a substantial growth in Norway’s gas production in 2017 (+ 7%), as the government has raised the production cap at the Troll field, which lead to growing exports to the UK. In Egypt, production began to grow after seven years of decline thanks to the commissioning of the West Nile Delta Project. Egypt plans to become self-sufficient in the short term thanks to the ramping up of major projects, including the Zohr field which began production in December.

The year 2016 has really marked the beginning of a new massive wave of expansion of the LNG supply (+ 7%). This latter has increased in intensity in 2017, with an additional gain estimated at 30mn metric tons (+ 11%), the largest increase ever recorded since 2010. Around half of this growth is attributable to Australia and more than a third to the United States. China alone has absorbed around 40% of the additional LNG supply to meet the strong growth in domestic demand. LNG was favored over pipelines imports which were less competitive throughout most of the year.

As in 2016 and contrary to what was predicted by many analysts, there was no significant surplus of LNG on the international market in 2017, which would seek takers in northwest Europe, where there is excess import capacity. On the other hand, southern Europe has significantly increased their purchases of LNG. The LNG market has experienced tensions in Asia in the last months of 2017, as evidenced by soaring spot prices. The market is expected to remain tight until the end of winter 2017-2018. China continues to use more gas for heating instead of coal in winter.