Natural Gas Faces Demand Destruction This Year And Next, Says Booz Report

Significant demand destruction will occur in 2009 and perhaps also in 2010, setting back the international gas market by up to nine years, Booz & Company said in a report entitled An Unprecedented Market: How the Recession is Changing the Global Gas Market . A combination of the global economic recession, the completion of gas export infrastructure projects currently underway, and reduced demand, the report said, could lead to an oversupply in the market of 5-15% until well into the next decade. In addition to this, large recent discoveries of unconventional gas sources in the US and its potentially shifting position may increase the pressure on the global gas market, according to Booz & Company.

“The implications for suppliers, buyers and infrastructure companies cannot be overstated,” the report said. “To reduce the risks of huge oversupply and concomitant price pressure, large incumbent suppliers have a strong incentive to manage supply through increased cooperation. Buyers must review their assumptions to take advantage of the current buyer’s market – eg, by joining together to access previously inaccessible sources of gas and spread the risk. Infrastructure providers may need to rethink their business models to take advantage of opportunities that may arise from changing trade flows.”

Since the international gas market began to develop in the 1960s, sales have grown continuously at an average rate of nearly 4% annually between 1965 and 2007, and analysts had forecast that it would continue to grow 2% annually through 2030, according to the report. This has been upended by the economic downturn, it said, adding that history shows that demand for natural gas closely correlates with changes in industrial output in developed countries. “With deep negative forecasts for industrial output in 2009, and potentially 2010, gas demand will be particularly hard-hit.” Moreover, natural gas demand will be affected not only by a decline in demand for industry, but also influenced by power generation and domestic heating.

Booz & Company devised two scenarios to project gas demand for 2009 and determined that it could fall by 2% or by 8%. But independent of which scenario might be accurate, “a bleak picture is emerging,” the report said, adding: “Worldwide demand for natural gas will be set back by at least two years and perhaps as many as nine years.” It may take until after the middle of the next decade to reach the level that pre-recession assessments had forecast for 2010 the report said, adding that by that time, structural demand destruction of between 101 and 422 bcm will have built up. This calculation is based on the belief that gas demand will at best enjoy a growth rate of nearly 2% per year once the recession is over, although there is the risk that demand could be lower.

Demand uncertainty has resulted in a number of new gas infrastructure development projects being canceled or delayed until growth returns, the report said, and mentioned projects in Russia, Algeria, Nigeria, Australia and Egypt. The big exporters: Russia, Qatar, Norway and Algeria, are faced with a stark choice. They can either compete head-on with each other and with smaller companies for market share while demand falls, or sit out the storm, accept the volume and revenue loss, reduce production, and strive to maintain prices and pricing structures. “The implications of head-to-head competition are unappealing; they include severely depressed price levels of some duration and altered contract structures and buyer behavior in the longer term, with gas prices potentially decoupling from oil prices,” said Booz & Company. It added: “The second option – sitting out the storm – therefore appears more appealing. However, it is unlikely that players will want to shoulder the burden of reducing sales volume alone. Therefore the anticipated over-supply may trigger increased coordination among the large exporters to manage world gas supply.”

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