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The global gas challenge: Uncertainty could lead to inadequate investment to meet projected growth in demand

Uncertainty over the level of future gas demand is at its highest in decades, according to a new report, The Global Gas Challenge, released by leading professional services organization Ernst & Young. This uncertainty could result in future supplies being inadequate to meet the projected growth in demand. While global gas demand is forecast to grow by 1.5% per annum through to 2030 by the International Energy Agency, actual growth will be influenced by a number of unpredictable factors.

Josef Pivoňka, Ernst & Young Partner, says: “The strength and speed of the economic recovery, future gas prices, government energy and environmental policies, and the impact of new technology will all have an influence on the level of future gas demand. With such an uncertain outlook, the concern is that companies are dissuaded from investing in natural-gas projects, meaning future supplies may be inadequate to meet demand.”

The majority of growth in gas demand is likely to occur in non-OECD countries, principally China, India and the Middle East, although there is much uncertainty around gas-demand growth in China and other Asian countries.

Long-term growth in shale gas production is likely to play an important role in North America, Europe and Asia. These unconventional gas resources have the potential to change the game by altering the global supply and demand balance and making some countries self-sufficient in energy. But that potential is currently unproven and subject to a number of uncertainties, including the ownership of sub-surface mineral rights, access to skilled labour and equipment, water availability, environmental concerns and higher population densities in some countries.

Josef Pivoňka comments: “In a world where reserves are remote from centers of demand and some governments subsidize the price of gas in their local markets, the economics of natural gas are far from clear. Prices are currently low by historical standards as a result of an oversupply of gas. This is caused by a combination of lower demand due to the recession, increased production, primarily from unconventional sources in North America, and a swathe of new LNG supply coming on stream. As such, oil and gas companies will be cautious about investing in new gas projects while there is a perceived gas bubble.”
The additional LNG capacity coming onstream may not have buyers lined up for all of the output so there will be more uncontracted gas available, which might be sold on a spot basis. Nevertheless, the majority of LNG produced is still sold on long-term contracts with prices linked to movements in the price of competing fuels. A truly global gas market will not emerge until there is greater flexibility in gas supplies, increased transportation between regions and more gas-on-gas competition.

About Ernst & Young's Global Oil & Gas Center

The oil and gas industry is constantly changing. Increasing regulatory pressures, price fluctuations and geopolitical complexities all present significant challenges. Ernst & Young’s Global Oil & Gas Center brings together a worldwide team of professionals to help you achieve your potential – a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant industry issues. Ultimately it enables us to help you meet your goals and compete more effectively. It’s how Ernst & Young makes a difference.

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