The global gas market will be shaped in the medium term through China's rising natural gas demand and the U.S.' greater focus on the market as a major supplier, according to the International Energy Agency (IEA).
The IEA's latest report, Global Gas Security Review 2018, showed that 2017 marked a turn in the evolution of natural gas markets, with robust growth in China as a major consumer and importer, and the emergence of the U.S. as a primary gas supply source and player for future global trade growth.
The agency noted that continuous demand from Asian buyers led by China, along with flexible U.S. LNG exports would shape the medium-term gas market.
"This changing environment raises new concerns in terms of security of supply, in the context of more interdependent markets and with more demand volatility and price sensitivity especially for emerging buyers," the report said.
China’s unprecedented natural gas demand growth led to supply shortfalls over last winter, which prompted immediate emergency measures as well as a range of policy and investment decisions being enacted since the beginning of 2018 to reinforce the security of supply, the report revealed.
According to the IEA, these decisions include the signing of several new supply contracts, particularly with Australia and Qatar, and ongoing talks on future supply options to further develop and diversify China’s natural gas supply portfolio.
The report noted that last winter’s events also highlighted the network's limits in terms of natural gas interconnection and storage capacity, which prompted a series of investment decisions to reinforce the country’s infrastructure with new pipelines, regasification terminals and underground storage facilities.
"Also during last winter, several episodes of cold spells combined with unplanned supply reductions occurred in Europe, without any physical supply shortage consequences observed for end users as supply flexibility enabled shippers to provide alternative sources of supply or use alternative routes,” the IEA said.
Several European countries used the EU’s crisis management measures, the IEA said, which it said reflected the resilience of the integrated European natural gas systems, while highlighting the importance of implementing coordination policies, the role of network integration and the cooperation between network operators.
The IEA stressed in the report that short-term contracts were key to supplying LNG shortfalls while providing flexibility to the LNG market.
"This recent evolution highlights the development of secondary markets where sellers source volumes from their portfolio of flexible long-term resources to meet the short-term, small volume requirements of new entrants, who do not have access to primary sourcing from liquefaction projects and for whom destination flexibility is less of a priority," the report said.
The agency said this development of a primary/secondary LNG market, alongside existing traditional back-to-back contracts between producers and end users, is enabled by the development of destination-free, long-term contracts that provide the backbone of a portfolio player’s sourcing.
It also highlighted shifts in LNG pricing mechanisms and noted that gas-to-gas indexation was becoming more common for new contracts, largely due to the development of U.S. LNG.
However, the agency added that oil indexation remained the major component of price determination for export volumes, and even more for import volumes - especially in the Asia and Pacific region.
"The risk of a tighter crude oil market, together with seasonal tensions in LNG supply, puts additional pressure on LNG pricing. The lasting influence of oil indexation continues to impact the development of a flexible and liquid global LNG market," it said.
By Murat Temizer