Worldwide Use Of Natural Gas To Climb 8% In Next 3 Years

Robert J. Beck
Associate Managing Editor-Economics

Natural gas will be the fastest growing major source of energy during 1997-99.

Abundance, competitive price, and environmental advantages over other hydrocarbon fuels ensure strong market growth for gas during the forecast period.

Gas consumption will increase more rapidly than overall energy demand, which will be strong due to worldwide economic growth.

Worldwide gas use will increase to 80.2 tcf in 1999 from an estimated 74.2 tcf this year. That 8.2% growth rate will be exceeded only by the "other fuels" forecast category, which includes relatively small sources such as hydroelectric and geothermal energy.

With consumption growing for all major fuels, the gas market share will rise only to 23.2% in 1999 from 23% in 1996.

Regional outlook

Gas consumption among members of the Organisation for Economic Cooperation and Development (OECD) will move up 6.6% during the forecast period to 41.7 tcf in 1999.

Gas prices, although rising in the OECD, will remain in line with prices of other fuels. This will help stimulate demand for gas, particularly for electrical generation. Gas is displacing oil and coal in power generation markets as technology raises efficiencies of gas-fired turbines and as environmental regulations favor cleaner-burning fuels.

Increased European demand will require increased imports. Through 1999, current sources of imports-the Commonwealth of Independent States (C.I.S.) and Africa-will satisfy European demand. Later, the region may have to seek supplies from the Middle East, where capacity to export liquefied natural gas is growing. European buyers already have purchased spot LNG cargoes from Abu Dhabi.

The ability of the C.I.S. to increase exports to Europe is subject to doubt. Demand for gas in the C.I.S. and East Europe is projected to increase by 909 bcf from this year's level to 21.8 tcf in 1999. Meeting just this demand growth will strain the ability of the C.I.S. to develop reserves.

Gas consumption in developing countries will move up 18% from current levels to 16.7 tcf in 1999, an increase of 2.5 tcf. Because all energy use will rise in the period, the gas market share will increase only to 15.1% in 1999 from 14.5% this year.

Gas demand growth in 1997-99 will be part of an established trend that will extend into the next century.

In the OECD, gas has appeal as a price-competitive fuel able to supply significant amounts of energy, combustion of which results in relatively less carbon-related air pollution than does that of heavier hydrocarbons.

For somewhat similar reasons natural gas demand will increase in the C.I.S. and East Europe, where concern for environmental values is growing. Assumed continuation of the transition to market economics will stimulate economic growth, and the region's huge reserves will make substitution of gas for more-readily exportable oil both possible and economically appealing.

In developing countries, gas demand will grow in areas with indigenous supplies and in those that can afford imports. Areas with limited domestic energy supplies and limited funds will tend to favor oil.

Overall, demand growth for natural gas depends heavily on the fuel's ability to compete with other hydrocarbons in terms of price. Despite the many advantages of gas as a fuel, most consumers won't favor it over other fuels if they have to pay a heavy premium.

Rapid production rise

During the past decade, marketed natural gas production worldwide has increased much faster than production of either oil or coal.

According to the BP Statistical Review of World Energy, worldwide gas consumption increased from 56.9 tcf in 1984 to 71.5 tcf in 1994. That 26% increase compares with increases in the same period of 14% for oil and 7% for coal.

The natural gas share of worldwide energy consumption moved up from 21.5% in 1984 to 23% in 1994.

Consumption patterns

Gas consumption growth has been especially rapid in the C.I.S. and East Europe. Demand in that group of countries increased from 20.2 tcf in 1984 to 26 tcf in 1990, while the gas market share rose from 32.1% to 38.1%. Huge reserves in the C.I.S. enabled countries, especially Russia, to increase exports to West Europe and to displace oil in domestic markets in order to have more for export.

Following collapse of the former Soviet Union (FSU), gas consumption in the C.I.S. and East Europe slumped to 21.3 tcf in 1994. But the gas share of total energy use in this group of countries moved up to 42.9%.

In the OECD, the shift to natural gas has been more gradual. Total OECD gas consumption increased from 30.7 tcf in 1984 to 37.6 tcf in 1994, while the gas market share rose from 21.1% to 22% in 1994.

