Gas Market Liberalisation Reform |
Global trends in natural gas sector |
Global trends in natural gas sector
Natural gas is a versatile fuel whose demand is growing in part because of its air quality and greenhouse gas emission benefits relative to other fossil fuels. The strong growth in global natural gas consumption observed in both 2017 (3%) and 2018 (over 4.6%) has been driven by both growing energy demand and substitution to cleaner fuels.
Fast-growing Asian markets have become the main driver of natural gas development
Natural gas is the fastest-growing fossil fuel in the International Energy Agency’s (IEA) New Policies Scenario, as elaborated in the World Energy Outlook (IEA, 2018a). At an average annual growth rate of 1.6% until 2040, the scenario estimates that natural gas will overtake coal by 2030 to become the second-largest source of energy after oil. The year 2017 marked a turn in the recent evolution of natural gas markets, with the robust growth of the People’s Republic of China (“China”) and other fast-growing Asian economies, such as India, as major consumers and importers and the emergence of the United States as a major source of natural gas supply and future global trade growth. These transformations, which were further evidenced in 2018 (IEA 2018b), will be instrumental in the shaping the mediumand longer-term evolution of natural gas.
The Asia and Pacific region is the main source of growth in demand for natural gas and is expected to contribute half of the global consumption increase to 2023 (Figure 1). The region currently accounts for one-fourth of total natural gas consumption and will see its share increase to 28% in the next five years and eventually to 35% by 2040, according to the IEA New Policies Scenario (IEA, 2018a). Global natural gas consumption is expected to increase by over one-third over the next two decades, with the Asia and Pacific region accounts for over half of this total demand growth. China and India alone account for 38% of the total natural gas demand growth to 2040. For both countries, the drivers of natural gas demand combine continuous energy consumption growth on the back of sustained economic development and policy frameworks to curb air pollution.
The future share and expansion rate of natural gas will depend on a range of domestic energy policy and market design decisions, such as the security of supply, availability of infrastructure, fuel policies, and prices.
It is worth mentioning here that the rapid development of biogas and hydrogen will also diversify the gas supply and increase the market competition.
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IEA. All rights reserved.
Gas Market Liberalisation Reform |
Global trends in natural gas sector |
Figure 1. Natural gas consumption in selected countries and regions, 2000-40
Note: bcm = billion cubic metres.
Sources: IEA (2018a), World Energy Outlook 2018; IEA (2018b), Gas 2018; IEA (2019), Natural Gas Information (database).
Emerging Asian markets, led by China and India, will drive global natural gas consumption growth in the medium and longer terms.
Liquefied natural gas development has accelerated the transition to market pricing
Natural gas pricing is transitioning from a system of indexation (usually against oil or oil products) and regulated pricing to market pricing determined and based on the fundamentals of supply and demand. The International Gas Union (IGU, 2018) has been reviewing the evolution of gas pricing mechanisms in its wholesale gas pricing global survey since 2005. Figure 2 shows the evolution of natural gas pricing by region for 2005 and 2017. The trend shows an overall shift from regulated and other forms of administered pricing to market pricing. Market pricing is progressing in all regions, particularly in Europe where the shift away from oil indexation has been massive.1 This structural change in European gas pricing was enabled by market liberalisation and the development of natural gas hubs but was also triggered by the arrival of market-priced liquefied natural gas (LNG) in the European system in the late 2000s.
The international development of LNG trade has resulted in a strong increase in the number of players involved – from a limited club of mature buyers. The number of countries and territories with LNG import terminals grew from nine in 2000 to 41 in 2018 and is expected to increase to 47 by 2023. At the same time, there are more new players and entrants within these countries. New buyers have varying profiles, from fast-growing economies to mature markets seeking new sources of supply. The increasing number of LNG importers is accompanied by greater differentiation among buyers according to their domestic market requirements. Whereas traditionally, buyers were characterised by a strong share of long-term contracts within their LNG supplies, recent buyers have opted for different approaches, from using LNG as a means of diversifying their natural gas supply portfolio to regarding it as a backup or reserve fuel
1Oil indexation is the price-forming mechanism that links the gas price with certain oil products prices.
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IEA. All rights reserved.