answers to these questions and a chronology of recent events... - IEA

Global Outlook for the Role of Natural Gas
• Gas currently provides around 21 per cent of global energy supply, rising to 24 per cent by
2030 (World Energy Outlook (WEO) 2005), overtaking coal as the world’s second largest
energy source.
• Gas demand is being driven increasingly by electricity demand, through a range of factors
including environmental performance, short lead times, low capital costs and high
thermodynamic efficiency, and phasing out of alternatives. Electricity and gas markets are
becoming very closely linked, with important policy implications.
• While gas reserves are large, they are concentrated in relatively few countries, notably Russia,
(annex 1 has more detail) Iran and Qatar (around 50 per cent of total). The call on Middle
East and North Africa (MENA) (45% of world reserves) and Russian gas (25%) will increase
over the next decades. LNG will play a greater role in trade as these countries (especially
Qatar) grow gas exports.
• The outlook for major IEA regions differs, but all are likely to increase imports in absolute
terms.
For OECD Europe:
WEO projects, on a business as usual scenario (no change to current policies), a decline in total
OECD European gas production – mostly from the North Sea –over the projection period to 2030.
Rising demand and plateauing and declining production will result in net imports rising from around
200 billion cubic meters (BCM) to 500 BCM in that time frame, so by 2030 OECD Europe will be
importing almost two thirds of its gas needs (compared with a little over one third now). For EU 25
import dependence will rise from just under half to over 80 per cent.
European gas demand will be met by imports from the Middle East, North Africa and sources further
afield such as Nigeria. LNG trade will grow. Russia’s net exports to OECD Europe are projected to
increase by 25% to around 150 BCM, losing market share, but still leaving Russia as the largest single
source of supply.
For OECD North America:
Demand will grow steadily, but imports, which are currently small, will grow markedly, as US
production plateaus, and Canadian imports cannot make up the gap. Imports are estimated at 142
Bcm, around 14 per cent of demand, much of it as LNG from global sources, including Trinidad,
Nigeria, the Middle East and North Africa, and Pacific Basin sources for the West Coast market.
For OECD Pacific:
Import reliance for Japan and Korea will remain very high, although Australia will increase LNG
exports (including to US markets). Russian gas supplies may also become available to this market.
China and India will emerge as major gas importers, growth rates averaging around 5 per cent so
imports are projected to reach 250 Bcm by 2030.
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Natural Gas Developments: A recent chronology
On 1 January 2006, Gazprom gas supplies were reduced markedly to the Ukraine, resulting in a
reduction of deliveries to many western European countries for a period beginning early on the
morning of 1 January and lasting for about 1.5 days, with interruptions concluding on 3 January, with
smaller reductions.
Hungary appears to have been heavily affected, losing a significant portion of gas supplies across the
Ukrainian border for a period approaching two days. (Hungary has highest gas use as a percentage of
Total Primary Energy Supply in the IEA—over 43%). Storage and voluntary fuel switching was able
to make up the shortfall.
Some interruptible gas use was invoked, if not actually required in the final analysis. These measures
were also applied in Italy, Poland, Slovakia, and the Czech Republic, although these countries were
not as heavily impacted as Hungary.
On 4 January price terms were agreed between Gazprom and the Ukraine, in a complex deal involving
averaging prices with Central Asian suppliers. Supply to Moldova, also in a price dispute with
Gazprom, was heavily disrupted. This dispute was apparently resolved on 16 January, with prices
rising to $110/mcm, well above previous levels.
Gazprom appears prepared to use supply interruptions to enforce more market oriented prices. The
new Russian-Ukrainian gas agreement has a number of key unresolved issues, with tight deadlines for
their resolution and implementation. Further interruptions to gas flows cannot be ruled out if this deal
were to unravel.
It should be noted that, at the beginning of 2004, Russian supplies to Belarus, including transit
supplies to Western Europe) were heavily disrupted for about 18 hours.
A sharp sudden cold snap during the third week of January saw sharply higher Russian demand,
(including from gas based power plants) and Russian suppliers including Gazprom struggled to meet
this, and reduced supplies to western Europe, notably Hungary, Italy, and Bosnia-Herzegovina.
Again stocks were drawn down quickly, and voluntary fuel switching arrangements triggered.