The comparative slowness of the shift to gas in the OECD stems in part from the relative maturity of gas markets in key industrialized countries. In addition, regulations restrained gas growth in some countries, including the U.K. and U.S., until the last few years of the period.

For Western Europe, where gas consumption totaled 10.3 tcf in 1994, the increase between 1984 and 1994 was 36.4%-14 percentage points more than for the OECD as a whole. The Western Europe gas market share in the period increased from 15.5% to 18.4%.

In developing countries as a group, consumption rose from 6 tcf in 1984 to 12.6 tcf in 1994. Gas provided 10.6% of the energy consumed by this group of countries in 1984 and 14% in 1994.

Production up

To support these increases in consumption, production of natural gas has risen in most areas of the world.

The lowest growth rate has been that of North America, where production in 1994 was up 16%, or 3.4 tcf, from the 1984 level. Much of that growth was in Canada, which has been increasing its exports to the U.S. in recent years.

Canadian production increased by 89%, or 2.2 tcf/year, between 1984 and 1994. U.S. output increased only 7.5%-1.3 tcf/year-during the period.

Despite recent declines, the C.I.S. is still the world's largest gas producing region. Output totaled 23.7 tcf in 1994, 32.2% of the world total. Those values were down from peaks of 26.8 tcf and 38.2% in 1990.

The next largest gas producer is the U.S., with 1994 output of 19.2 tcf, 26% of the world total. Canada produced 4.8 tcf in 1994, followed by the Netherlands and U.K. with 2.3 tcf each, Indonesia 2.2 tcf, Algeria 1.8 tcf, and Saudi Arabia 1.3 tcf.

The largest increase in gas production during 1984-94 was in the C.I.S.-4.3 tcf, or 27% of the total worldwide output gain. Asia-Pacific production moved up 3.6 tcf in this period as Australia, Indonesia, and Malaysia developed or expanded their liquefied natural gas export industries.

Gas production in the Middle East moved up 2.4 tcf in this period as several countries increased domestic use of huge gas reserves to preserve oil for export. African production increased 1.1 tcf, primarily due to output in Algeria, which benefited from opening of a pipeline to Europe.

Western Europe natural gas production moved up 1.3 tcf due primarily to increased development of North Sea reserves by the U.K. and Norway. Production in Latin America in 1994 was up 898 bcf from its 1984 level. There were substantial increases in Venezuela and Argentina.

International gas trade

World trade in natural gas is increasing as technology lowers costs of long-distance pipelines and LNG processing and transportation.

An estimated 12.5 tcf of natural gas moved in international trade in 1994, 17% of total world output, compared with 10.1 tcf and 15% of production in 1989. Earlier figures on worldwide natural gas trade movements are not available. The average rate of increase in trade during this period was 4.3%/year.

The fastest increase was in LNG trade. During 1989-94, overall world gas trade increased by 24%. International pipeline movements of gas increased 20% to 9.4 tcf, and LNG shipments increased 36% to 3.1 tcf.

The C.I.S. is the world's leading exporter, as well as producer, of natural gas by virtue of its high-diameter pipelines to East and West Europe. C.I.S. exports in 1994 were an estimated 3.7 tcf.

Canada was the second largest exporter with pipeline deliveries to the U.S. of 2.5 tcf in 1994.

The U.S. in 1994 delivered an estimated 64 bcf via pipeline to Canada and Mexico and 56 bcf as LNG to Japan.

The Netherlands exported 1.4 tcf in 1994 to other countries in West Europe. Norway exported 939 bcf within Western Europe. Denmark exported 60 bcf and Germany 53 bcf.

Algeria's 1994 gas exports totaled 1.1 tcf-477 bcf via pipeline and 642 bcf as LNG.

Indonesia was the largest exporter of LNG, with 1994 export volumes of 1.2 tcf. About 70% went to Japan, most of the rest to South Korea and Taiwan. Other countries with large LNG exports in 1994 were Malaysia 388 bcf, Brunei 271 bcf, Australia 300 bcf, Abu Dhabi 152 bcf, and Libya 53 bcf.

The largest gas importer in 1994 was the U.S., with 2.6 tcf. It was followed by Germany 2.4 tcf, Japan 2 tcf, France 1.1 tcf, and Italy 1 tcf.

All of Japan's gas imports were LNG, representing 65% of total world LNG trade. The next largest LNG importer was South Korea at 279 bcf, followed by France 272 bcf, Spain 226 bcf, Belgium 141 bcf, and Taiwan 106 bcf.

