The International Energy Agency released this week its annual Medium-Term Gas Market Report 2016 and it makes grim reading for gas exporters.
The gas oversupply will be with us at least to 2021, with demand growth slowing to 1.5% per year, down from IEA’s 2.5% forecast last year. But even this is based on the assumption that Chinese gas demand growth will average 9% per year over the next 5 years, from 4% now. If this does not materialize recovery will take longer, well into the next decade; the forecast for 2016 so far is 6-7%.
On top of this the IEA expects the massive growth in LNG exports to carry on growing, increasing by 45% between 2015 and 2021. This is supported by forecasts from the US that show US LNG exports growing from zero at the start of 2016 to an astonishing 180 bcm per year by 2040.
And this is not the only bad news. Use of coal, which declined last year, is now increasing due to very low prices, currently less than half the price of gas. The IEA stated that ‘in the absence of environmental regulations particularly in Asia, people are still going for coal-fired power stations because they are cheaper.’ Apparently ‘cheaper’ still trumps ‘cleaner’.
The world has also entered an era of energy-plenty. This is because of the increasing production of unconventional oil and gas, due to fracking, rapid growth in renewables and energy efficiency. These, combined with very cheap coal and the return of Japanese reactors are squeezing use of gas in power generation.
Even in Europe increase in gas consumption is expected to be anemic, about 0.3% per year. But Europe is seen as a market of last resort for excess LNG, due to very competitive Russian pipeline gas supplies.
As a result, the IEA concludes that global gas prices are set to stay under pressure, especially with the huge amount of LNG export capacity coming online just as demand slows.
In its report the IEA concludes: “It is therefore clear that the trajectory of global gas markets – and how fast they rebalance – will depend on the scale of expansion in China and the rest of developing Asia.” Indications so far are a cause for concern. Low gas prices are destined to be with us for a long time.
This of course has major implications for East Med gas. The expectation that Israel and Cyprus will take their gas to Egypt to be liquefied and exported to Europe looks unattainable. That may be the reason why Israel has been concentrating its efforts on Turkey, where problems with Russia and high gas prices make such exports more likely. A pre-requisite to a pipeline through Cyprus EEZ, of course, is solution of the Cyprus problem. Or, alternatively, development of Leviathan by FLNG or FCNG.
Israel’s Prime Minister Netanyahu is not resting on this and has opened another possible route for exporting Leviathan gas. In his visit to Moscow on 7 June he said "There are no legal restrictions on Russian companies participating in gas projects in Israel." He then went to emphasize this further by adding "I would like … to clarify things. Once again, I encourage Russian energy companies to participate in all tenders in this area." It remains to be seen how Russian companies, and particularly Gazprom, respond.
In the meanwhile, Cyprus is still stuck to the same story, of selling Aphrodite gas to Egypt. In the meanwhile Shell’s plans in Egypt are unclear, having just cut its investment there by $100million this year. Shell has also announced this week that it plans to exit operations in up to ten countries during the next two years.
The bottom line is that the risk of Israeli and Cypriot gas becoming stranded is increasing. Urgent and proactive planning is needed.
Dr Charles Ellinas, Nonresident Senior Fellow – Eurasian Energy Futures Initiative - Atlantic Council