Nonetheless it appears that supplies remained within contractual tolerances, and such conditions
would stress any gas supply system anywhere in the world. Separately, gas supplies to Georgia and
Armenia have been seriously affected by pipeline failures caused by explosions.
Several countries in Europe have minimal gas reserves now and may need to interrupt gas supply to
industry before the winter is over. The Italian difficulties are an example of such problems. This
problem is likely to become more acute if cold weather reaches Western Europe more widely now, or
later in the season, say March as happened in 2005.
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What Policy Options are Available to Gas Consuming and Importing Countries?
Energy security issues, including for gas, require governments to deploy a full range of tools
to meet both short term and longer term threats. To address short term threats, a range of tools are
available, including fuel switching of large gas users in industry and electricity generation,
interruptibility of use (especially where contracted and known in advance) and stocks. Stocks are
already a key feature of the industry to meet seasonal and diurnal demand shifts. To impose strategic
stocks in gas would be much more costly than for oil, (of the order of 10 times more expensive on a
comparable basis) and not as easily deployed because of the technical drawdown characteristics of
most gas storage. Hungary is a good example of a country with several of these measures available.
Planning for possible emergencies also has many advantages, especially where grids are isolated (eg
Spain, Australia, Japan).
In the longer term, policy prescriptions include increased energy efficiency (which by definition will
mitigate the rise in- import dependency), greater diversity of energy sources and suppliers, and
attention to barriers to investment for some technologies in the electricity sector, to ensure that these
are not forcing an undue reliance on gas fired power. Large scale infrastructure investments (such as
the Northern European Gas Pipeline) provide an extra channel for gas supply, but of course do not
necessarily diversify suppliers, or guarantee the upstream investment to ensure that gas supplies will
be available for export when needed.
Energy efficiency has an important role, but analysis from the WEO alternative scenario
indicates that, with strong policy interventions, (stronger energy efficiency measures and changes in
the fuel mix) gas demand will be 10 per cent less than would otherwise be the case, largely driven by
electricity demand reductions and assuming an increased role for nuclear power (relative to the
scenario in which nuclear declines substantially). Nonetheless, in this scenario, all IEA regions will
remain increasingly dependent on imports, notwithstanding that this dependence rises at a slower rate.
Interestingly, the share of Middle East/North Africa in interregional gas trade (which might be
considered one measure of supply security) remains nearly unchanged at 48% versus 49% in the
reference scenario.
Energy diversity covering both all available energy sources and suppliers offers a most
valuable risk management tool. A balanced portfolio of suppliers and countries of origin is an
important element in security policy. Japan is a good example in an IEA context; it has been able to
smoothly manage the reduction in the share of Indonesian gas supplies for example. Europe can
improve its efforts in this regard, for example it seems that nuclear, renewables and coal must be part
of the suite of energy supply alternatives, noting of course that individual countries will make their
own choices in this regard. LNG supplies also offer gas supply diversity for both Europe and North
America, especially as that energy source grows in flexibility.
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Why is Russia Important?
Russia holds the world’s largest share of natural gas reserves
• 47 trillion m3 or 26% of global gas reserves)
It is the world’s largest gas producer ( producing 641 bcm in 2005)
Russia is the world’s biggest gas exporter
• 140.5 bcm to Western Europe in 2004 (around 80 % transiting through the Ukraine,
the balance through Belarus, noting some supplies directly to Turkey and Finland),
more than a quarter of OECD Europe demand.
• 52.5 bcm to the FSU in 2004
Russia is also a significant supplier of other energy materials to IEA member countries including oil,
nuclear fuel and coal.
Gazprom, which accounts for 85 per cent of Russian production, is now the world’s biggest gas
company and has a market capitalization in excess of $200 billion, putting it amongst the world’s
biggest energy companies.
Gazprom controls the Russian integrated pipeline network and thus controls access to it by non-
Gazprom gas producers – thereby limiting competition in Russia’s upstream gas sector (including
hinterland countries of Central Asia).
Gazprom is working to extend its upstream influence (especially into Central Asia) and downstream,
by acquiring pipelines, marketing companies and gas using industries in FSU republics and Western
Europe.
Russian investments to meet current and projected demand are estimated by the IEA at $11 billion per
annum over the period to 2030; no more than $9 billion is occurring, and it seems that most of this is
going into a few high profile projects. Hence the IEA concern that Russian gas suppplies may be
inadequate to meet growing domestic and export demand.
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