International Energy Agency Reports Increasing Divergence of Oil and Gas Markets

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land)--Commenting on the International Energy Agency's (IEA) report "Medium Term Oil and Gas Markets 2011," the agency's executive director Nobuo Tanaka said that oil's twilight as an industrial fuel continues, and this is becoming increasingly noticeable in the transportation and petrochemical sectors. "Gas on the other hand continues to increase in power generation, as well as industry and space heating. In terms of market structure and pricing, oil is a genuinely global commodity, while gas markets, although globalizing, remain bound by some key regional constraints, not least in terms of transportation," he said.

The report, launched at the St. Petersburg International Economic Forum last week, examines the increased divergence in the oil and gas markets. Annual base growth in oil demand could average up to 1.2 million barrels per day (BBL/d) through 2016, while natural gas demand could grow by 500 billion cubic meters over the same period, representing about 2.5 times Russia's current gas exports.

Making an assumption, not a forecast, that oil averages $102 a barrel (an increase of $20 on last year's assumed price) the report projects that as higher prices unlock new supplies, the growth in oil supply averages 1.1 million BBL/d. Iraq, United Arab Emirates and Angola are the leading growth prospects from OPEC, while non-OPEC increases are driven by Brazil, Canada, Kazakhstan and Colombia. Conventional oil will account for less than 40% of the increase, while natural gas, biofuels and unconventional oil from the U.S. will account for the lion's share of new supplies, says the report.

Higher oil prices threaten to weaken economic growth and decrease demand, although they could spur investment in exploration. Bracketing the higher and lower demand scenarios, the IEA says demand in the base-case scenario could reach 95.3 million BBL/d in 2016 or see a lower figure at 92.9 million BBL/d by 2016.

China, Asia and the Middle East generate about 95% of net growth, with diesel and petrochemicals providing major growth. Neither price volatility nor speculative activity appears out of line with historic levels, says the report.

Gas consumption is projected to grow at a rate of 2.4% per year through 2016, increasing share in the global energy mix. The non-Organization for Economic Cooperation and Development (OECD) countries are not only the main drivers behind the growth, but also contribute 90% of additional supplies.

As more countries become gas importers, global natural gas trade is expanding and joins oil, iron ore and other resources in the group of commodities in which China is the increasingly dominant source of demand. With about 33% of global demand growth, China has become one of the biggest importers of pipeline gas and liquefied natural gas (LNG), and at the same time is increasing its own domestic production.

Emerging as one of the leading LNG exporters, Australia rivals Qatar and remains a testing ground for pioneering technologies like coalbed methane and floating LNG platforms. Australia is the key source in meeting the Asia-Pacific region's growing gas demand.

In the U.S., the shale gas revolution continues as domestic gas drives out imported LNG. North America will become a segmented "island" market, where low prices stimulate demand, especially in power generation and the chemical industries.

Despite the creasing efficiency and liquidity of gas trading hubs, oil indexation continues to be relevant in Europe and the Asia-Pacific regions. Europe will experience a growing dependence on a small number of gas exporting countries as it experiences growing demand and the depletion of domestic resources.

But, says the report, the globalizing LNG trade plays the increasingly important role of linking regions and reacting to supply/demand disturbances.

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