Booz & Co.: Global gas market demand drops due to recession

Uchenna Izundu
OGJ International Editor

LONDON, June 19 -- The global recession caused global gas demand to drop for the first time in the industry’s history, a report from global management consulting firm Booz & Co. warned, adding that the markets could be set back by as much as a decade.

Author Robert Oushoorn told OGJ it constructed two scenarios for the gas market. “In our most pessimistic scenario worldwide demand for gas will decline by 8% in 2009 and a further 4% in 2010, on the back of reduced industrial production and reduced demand for power (which impacts gas demand through gas-fired power plants). In our more optimistic scenario gas demand will reduce by some 2% in 2009 but will pick up again in 2010.”

He said that the uncertainty rests in how long and deep the economic recession will be.

In 2009, analysts forecast the automobile manufacturing sector’s demand could contract by as much as 25%; output in the chemical industry will drop at a similar pace with the steel industry’s output declining by 30% in Europe and North America.

Jake Leslie Melville, an energy partner at Booz & Co., said the effect would be that companies would have to re-assess projects and developments in the future.

The report said with new gas production coming onstream combined with demand destruction, the gas market could see an oversupply of 5-15%.

“To reduce the market risks of oversupply—such as pressure on prices and potentially even changes in pricing structures such as decoupling from oil prices—the leading gas exporters such as Russia, Norway, Algeria, and Qatar have a strong incentive to cooperate to manage market quality. In addition to reduced demand, profitability will be at risk if buyers seek to renegotiate contracts,” said Booz & Co.

“Before the recession hit, analysts predicted world gas demand to grow steadily by an average of 2% per annum for the foreseeable future, almost double the demand for oil,” added Booz & Co.

Amid uncertainty regarding demand and the shrinking of the credit markets, gas developers in Russia and Bolivia have either postponed or cancelled projects. Projects in Iran, Nigeria, Australia, Egypt, and Trinidad and Tobago are awaiting final investment decision.

The firm recommended that large gas producing national oil companies assess the reducing production and align their project portfolios with the new market realities. It stressed that this was a key opportunity for OAO Gazprom, StatoilHydro ASA, Sonatrach Group, and Qatar to reduce costs for equipment, steel, contractors, and rig rates.

“Other options to consider are geographical swaps with other players to optimize logistical costs and expansion of capabilities by taking over specialized companies taking advantage of lower company valuations,” the company said.

International oil companies, in contrast, have the advantage of global gas portfolios and can benefit from economies that bounce back quickest.

But customers eager to knock down their contract prices during this downturn need to be cautious as this could strain relationships with producers, the report stressed. “Buyers should also review their gas supply portfolios and consider the merits of partnering with other importers to secure new sources of gas, share risk, and take advantage of the current lower asset valuations, for example by taking equity stakes in upstream fields.”

The report is titled An Unprecedented Market: How the Recession is Changing Global Gas Markets.

Contact Uchenna Izundu at [email protected].