Recent changes in global gas markets, implications and challenges for India
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Gas can provide India with a relatively reliable energy resource, IEA Executive Director Maria van der Hoeven has said. Speaking in New Delhi on 23 March at the 7th Asia Gas Partnership Summit, she noted that although coal will be central to Indian power generation for the foreseeable future, domestic production will struggle to keep pace, as will infrastructure for imports and distribution. “Increasing the share of gas as well as other sources, in particular renewables, will be good for Indian energy security,” Ms van der Hoeven said. “This will also have environmental benefits, not just in terms of atmospheric carbon dioxide levels, but also for the millions of people affected by local pollution.”
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Recent changes in global gas markets, implications and challenges for India
- 1. 7th Asia Gas Partnership Summit 2012 © OECD/IEA 2012
- 2. Emerging economies continue to drive global energy demand Growth in primary energy demand - by region 16961 mtoe 4 500 Mtoe 4 000 China 3 500 India 3 000 Other developing Asia 2 500 Russia Middle East 2 000 Rest of world 1 500 OECD 1 000 500 0 2010 2015 2020 2025 2030 2035 Global energy demand increases by one-third from 2010 to 2035, with China & India accounting for 50% of the growth © OECD/IEA 2012
- 3. There will be large investment needs in India Notably in the power sector Evolution of Capacity by Fuel Power needs in India will triple over the projection period, implying significant investments in the power sector © OECD/IEA 2012
- 4. Natural gas demand growth comes mainly from China, Middle East, India Natural gas demand by selected region in the New Policies Scenario, 2009 and 2035 1 000 Additiona bcm to 2035 800 2009 600 400 200 0 North European Middle Russia China India Japan America Union East Gas demand grows fastest in the non-OECD regions, led by China, which accounts for more than a quarter of the worldwide increase in demand between 2009 & 2035 © OECD/IEA 2012
- 5. Global gas resources represent 250 years of current gas production Natural gas can enhance security of supply: global resources exceed 250 years of current production Thanks to unconventional gas, gas resources are more homogenously spread between regions © OECD/IEA 2012
- 6. Unconventional gas profoundly affected gas markets US gas production forecasts (EIA) US shale gas production rose from 20 bcm in 2005 to reach 140 bcm in 2010 Shale gas now represents over 20% of US gas production, and has been the main driver behind the 100 bcm increase of US gas output over the past 5 years US shale gas is expected to be the major driver behind US gas production growth And the United States is now looking at exporting LNG © OECD/IEA 2012
- 7. Divergence of regional prices Will expanding LNG trade lead to more competitive gas markets? Most prices are on an upward trend, except in North America Japanese prices increase sharply due to rising oil prices and tightening gas markets The US remains disconnected from other markets © OECD/IEA 2012
- 8. Concluding Remarks International gas prices likely to rise Gas will play an important role in India’s energy mix Mobilizing investment will be crucial Stable and predictable investment and regulatory framework needed Functioning market price signals © OECD/IEA 2012
Notas del editor
- This is my first time in India as Executive Director of the International Energy Agency, and I am delighted to participate in this conference. I would like to focus my remarks on three aspects: the significant recent changes in global gas markets the implication of those changes on India andthe challenges for India.
- In the year to come, emerging economies like India are driving global energy demand, including for gas. The IEA’s 2011 World Energy Outlook points out that global energy demand is increasing by one third over the next 25 years, reaching almost 17,000 Million tonnes of oil equivalent by 2035. This will mean drastic growth in the period to 2035 in fossil fuels and renewables.India and China alone account for half of that growth.By contrast, energy demand growth in the mature OECD markets is much more limited. Indian energy demand is projected to more than double over the next 25 years. Oil and coal will maintain their shares in the primary energy mix, while gas will see its share increasing to 11% mostly at the expense of traditional renewable energy like biomass.According to our scenarios, India is projected to displace the United States as the world’s second largest coal consumer by 2025. Over 60% of the rise comes from the power sector, reflecting the enormous demand for electricity in India.On a global scale, natural gas is the fastest growing fossil fuel withdemand increasing by 54%, much higher than for other fossil fuels. As with coal, the power sector is the primary consumer of natural gas, and mainly responsible for its rise. It goes without saying that with this steep growth in energy consumption, emerging economies will play a much more important role in global energy markets and, as a consequence, we even have to take more responsibilities with regards to global energy.
