The unexpected boom in North American unconventional gas production, together with the current recession’s depressive impact on demand, is expected to contribute to an acute glut of gas supply in the next few years.
Our analysis of trends in gas demand and capacity, based on a bottom-up assessment of ongoing investment and capacity additions from upstream, pipeline and LNG projects, points to a big increase in spare inter-regional gas transportation capacity. We estimate that the under-utilisation of pipeline capacity between the main regions and global LNG liquefaction capacity combined rises from around 60 bcm in 2007 to close to 200 bcm in the period 2012-2015. The utilisation rate of this capacity drops from 88% to less than three-quarters. The fall in capacity utilisation is likely to be most marked for pipelines; the owners of new LNG capacity are likely to be more willing to offer uncontracted supplies onto spot markets at whatever price is needed to find buyers, backing out gas that would otherwise have been traded internationally by pipeline (though the volume guarantees in long-term, take-or-pay contracts will limit somewhat the extent to which buyers will be able to reduce their offtake of piped gas). The looming gas glut could have far-reaching consequences for the structure of gas markets and for the way gas is priced in Europe and Asia-Pacific. The much-reduced need for imports into the United States (due to improved prospects for domestic production and weaker-than-expected demand) could lead to less connectivity between the major regional markets (North America, Europe and Asia-Pacific) in the coming years. Relatively low North American gas prices are expected to discourage imports of LNG. Assuming that oil prices rise in the coming years — and that there is no major change in pricing arrangements — gas prices will tend to rise in Europe and Asia-Pacific because of the predominance of oil-indexation in their long-term supply contracts, diverging from those in North America. However, sliding spot prices for LNG could increase the pressure on gas exporters and marketers in Europe and Asia-Pacific to move away from, or to adjust, the formal linkage between gas and oil prices in long-term contracts. If the major exporting countries bend to pressure from importers to modify the pricing terms in their long-term contracts and make available uncontracted supplies to the spot market, lower prices would result. This would help to boost demand, especially in power generation (in which some short-term switching capability exists and new gas-fired capacity could be brought on stream within three to four years) and reduce the overhang in supply capacity in the medium term.