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Global Energy Markets Favor Natural Gas

Globally, natural gas demand is increasing, largely driven by emerging economies that are seeking natural gas to meet their growing energy needs for power generation, industrial and residential use, and even for transportation. Worldwide natural gas consumption grew by 11.2% from 2010 to 2011, or 23.1 Bcf/d (173 mmtpa). In its 2011 World Energy Outlook, the International Energy Agency forecasted an average annual increase in global gas use of as much as 7.5 Bcf/d through 2020 and 7.5 Bcf/d from 2020 to 2035. Natural gas is the only fossil fuel for which the agency has forecasted a demand rise in all three of its scenarios. A study conducted by PIRA Energy in 2010 found that there is 100 Bcf/d of potential demand for natural gas simply from switching all substitutable power generation, industry, and other non-transportation uses to natural gas.

Global LNG Demand

Worldwide LNG production is currently approximately 240 mmtpa, or approximately 32 Bcf/d, which represents about 10% of the world’s natural gas market. Demand for LNG is expected to grow by an average of approximately 13.4 mmtpa per year through 2025, requiring more than 3 new natural gas liquefaction trains to be placed into service every year to keep pace with demand. The growth in global LNG demand is driven by a range of factors, including economic growth, the relative attractiveness of gas-fired power generation to other generation alternatives, tighter carbon emissions standards, the decline of indigenous natural gas production, limited access to piped natural gas, the superior flexibility of LNG to respond to seasonal or changing market conditions, and the added security of supply by improved access to multiple producers and pricing points.

LNG is substantially more flexible than pipeline-delivered natural gas, continues to be the fastest-growing component of the global natural gas market, and according to Wood MacKenzie, is forecasted to increase by 49%, or 5.7 Tcf, by 2020 and reach a total of 456 mmtpa, or 22.2 Tcf, by 2025. Currently, there are 93 LNG regasification facilities in 26 LNG importing countries throughout the world, up from 17 importing countries in 2007. Numerous developing countries, including Poland, Lithuania, Israel, and Pakistan, among others, are currently building or considering plans to build new LNG terminals and enter the global LNG trade.

The pricing paradigm underpinning the world’s gas trade is heavily dominated by oil indexation, which adjusts prices for natural gas by referencing lagged oil product prices. Oil indexation is the dominant method for long-term contracting across Europe and Asia, both for pipeline gas and LNG.

Regional Natural Gas & LNG Prices

Oil indexation provides buyers and sellers with a transparent pricing mechanism that equilibrates among regions relatively quickly, reflecting the liquidity and substitutability of the oil markets. However, the increasing role of the spot market in natural gas pricing has led to stark regional differences in natural gas prices, with North American natural gas trading entirely on a gas market indexation and short term basis, Europe renegotiating contracts to reflect a component of natural gas trading hubs, and Asia pricing almost entirely based on oil prices. High oil prices continue to highlight the regional disparity and buyers are increasingly seeking gas market based pricing as a component of their portfolio.