- Sufficient power provision is key to sustaining economic growth and development. The rapid growth of emerging economies like India therefore require significant power demand increases.According to our analysis, in India, electricity demand is projected to more than triple to over 3200 TWh by 2035. This would imply that over 650 GW of new capacity will have to be built.By 2035, gas is expected to be the second largest source of electricity generation, but still modest compared to coal. We expect coal use in the power sector to almost triple over the forecast period. Nuclear power generation grows almost ten-fold.The most impressive increase takes place with renewable energy sources as their contribution increases 20-fold over the projection period.The WEO provides scenarios, not predictions – and achieving such rates of capacity growth will not be easy. Indeed while coal remains the backbone of Indian electricity generation during the whole period, the ability of coal to keep pace with such enormous power demand increases is unsure. This is largely due to logistical challenges and constraints on domestic production. Diversifying into gas and other alternatives is therefore a matter not merely of the environment, but also energy security.Of course meeting such rises in gas demand will require significant investment, and will also depend on favourable policy framework. The projected increases in nuclear and renewable capacity will pose significant challenges, in particular with regards to finance.In WEO 2011, we estimate that investments in new power plants in India will reach $1 trillion over the period 2011-35. Add to that, an estimate of transmission and distribution infrastructure of $632 billion over the same period, and the costs are indeed enormous.These large investment needs imply that India will have to mobilize private capital. That will require an effective and stable policy framework which encourages investment by allowing reasonable and predictable returns.
- There will also be competition. When it comes to rising electricity generation needs, and the gas required to meet them, India is not alone.Power generation is the strongest driver behind gas demand everywhere, which increases at 1.8% per year in our New Policies Scenario. But of course the real story is outside the developed economies, where gas demand rises are limited.Non-OECD countries are projected to account for approximately 80% of gas demand growth to 2035. And in Asia, demand is projected to increase by over 4% per year.In particular Chinese gas demand will surge significantly and reach up to 500 bcm by 2035. That represents a quarter of additional gas demand globally. The Middle East, endowed with large resources, will also see demand rise significantly.Over the same period, Indian demand will triple to 190 bcm. Domestic gas production in India will not be able to keep up, requiring investment in import capacity, for example in LNG. Global LNG trade has been growing sharply by around one third between 2009 and 2011. It is becoming an important feature of global gas markets, helping countries such as India to bridge the widening gap between production and demand. The first LNG wave largely driven by Qatar is now completed; a new wave will come from Australia in the middle of the decade. The United States remains largely disconnected from the world in terms of trade and prices. But the prospect of LNG exports from North America is not far off.There will be competition for these new sources of LNG supply. Asia will remain the leading importer of LNG: this includes not only Japan and Korea as historical importers, but also China and India.Many other countries are looking at importing LNG: Thailand just started, and Malaysia, Vietnam, Indonesia, Singapore will soon join too.
- You may wonder whether there will be enough gas available for this huge increase in demand in the years and decades to come.The good news is that the world has substantially more gas than expected 5-7 years ago.At the IEA, we have dubbed this the “golden age of gas”, and we expect that gas will significantly contribute to energy security in the future. In addition to proven conventional gas reserves, the amount of recoverable conventional gas resources has increased sharply. Combined conventional gas resources now amount to around 130 years of current production. And that is without unconventional gas. The IEA estimates total unconventional gas resources to be of a similar magnitude as conventional ones, implying that the total amount of recoverable gas resources is roughly equivalent to 250 years of our current gas production (that was 3300 bcm in 2010). And unlike conventional gas which is concentrated in a few countries, unconventional gas resources are more evenly spread between regions. Around 20% of total unconventional gas resources are estimated to be in Asia and an equal share in North America, both close to major consumers. All this is good news for energy security worldwide.However, resources underground is one thing, turning them to actual supply is another. Gas production is capital intensive. Developing a major complex field, especially offshore can easily take billions of dollars of investment for a decade. Development costs have been rising in upstream and this is a global phenomenon. A good, investor friendly energy policy, protection of property rights and contracts as well as efficient pricing of gas is essential to maintain investment in developing gas resources.
