China will be the big driver of natural gas markets for the rest of the decade. And Europe is missing the bus.
- By Keith JohnsonKeith Johnson is Foreign Policy’s acting managing editor for news. He has been at FP since 2013, after spending 15 years covering terrorism, energy, airlines, politics, foreign affairs, and the economy for the Wall Street Journal. He has reported from Europe, the Middle East, Africa, and Asia and, contrary to rumors, has absolutely no plans to resume his bullfighting career.
Here’s the future of natural gas, according to the latest deep dive by the International Energy Agency: China is really joining the party, both as a consumer and as a producer; the United States is poised to play an outsized role in the gas export market; and Europe will continue to struggle with declining domestic production and continued reliance on Russia as an energy supplier, with little help in sight from U.S. gas exports.
The IEA’s medium-term gas report, out Tuesday, sketches the outlook for global natural gas supply and demand through 2019. The development of natural gas markets — as well as the ways gas competes with other energy sources, both old and new — matters for a host of reasons.
Gas will be one of China’s main weapons as it carries out its declared war on coal pollution. That will make China the biggest driver of global gas demand over the next five years and turn it into a key battleground for gas exporters, including Russia and the United States.
Europe’s unwillingness to take any strong measures in response to Moscow’s aggression in Ukraine can largely be attributed to its heavy reliance on gas imports from Russia, a situation that’s unlikely to change for the rest of the decade. And U.S. dreams of turning booming energy production into booming energy exports will depend, in large measure, on making sure that natural gas can compete on price with older, dirtier sources of energy.
The biggest takeaway from the IEA’s report is that China, which overwhelmingly relied on coal and oil to fuel its 30-year economic boom, is finally getting on the gas bandwagon. Demand there is set to nearly double by the end of the decade, to more than 300 billion cubic meters a year, accounting for half the increase in global demand. The country is also on track to post the biggest gains in gas production.
"The golden age of gas has arrived in China," said IEA executive director Maria van der Hoeven.
China will partly meet that new demand with its own abundant gas reserves, including plentiful deposits of shale gas, the IEA says. But a big chunk will come from ramped up production of synthetic gas from coal, which is a mixed blessing for the environment. The rest will have to come from imports, such as China’s recent mammoth gas deal with Russia and a spate of new terminals on the coast to import liquefied natural gas from the Middle East, Australia, and North America.
The United States could supply some liquefied natural gas, or LNG, to China: After a couple of sluggish years, LNG exports are expected to grow 40 percent over the next half-decade, much faster than gas shipped the traditional way, in pipelines. With a bevy of export projects awaiting government approval, the United States could grab 5 percent of the global gas trade in the next five years, the IEA says — a dramatic reversal from just a few years ago, when the United States was scrambling to secure imported gas.
"We do foresee the United States emerging as a significant, meaningful LNG exporter," said Laszlo Varro, the head of gas and coal markets at the IEA.
Even more important than the volume of future U.S. gas exports — which will still be dwarfed by traditional suppliers such as Australia and Qatar — is the way that U.S. gas will be sold, he said. Shale gas frozen to a liquid and packed on tankers in the United States won’t be linked to the high price of oil, as natural gas traditionally has been in Europe and Asia.
Rather, the gas price is linked to the low prices of natural gas at U.S. trading hubs. And that U.S. gas won’t be earmarked for one specific country. The new business model being pioneered by the United States could help remove one of the biggest stumbling blocks to more gas use, especially as a fuel for power generation: the gaping gas price difference between North America and Asia. Indian energy firms, for example, plan to use those lower U.S. prices as they resell U.S. gas in the Indian market.
The United States "is going to play a disproportionate role in developing efficient, competitive gas markets," Varro said.
Unfortunately, that will be little consolation for Europe, despite a chorus of calls both in Washington and in European capitals for American energy to rescue the continent from its dependence on Russian energy. Instead, Europe stands out as the one region where natural gas production will decline over the next five years, the IEA said.
Although some European countries — even environmentally conscious Germany — are rethinking their opposition to hydraulic fracturing, or fracking, in a bid to boost European gas consumption, the IEA isn’t predicting a European shale gale.
"We don’t see a realistic chance for shale gas in Europe to turn around" declining production from traditional sources of gas, Varro said.
Europe is unlikely to shake its reliance on fickle Russian energy supplies, even though its demand for natural gas will remain sluggish — the fruit of a painful recession, cheap coal, and aggressive government support for renewable energy.
The idea that U.S. gas will flood into Europe is "simplistic," van der Hoeven said. New sources will just compensate for declining domestic production, such as in the North Sea, the IEA said, rather than replacing problematic Russian gas. Supply from other potential exporters to Europe, such as Azerbaijan, will take years to materialize.
"There is little opportunity for Europe to diversify its gas supply by the end of the decade," van der Hoeven said.