Meeting gas demand forecasts - The analytical framework
Will the growth forecasts be realized?
The global picture is the result of gas consumption exceeding expectations in North America and the Middle East, while growth has lagged expectations in Europe and non-OECD Asia. When excluding the dramatic growth from Japan post-Fukushima, growth in Asia missed IEA targets by nearly 10bcm in aggregate through 2015. In the context of slower-than-expected overall growth and significantly divergent regional trends, the following section aims to:
- Identify a framework and key drivers across markets that can broadly explain recent trends, and assess how these have played out at a regional level since 2010
- Describe progress against these drivers and the barriers that remain to achieving gas growth forecasts
- Describe a number of initiatives which would contribute to overcoming remaining barriers (“enablers”) and support the achievement of gas consumption forecasts at a national and regional level.
While at a country level there are a number of variables affecting consumption dynamics, ultimately three fundamental drivers can broadly explain gas consumption growth at a market level.
Cost is a clear and consistent driver of government energy policies as well as personal and business decisions on sources of energy supply. In practice this can play out differently in the short run vs. the longer run when decisions are made on fuel choices.
In the short run, fuel switching will occur when there is a choice between two fuels and the variable cost structure differentiates the choice. This is the case for the power sector where the lowest marginal cost source of supply is dispatched.
In the longer run, the cost competitiveness of gas affects capital investment decisions for specific technologies. In the power sector, price disparity between gas and coal is central for driving decisions on capital investment. While the capital cost of a gas-fired power station is less than for a coal-fired one, the additional cost of fuel can result in electricity from a gas-fired plant being more costly, depending on the region.
Gas supply security
While gas reserves and production may be widely available on a global basis, supply and trade discontinuities combined with geopolitical concerns can limit access to gas in specific markets.
In practice, two factors have been shown to consistently help overcome supply availability and security challenges for specific countries.
- First, domestic production of gas can directly achieve localized supply availability and provides domestic political control over gas supply. Local gas production tends to support more competitive pricing, unlock investment in gas infrastructure and alleviate supply security concerns. Achieving domestic supply growth requires a policy and fiscal environment at a national level that promotes upstream investment.
- Second, growing and diversifying natural gas infrastructure and access to gas trade promotes flexible and abundant gas supply, in turn improving supply security. The development and diversification of global LNG trade has helped to advance availability and security, particularly due to more flexible contracting and availability of spot markets. Meanwhile, the increasing availability of small-scale flexible infrastructure such as FSRUs is also facilitating more modular and rapid deployment of infrastructure.
The environmental attributes of natural gas contribute to consumption growth and policies that support gas in two ways. First, fewer localized emissions than coal, in particular, supports adoption of gas as a means of reducing air pollution, which has been particularly relevant in Asia. Second, its lower greenhouse gas emissions than other fossil fuels have supported the adoption of gas as a means of meeting climate change emissions goals.
Nonetheless, gas is a fossil fuel that directly contributes to climate change both through the release of CO2 when burned and when methane is leaked. This presents specific sustainability challenges for gas both in the near-term and long-term.
In the near term, concerns over methane fugitive emissions (the unconstrained release of natural gas without combustion) can constrain gas exploration and production. This concern has begun to contribute to opposition to gas sector development (particularly shale development), and has emerged as a basis for specific government regulations across the gas supply chain.
In the longer term, investment in the gas industry may be hampered by concerns about the long-term viability of gas as the world moves towards a zero-emission energy environment and policy makers begin to adopt measures that drive deep decarbonization pathways.
This is due to perception of natural gas and its long-term sustainability as a fuel. Natural gas is a fossil fuel with a limited impact on environment, it can provide low-emission energy and foster an efficient decarbonisation path, also thanks to development of new and increasingly environment-friendly technologies like biomethane and Power-To-Gas.
03 October 2017 - 10:17 CEST