IEA’s five-year view sees gas demand slowing, more spot pricing

The International Energy Agency says slowing global gas demand will likely weigh on prices and force pricing model changes on pipeline suppliers suck as Russia’s Gazprom in the next five years.

By Alissa de Carbonnel

BRUSSELS, June 8 (Reuters) – Oversupply and slowing global demand is likely to weigh on natural gas prices and force pricing model changes on pipeline suppliers such as Russia’s Gazprom over the next five years, the International Energy Agency (IEA) said on Wednesday.

In its medium-term market report, the West’s energy watchdog said gas faces competition from renewable energy and cheap coal that would keep the market flush with liquefied natural gas (LNG).

Annual growth of 2.5 percent seen over the last six years is expected to slow to 1.5 percent through 2021, the IEA said.

“Developments are pointing to a period of oversupply,” IEA head Fatih Birol said in the report. “The next five years will witness a reshaping of global gas trade.”

“We are at the start of a new chapter in the European gas markets, especially in terms of prices,” Birol said. “It would be optimistic to expect gas prices to increase.”

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Suppliers Russia and Qatar face a challenge from an LNG glut as export capacity rises 45 percent by 2021, mostly from the United States and Australia.

At the same time, demand is expected to slow from key importers Japan and South Korea.

Gas demand growth in China fell to 4 percent in 2015, its slowest rate in more than 15 years, but is expected to rebound to 9 percent through 2021, the IEA said.

A switch to gas- from coal-fired power generation is expected to boost China’s annual demand to 320 billion cubic metres (bcm), it said.

India and the Middle East will also be big importers.

While production shrinks in Europe and U.S. gas production stays near flat next year, the U.S. shale industry is expected to help drive a recovery in production that will account for roughly a third of the global supply increase through 2021.

LNG TO EUROPE

The IEA expects the cost of delivering U.S. LNG to Europe to fall below oil-linked Russian gas or hub prices, creating “a stark change in Gazprom’s operating environment”.

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Although most Russian gas exports to Europe are locked in via take-or-pay contracts, the IEA said Gazprom would need to win an extra 15 to 20 bcm to retain its market share.

The IEA sees imports in Europe rising by 40 bcm by 2021 amid falling European production.

Cheap spot prices would likely trigger tensions with European clients over long-term contracts and force Gazprom “to adopt more competitive pricing mechanisms”, it said.

A trend toward hub pricing is being fuelled by Asian nations entering the spot market to sell excess supply.

Given the market’s oversupply, the IEA also questioned the economics of Gazprom’s plan to expand the Nord Stream pipeline to Germany, as well as its implication for Europe’s security of supply.

The plan would double Nord Stream’s annual capacity to 110 bcm.

(Additional reporting by Barbara Lewis; editing by Jason Neely)