Gas demand set to drop in downturn

Natural gas, the fuel of choice, is not going to escape the consequences of the economic and financial crisis as its demand is likely to suffer a revision downward to a certain extent.

Its fortunes in the last year have followed that of crude oil with a difference. Judging by the level of prices and just like crude oil, prices reached their highest level in June/July 2008 only to start falling in line with those of crude oil. Prices in the US market for instance reached $12.65 per million British thermal units (mbtu) in July and gradually declined to $5.5/mbtu in December. However, crude oil prices have somehow recovered since the lows of January 2009, while gas prices continued to fall to reach the level of $3.67/(Dh13.47) mbtu on May 6.

Other regions displayed similar price behaviour where in Japan prices are now $3.80/mbtu and the appreciation of crude prices was not sufficient to raise gas prices so far. This may indicate lower demand as well as higher supply due to the operation of new liquefaction trains around the world and especially in Qatar. Liquefied natural gas (LNG) production capacity increased in 2008/2009 by about 60 million tons per annum (mta) and more than half of that is from Qatar. Capacity is projected to increase further by the completion of projects under construction and further 22 mta are likely to come on stream by 2010/2011 again especially from Qatar. Therefore for the next few years gas prices may struggle unless economic recovery around the world materialises as we are often promised. Liquefied natural gas (LNG) constitutes only seven per cent of world natural gas demand but it is taking an increasing role. Trade in LNG increased from 140 million tons (mt) in 2005 to 170 mt in 2007 and is expected to reach 300 mt by 2012 though this figure may be too optimistic now.

There are other factors that may influence demand for gas. Japan is considering the extension of operating runs of nuclear plants between mandatory inspections and this will reduce the demand for LNG and other liquid fuels as a substitute during the periods of maintenance and inspection. This may be even more pronounced if Korea for instance followed the same route. On the other hand, Germany is committed to phase out nuclear power and this may increase substantially its natural gas demand. Concern about climate change may also enhance demand for natural gas In 2007, world natural gas consumption was 2940 billion cubic meters (BCM) and according to the International Energy Agency (IEA) is expected to reach 3600 BCM and 4950 BCM in 2015 and 2030 respectively. These estimates were done in November 2008 and before the extent of the financial and economic crises became fully appreciated and therefore may be revised downward in the future. No matter what the revision may be it is unlikely to be severe in the long run and natural gas due its qualities and the preferences of consumers is likely to resume higher growth rates once economic growth return.

Trade in LNG is also changing due to evolution of markets and the increase in the number of participants.

LNG was traditionally traded on long-term contracts. However, producers and consumers interests converged to allow a certain degree of spot market trading. This may eventually lead to the emergence of world market trading patterns similar to oil especially that LNG contract clauses relating to destination are softened. Storage capacity around the world is also increasing to prepare for more trade in LNG and the Dubai project in this instance is a case in point.

Qatar as the largest exporting country of LNG is likely to be affected by these developments at least in the medium term.

- Saadallah Al Fathi is the former head of the Energy Studies Department at the Opec Secretariat, Vienna.