The largest pipeline importers of gas in 1994 were the U.S. at 2.5 tcf and Germany 2.4 tcf. They were followed by Italy 1 tcf, France 830 bcf, and the former Czechoslovakia 459 bcf.

Prices fluctuate

Natural gas prices have fluctuated in recent years but remain in ranges below the peak levels they reached in the first half of the 1980s.

According to the BP Statistical Review of World Energy, prices in the past decade peaked at different times in different areas. In OECD Europe the price of natural gas hit a high of $4/MMBTU in 1982. As oil prices slumped, gas prices in OECD Europe fell to a recent low of $2.10/MMBTU in 1989, then rebounded to $3.20/MMBTU in 1991 with the oil price spurt attending the Persian Gulf war before settling to $2.40/MMBTU in 1994.

Gas price movements have been similar in the U.S., where the wellhead price peaked at $2.70/MMBTU in 1984, fell to $1.60/MMBTU in 1991, and rebounded to $2/MMBTU in 1993. The price then slipped to an average $1.80/MMBTU in 1994.

The U.S. import gas price peaked at $4.80/MMBTU in 1982, fell to $2/MMBTU in 1988 and remained at that level until slipping to $1.90/MMBTU in 1992. The import price fell again to $1.60/MMBTU in 1994.

In Japan, the price of LNG peaked at $5.80/MMBTU in 1981, fell to $3.20/MMBTU in 1988, moved up to $4.10/MMBTU in 1991, and fell back to $3.20/MMBTU in 1994.

These diverse price trends indicate that natural gas prices are still strongly influenced by regional market conditions. But general gas price trends remain strongly influenced by world oil prices.

Gas reserves

A possible factor in recent gas market growth is that the Organization of Petroleum Exporting Countries, despite its members' huge gas reserves, plays a smaller role in international gas supply than it does in oil supply.

Buyers tend to view OPEC oil supplies as being subject to political influence and, therefore, less reliable than sources influenced mainly by commerce.

Worldwide reserves of natural gas totaled 4.934 quadrillion cu ft at the start of 1996, of which OPEC's 2.037 quadrillion cu ft represented a share of 41.2% (OGJ, Dec. 25, 1995, p. 35). By comparison, OPEC accounts for 77.2% of total world crude oil reserves.

Last year, OPEC's gas output represented 12% of the worldwide total. The group's reserves life index (based on the ratio of reserves to current production) is 216 years, a very high level that indicates a low degree of reserves development.

OPEC member Iran has the second largest volume of natural gas reserves in the world-742 tcf at the start of 1996. Because of the country's distance from large markets, however, relatively little of the gas potential has been developed. At current rates of production, Iran's reserves life index is 658 years.

The C.I.S., with 1.977 quadrillion cu ft of estimated gas reserves, accounts for 40.1% of the world total. It has been more aggressive than the Middle East at developing gas reserves for domestic consumption and export. The C.I.S. reserves life index is 79 years.

According to the latest Energy Information Administration estimates, U.S. reserves of dry natural gas totaled 164 tcf at the end of 1994. At 1995 rates of consumption, that represented a 7.6 year supply.

With a large and growing appetite for gas, the U.S. will increasingly rely on imports.

Future consumption growth in Europe also depends on imported supply, although recent North Sea discoveries have boosted reserves. West Europe's gas reserves total an estimated 168.1 tcf, and the region uses more than 10.3 tcf/per year: a 16.3 year reserves life index.

Development of large deepwater gas reserves off Europe might moderate the need to import growing volumes of gas from the C.I.S. and North Africa.

Outside the C.I.S. and OPEC, gas reserves total 920 tcf, and consumption is 44.2 tcf/year-a reserves life index of 20.8 years.

The current worldwide reserves life index for natural gas is 63 years.

Drilling shift

Gas has become the primary drilling target in the U.S., where more than 50% of the active rotary rig count now is committed to gas wells.

During 1997-99, the gas-well share of total drilling will increase elsewhere in the world, where gas production tends to be associated with oil output more than it is in the U.S.

This expected growth in gas-well drilling outside the U.S. is a factor in OGJ's forecast for an increase in worldwide drilling during the forecast period (see p. 56).