- While unconventional gas is not new, its surge really started in 2005, and quite specifically in the US. It was the combination of five elements – a “perfect storm”.* First, an established knowledge of geological resources and experience with extraction.Second, a competitive and enterprising upstream industry that led the development and improvement of key technologies for shale gas, such as hydraulic fracturing and horizontal drilling.Developed infrastructure with transparent 3rd party access efficient markets for gas as well as for capital – companies could trust that they will sell at the market price and they could raise large amounts of capital from investors.Since then, US prices have collapsed but shale gas production is still increasing.US gas production increased by 100 bcm between 2005 and 2010, essentially driven by shale gas. This gas revolution prompted many countries to look to their own unconventional production, but experience suggest that is not easy or rapid to replicate the combination of favorable factors in North America. However, non-conventional gas production has genuine environmental effects, especially water use and the treatment of fracking liquids some of which are highly toxic. This is a problem the industry can solve. We know how to drill and develop wells safely, we know how to recycle water, this is essentially good management and good regulation. But we must solve this problem, since non conventional gas production needs to maintain a social legitimacy in order to became a major component of energy supply. Creating such a framework, including regulations to safeguard safety and the environment, will be important to spurring investment but also to maintaining this revolution by keeping public support. We call these the “Golden Rules” for a Golden Age of Gas, and the IEA has just this month held a workshop to consider such rules. Our analysis will be published in this year’s World Energy Outlook.
- The spread of unconventional gas exploitation may contribute to supply and help to ease market tightening over the medium to long term, but its share of global production remains small, and the scale and speed of demand growth are significant. Apart from the United States, most prices are on an upward trend. The 2009 price collapse, precipitated by oil prices and a temporary gas glut, is now over. Oil prices have been increasing and LNG markets are tightening. 2009 saw a gap between spot prices and oil-linked prices in Continental Europe. Some companies even obtained a partial de-linkage from oil prices. But today spot prices are much higher due to the tightening of gas markets. In Europe spot prices and contract prices have converged at around $8-$10/Mbtu.In Asia the story is more pronounced. Japanese gas prices surged to $16/Mbtu thanks to the oil-linkage in Japanese contracts, and also the rapid tightening of gas markets. In the future, we may begin to see a more liquid LNG market and less pronounced price divergence, but prices will still be relatively high.New gas coming from Australia will not be cheap, and is also priced based on an oil linkage. Even LNG from the United States, taking into account margins and transport costs, will not arrive to Asia at below $7/Mbtu. You may wonder what this will mean for India in the future. At the IEA, we expect that India will need to get accustomed to two-digit prices for gas imports.
- Let me conclude by summarising the key points:Indeed, Indian policy makers have to expect that gas will become more expensive in the future. At the same time, power demand will rise significantly and only a solid energy mix will provide India with energy security. Coal will be central to Indian power generation for the foreseeable future, but domestic production will struggle to keep pace, as will infrastructure for imports and distribution. Gas can provide a relatively reliable energy source, with high thermal content, and the potential for domestic unconventional production. Increasing the share of gas as well as other sources, in particular renewables, will be good for Indian energy security. And this will have environmental benefits, not just in terms of atmospheric CO2 levels, but also for the millions of people affected by local pollution.Mobilizing investment will be crucial. It will be crucial to unlocking Indian unconventional gas potential, to building generation capacity across all fuels, and to meeting infrastructure needs for transmission and distribution of both primary fuels and electricity.That investment will require a sound investment and regulatory framework marked by stability and predictability. It will also require functioning market price signals. Our World Energy Outlook is optimistic about meeting Indian demand over the next decades. But the WEO only provides scenarios, and it will be up to policy makers and investors to meet these great challenges.The award is nothing less than the Indian economic miracle we all hope to see. Thank you.