Box Adequacy of gassupply infrastructure and risks of shortages

(continued)

Recent supply problems in several markets have refocused attention on gas-supply security. The loss of US gas-production capacity through hurricane damage in 2005 resulted in a surge in prices that choked off a substantial amount of industrial demand, rebalancing the market. The high degree of interconnectivity of the North American network enabled supplies to be redirected. In the event, no customer was forced to stop using gas. But other countries that have not liberalised their gas markets to the same degree cannot rely on market forces to bring demand back into balance with supply during a crisis. In the winter of "2005/2006", cold weather and higher-than-usual use of gas for power generation led to a surge in demand in Italy. A lack of cross-border capacity and fixed prices to most customers resulted in physical shortages that could only be addressed through plant closures through administrative decree, the temporary relaxation of environmental standards to allow fuel oil to be used instead of gas and rationing. Commercial disputes with neighbouring countries have recently led to disruptions in Russian gas supplies to Europe. These incidents have highlighted the importance of giving full rein to markets in balancing supply and demand in the event of a crisis, and to the need for timely and adequate investment in transmission and storage capacity.

There are particular concerns about the adequacy of investment in LNG capacity in the medium term. An unprecedented major expansion is underway worldwide in regasification capacities, well in excess of LNG-production capacity. As a result, global regasification capacity is likely to be under-utilised, even though its availability will increase supply flexibility.3 But liquefaction capacity is not expected to increase as quickly. Although a significant amount of capacity is planned and proposed, many projects have yet to be formally sanctioned. Major delays and cost over-runs afflict many projects that have been given the green light, which has discouraged companies from proceeding to final investment decisions on other projects and has led to some cancellations. The dearth of investment decisions in new LNG projects since mid-2005 means that any new surge of investment is unlikely to result in additional capacity, beyond that due in service by 2012, being available before 2015, given the long lead times involved. Notwithstanding the massive expansion in LNG supply that will undoubtedly occur by 2012, the lag in LNG investment beyond 2012 raises questions about the availability of incremental LNG supply for both OECD and non-OECD importing countries. Shortfalls in the availability of LNG could push up prices and encourage the faster development of indigenous resources in importing regions.

3. There has already been an increase in inter-regional swaps of LNG cargoes, particularly from the Atlantic to Pacific regions, facilitated by growing supplies and changing business models in the LNG industry.

Table 4.3 • Net inter-regional natural gas trade in the Reference Scenario

2006

2015

2030

bcm

% of primary demand*

bcm

% of primary demand*

bcm

% of primary demand*

0ECD

- 353

24

■496

30

■741

41

North America

-15

2

-53

6

-143

16

Europe

-241

45

-333

54

-477

69

Pacific

-97

61

-111

61

-121

54

0ECD Asia

- 115

91

- 143

97

- (79

98

0ECD Oceania

18

38

32

47

58

58

Non-OECD

353

19

496

21

741

22

E. Europe/Eurasia

137

16

185

19

224

21

Russia

(98

30

205

29

270

34

Asia

46

14

36

8

-126

19

China

- 1

2

- 17

14

- (06

48

India

-8

21

- 16

29

-71

61

Middle East

55

17

105

22

323

32

Africa

99

50

162

57

284

63

Latin America

16

11

8

4

35

12

World

441

15

582

17

1 022

23

European Union

-305

57

-435

72

-582

86

* Production for exporting regions.

Note: Trade between WEO regions only. Positive figures denote exports; negative figures imports. Sources: IEA analysis and databases; Cedigaz (2008).

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