Today's low natural gas prices and abundant supplies do not reflect inherent inflexibilities in global LNG markets, according to the International Energy Agency's first Global Gas Security Review.
"Today's oversupply should not be regarded as a structural feature of the market and thus as an expression of the higher level of security that LNG markets can bring," said the study, which IEA released in Tokyo on Nov. 23. "On the contrary, it stems from a step-change in the pace of global gas demand expansion that caught industry by surprise, and as such it highlights the challenges of accurately forecasting demand (and supply) in a rapidly evolving energy system."
It said, "What is clear is that market conditions change, often unexpectedly, and the global gas security structure should be-as much as possible-resilient to sudden shifts."
IEA Executive Director Fatih Birol said, "The growth in the global gas trade, along with the diversification of supply sources, is improving the security of supply, but there is still a need to be vigilant on gas security as the changing nature of the market means that regional demand and supply shocks may now be felt in more distant places than ever before."
The study focused on what IEA considers two essential elements of a global gas security assessment: how much redundancy is embedded in LNG infrastructure-particularly the liquefaction portion-and how flexible LNG supplies are in practice.
It said LNG export infrastructure has lower physical production flexibility than commonly perceived. "Today, around 15% of export capacity is offline-roughly the equivalent of the combined exports of Malaysia and Indonesia," the study said. "The lack of feedstock gas is the main factor explaining the large level of unusable capacity. The remainder is attributable to a combination of hard security issues and technical problems."
LNG plants operate as baseload facilities, with very high utilization that has hardly changed since 2011, the report noted. "This reflects both the cost structure-characterized by very high upfront capital costs-and the technical characteristics of LNG export plants," it said. "As such, the business model underpinning LNG production is by definition rigid. The result is a basic lack of short-term upswing capability in LNG production."
Cyclical, not structural
A large wave of new capacity that is currently entering the global LNG market potentially could push utilization lower as a means of rebalancing the market, the report said. But it should be regarded more as a cyclical than a structural development since neither US nor Australian LNG export facilities are built with the explicit objective to operate below full capacity, it added.
Destination flexibility is increasing thanks to growing US exports, it said. "The possibility to redirect LNG as needed according to price signals would allow for an efficient low-cost allocation of available supplies," the report said. "In the event of a supply disruption or a demand shock, LNG trade flows would rapidly shift so that gas can reach the regions that need it most."
Among producers, Qatar has accounted for more than half of overall uncontracted supplies, while Nigeria, Trinidad and Tobago, and Equatorial Guinea-alongside Qatar-have provided most of the flexible volumes delivered via diversions or through open destinations, it said.
Japan's experience in dealing with the electricity supply shortage that followed the Fukushima nuclear accident illustrates the importance of having flexible energy systems to address sudden disruptions, the report said. On the other hand, it was lower gas demand in Europe, mostly caused by the financial crisis and the flexibility of a well-diversified power generation mix that made available the incremental LNG volumes Japan needed, it added.
"Fuel-switching capabilities in Europe, however, are decreasing substantially. Gas-fired [power] generation has fallen by one-third since 2010," the report said. "In most European countries, gas is now mostly dispatched for balancing or via combined heat and power systems. Even with coal-fired capacity available, displacing this portion of gas demand would be much more difficult owing to its rigid nature."
European gas storage operators have come under increasing economic pressure as shippers have become more hesitant to book capacity because of low spreads between summer and winter prices, IEA's report said. This development must be carefully assessed since storage provides an important contribution to Europe's ability to respond to demand and supply shocks, it suggested.
"From a global security perspective, injecting less gas in European underground gas storage during summer would potentially raise Europe's call for flexible imported volumes during winter which-if coming in the form of LNG-would reduce flexible supplies available to others," the report said. "From a domestic perspective, any disruption that could occur along the transportation route of long-distance pipelines or LNG imports would pose higher security concerns in the absence of sufficiently filled gas storage [sites] close to European demand centers."
