Gas supply security

May 9, 2016
About 3 weeks ago, the International Energy Agency hosted a workshop on natural gas supply security at its headquarters in Paris. The purpose of the event was to respond to an agreement at the IEA ministerial meeting in November 2015 to adopt tackling gas supply security as a new mandate for the agency.

About 3 weeks ago, the International Energy Agency hosted a workshop on natural gas supply security at its headquarters in Paris. The purpose of the event was to respond to an agreement at the IEA ministerial meeting in November 2015 to adopt tackling gas supply security as a new mandate for the agency. Ken Koyama, a participant of the workshop and chief economist of the Institute of Energy Economics of Japan, summarized some points that impressed him at the meeting.

At first glance, discussing gas supply security seems probably redundant, under the current gas-LNG market conditions. The increase in supply, coupled with weak demand, has and will continue to put downward pressure on LNG and gas prices, which at the end of 2015 were already at their lowest level since 2009 in Asia and the lowest in over a decade in Europe and North America.

A question raised by workshop participants is, however, if the present weak gas prices may be creating future gas supply security problems and how gas market stakeholders should respond to such problems. Low prices, while benefiting consumers, could postpone or reverse capital investment decisions and jeopardize future supply.

"LNG market analyses indicate that after gas oversupply continues until around 2020, supply expansion may fail to catch up with demand growth due to present difficulties in making investment decisions for new LNG projects, leading to a possible change in the gas-LNG supply demand environment. In considering gas-LNG supply security, we must not only analyze present market information but also expand and improve future outlooks," Koyama said.

According to a outlook of Gas Strategies Group Ltd., the success rate of LNG final investment decisions in 2016 is unlikely to be better than in 2015 and it could be 10% or lower, due to the current low price environment. Actually, the success in achieving the targets for FIDs has been in decline-it was just 19% in 2015 compared with 27% in 2014 and 29% in 2013.

Meanwhile, when giving consideration to future supply security problems, uncertain demand will also be an issue. "Gas supply chain capacity will have to be secured appropriately to meet future gas-LNG demand. However, it is not easy today. Both developed and emerging countries have uncertainties about their economic growth, while coal, nuclear energy and renewable energy competing with gas have future uncertainties and potential," Koyama said.

Another focus of the workshop discussions was the significance of well-functioning market for supply security. Although no market is close to perfect, information for the gas market is less available than the oil market. While the oil market has global characteristics, the gas market even amid globalization still has regional characteristics. Potential risks regarding gas supply security vary across countries or regions.

The IEA's role

The role the IEA should play in addressing the gas supply security is no doubt a key of the workshop.

Since the IEA was created in the face of the first oil crisis in 1973, its mandate has been to address oil supply security problems. In this sense, the IEA has accumulated know-how experiences regarding oil supply security problems and can take advantage of its oil market experiences for the gas-LNG market. The IEA is expected to play important roles in various areas, including improving gas market information, and making objective and scientific analysis in response to uncertainties.

"Oil and gas-LNG markets, though having some common points, have various differences. The IEA may have to accurately check gas-LNG market problems facing each country or region and analyze necessary policies. It may have to develop various risk scenarios and conduct exercises for responding to emergency situations by exploiting oil market experiences. This may be the role that the IEA could play in tackling gas-LNG problems," Koyama said.

About the Author

Conglin Xu | Managing Editor-Economics

Conglin Xu, Managing Editor-Economics, covers worldwide oil and gas market developments and macroeconomic factors, conducts analytical economic and financial research, generates estimates and forecasts, and compiles production and reserves statistics for Oil & Gas Journal. She joined OGJ in 2012 as Senior Economics Editor. 

Xu holds a PhD in International Economics from the University of California at Santa Cruz. She was a Short-term Consultant at the World Bank and Summer Intern at the International Monetary Fund.