Doris Leblond
OGJ Correspondent
PARIS, June 15 -- The opening up of natural gas markets substantially improves security and reliability of supply, but governments must continue to play an important, albeit ever-changing role in stabilizing and maintaining these markets. Along with ensuring the secure delivery of gas supplies, governments also must provide adequate capital investment.
These were some of the comments made by Claude Mandil, executive director of Paris-based International Energy Agency, during the launch this month of a new book published by IEA, entitled, "Security of Gas Supply in Open Markets: LNG and Power at a Turning Point."
The turning point in the balance between gas supply and demand stems from the fact that while markets are opening up within member countries of the Organization for Economic Cooperation and Development, a new wave of demand is being triggered by gas-to-power markets, thereby forging an increased interdependence between the gas market and the electric power market, Mandil stated.
Also, the global gas market is shifting more toward LNG trade, which is providing increased flexibility and the mobilization of more gas reserves. All of this is taking place in a context where most IEA countries (excluding Australia, Canada, and Norway) are becoming increasingly dependent on gas imports.
Governments' role
In open markets, gas supply and demand can be balanced effectively by market mechanisms, providing endusers with more choices and higher efficiency, Mandil said. Security of gas supply is becoming more complex, however, as it does not stop at national borders and must address every link in the gas supply chain.
"Instead of managing the sector, governments have to set objectives to minimize and mitigate the implications of increasing import dependence and to define the right framework to enable the markets to deliver reliable gas supplies from the production-import point to the final customer," Mandil said. "In particular, governments have the responsibility for defining clear policies on security of gas supply and the responsibilities of each player."
Governments need not invest directly in the market, but must see that regulators, laws, and taxes allow operators to invest, Mandil noted.
Gas supply security
IEA's publication indicates that security of gas supply in its changing environment includes three main dimensions:
-- Diversity of supply sources, routes, and facilities. For example, over the next decade Europe will depend increasingly on Russia's OAO Gazprom as a major gas supplier but, Mandil warned, "so long as [Gazprom] remains a monopoly, the market will be unbalanced."
-- System reliability, such as spare capacity and the ability to cope with short-term gas demand increases or supply disruption.
-- Timely investment in additional capacity for long-term security and the capacity to mobilize long-term supply and ensure deliverability. This implies continuing to resort to long-term contracts in addition to the short-term, spot transactions.
OECD countries' dependence on gas imports is projected to increase to a total of 1,091 bcm, or 45% of gas consumption, by 2030, from a total of 274 bcm, or 20% of total gas consumption, in 2000, the study said. The major portion of this imported gas is expected to fuel the electric power sector. Overall, gas demand by the power sector in OECD member countries is expected to reach 958 million tonnes of oil equivalent (toe) in 2030 compared with 328 million toe in 2000, representing about a 72% increase in gas demand.
This increased use of gas for electric power generation has strong implications for both the long-term external supply security and the short-term reliability of the electric power and gas systems, but the closer link between these two systems also will have an impact on future gas prices as well as their volatility, especially in combined-cycle gas turbines (CCGT), the study said.
LNG industry
The increasing development of the global LNG industry, pulled along by tremendous cost reductions, will have great implications for the global gas industry and in particular for security of gas supply, for "it can remove obstacles to trade and investment," said Mandil. And since most of the worldwide, undeveloped gas reserves lie far from OECD markets, it is clear that LNG will play a key role to bring this gas to the market, when distance and political obstacles make impossible gas transport via pipeline, Mandil added.
Adding to the security of gas supply is the increased flexibility in LNG trade, which can physically be directed to the highest value market. Contractual arrangements also are more flexible. Spot and flexible LNG purchases are increasingly used to cover part of peak gas demand, and LNG is already linking different markets together even though global gas market is still a long way off.
"A key issue," notes the IEA publication, "is to make sure LNG trade can develop without market barriers, by streamlining administrative procedures while ensuring high safety and environmental standards over the whole chain."
Whatever the common dimension of gas supply security, the basic features of the gas industry vary widely among IEA members, as do the starting conditions and the status of gas market reform.
In North America, the marketplace plays a primary role in securing supply through supply and demand response to price changes. A large resource base and a large and well-connected marketplace play their role, but the market is at a turning point, from self-sufficiency to partial dependence on imports. LNG can play a huge part in bringing access to world gas resources and the ability to act quickly to changing market conditions.
A further challenge is the increasing share of gas in electric power generation, especially when linked to reduced capability through the short-term switch to other fuels. A longer-term issue is whether investment in other large-scale power plants (like coal or nuclear) is held back due to regulations.
In OECD Europe, which is undergoing substantial changes, increasing demand will spur the need to build new pipelines and LNG terminals and increase storage capacity and interconnection of the gas transportation grids. Supply and transportation flexibility will decrease as imports come from ever-more remote areas, an issue partly compensated by increased LNG supplies.
Challenges for supply security come not only from a national dimension—which is key—but also from a regional and global dimension. A clear understanding of the roles of governments, regulators, and companies of the European countries and of the European Union is essential.
Supply security also could be affected through the unbundling of activities within the reform of the market, which leads to the unbundling of responsibilities for supply security, as well as the lack of clear market signals and incentives for investments in assets for low-probability, high-impact events. The key external challenge for the European market is how to reconcile competition with the need for many countries to secure future supplies at competitive conditions in a timely manner from non-OECD Europe. The EU's recognition of long-term contracts acknowledges the situation.
The UK's switch from net exporter to large importer and the changes in the marketplace raise new issues for the country's supply security. The UK's installation of a comprehensive and transparent monitoring method of key developments of the reliability of gas supply should help address any upcoming concern in a timely manner.
The gas industries of the four OECD Pacific countries vary greatly with Japan and South Korea, which are both almost entirely dependent on LNG supplies. Whereas Australia is becoming a major LNG exporter and New Zealand is so far self-sufficient.
The extent to which a market is opened also differs with Japan and South Korea at relatively early stages. Therefore, the security of supply also differs greatly. Japan's and South Korea's dependence on gas imports conflicts with the idea of opening up the markets and the need to sustain long-term contracts. But policies that would diversify supplies as well as cooperating with exporting countries and LNG buyers can successfully address the problem. Internally, investment in new gas infrastructure, facility concentration, and insuring against low-probability events are the main issues.
