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Global Natural Gas Demand Dip Today Will be Felt for Years

June 29th 2009

Energy / Environment - LNG Tanker

Like other segments of the worldwide energy industry, natural gas is experiencing its first dip in years—in fact, decades. That is a mixed blessing. True, global demand is softening for the first time in a half century. But that means that costly investments in new production have been comprised. Forecasters see a supply crunch hitting in about 2013, according to the International Energy Agency which tracks such trends.

"We have moved from a tight supply and demand balance with extremely high gas prices to an easing one with plummeting prices," Nobuo Tanaka, executive director of the IEA. Oil has experienced a similar drop in prices, although is now rebounding.

"Both markets face enormous uncertainty surrounding the timing, pace and extent of any economic rebound, which affects all prognoses for oil and gas market fundamentals over the next five years."

After a 1 percent increase in 2008, gas demand in key European countries fell by 4 percent in the first quarter of 2009 and is expected to further decline through the year.

"For the first time in 50 years, the world will witness a drop in global gas demand," the IEA stated in its publication Natural Gas Market Review 2009. The publication added that American output remains one of the major ambiguities of the global gas market.

Cratering sales volumes, low prices and governmental uncertainties have combined with the global credit crunch to undermine new projects. Hence, when economies recover, the energy will not be there, or will be very costly, the IEA predicted.

"Financing problems are likely to bedevil all new construction projects in 2009 and even into 2010," the agency stated. It identified several key liquefied natural gas (LNG) projects, asserting if they were not greenlighted the next 18 months due to cost, credit or demand problems, the world would feel the pain in 2012.

Few new LNG projects have been approved this decade. But the next three years is slated to witness increased production capacity from 240 billion cubic meters last year to at least 370 billion cubic meters. But the growth comes at moment of flat if not receded demand.

"Thus, 2009 and 2010 will test the flexibility and resilience of the global LNG market," the IEA concluded.

The Russian gas export monopoly Gazprom which sold gas at about $12 per million BTUs last year may be among the hardest hit. This could trigger further spike hikes and European pipeline shutoffs. The price of gas also factors into Iranian stability as natural gas is a major revenue source for the disputed regime of Iranian strongman Mahmoud Ahmadinejad.

The environmental fallout may be felt for years. If natural gas supplies falter, cheap and dirty coal-fired plants may be erected with greater frequency, especially in those nations that do not scuttle such plans over environmental protest. On the other hand, the necessity for increased wind, solar and geothermal may also rise. By any measure, the impact of the current global economic downturn will have an impact on energy well into the next decade.

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