From a Golden Age of Gas to a “harsh reality” in just a few years – the 2015 “Gas medium-term market report“ released by the International Energy Agency (IEA) on 4 June in Paris sounded a warning note to anyone who believes gas is bound to conquer the world. That can still happen – but only if gas drastically improves its competitiveness, said the IEA.

The IEA’s Executive Director Maria van der Hoeven and her team presented the IEA’s annual gas market report in the lion’s den, at the World Gas Conference in Paris where the prevailing mood was one of optimism about the prospects of gas. The IEA, which itself introduced the notion of a ‘Golden Age of Gas’ some years ago, now notes that the future is still quite uncertain. Above all, the most important growth market, Asia, can no longer be counted on as a certainty, said Van der Hoeven: “The belief that Asia will take whatever quantity of gas at whatever price is no longer a given.”

The timing of this message is a bit surprising, as gas prices in Asia have come down since oil prices started to slide in the middle of last year. Gas contracts in Asia tend to be based to oil prices. But the damage had already been done: the “hefty premium” Asian consumers were paying in the past led many of them to switch to coal. Hence, although Asian gas prices have dropped recently, “demand for gas may not recover as quickly as the drop in prices”, noted Van der Hoeven.

“For gas to make sustained inroads in the energy mix, confidence in its long-term competitiveness must increase”

Some Asian countries – like India and Indonesia – have “decided to move ahead with plans to expand coal-fired power generation instead of gas-fired generation”. As these countries are also increasingly turning to renewables, gas is under threat from two sides. “The experience of the past two years has opened the gas industry’s eyes to a harsh reality”, said Van der Hoeven. “In a world of very cheap coal and falling costs for renewables, it is difficult for gas to compete.” The IEA’s director added that “For gas to make sustained inroads in the energy mix, confidence in its long-term competitiveness must increase.”

India is a telling case in point, Van der Hoeven said. That country has 22 GW of gas-fired power generation capacity all ready to roar ahead – no capital investment needed – but 80% of it is standing idle, simply because coal is cheaper in India than gas.

Interesting picture

China, the country that the sector has pinned its hopes on above all for its future growth, presents another very interesting picture. There is some good news from China for the gas industry. In particular the Chinese’s government’s drive to reduce pollution tends to favour gas. The government has put various schemes in place to get households and industry to switch from coal to gas. In the power sector, fuel switching is also promoted. Here gas consumption is expected to roughly double between 2014 and 2020.

Yet, impressive though this may sound, the IEA notes that “gas will not become the fuel of choice in China’s power sector”. The reason is that in terms of capacity gas is quite insignificant in China: it represents just 4% of the total. Its share in generation is even lower. “Gas will have a strong role in some segments, such as co-generation for distributed systems and small-scale installations, but it is unlikely to find a widespread role as a base-load option”, concludes the IEA.

“Gas will not become the fuel of choice in China’s power sector”

Instead, China is turning more to nuclear power (30 new nuclear power plants are currently under construction) and hydropower, which is to reach no less than 340 GW by 2020. In addition, China is expanding wind power (to 200 GW by 2020) and solar (to 100 GW). The share of coal in power generation is expected to be reduced from 66% to 62% in 2020.

In other parts of the world the outlook is mixed. Japanese gas demand is expected to go down, Europe is expected to show some recovery after a long decline. An important growth market looks to be Mexico. All in all, Maria van der Hoeven summed up the global outlook for gas demand as “increasingly uncertain”.

Complex geology

Another piece of disappointing news is that China has so far been unable to create its own shale gas revolution. The Chinese government has downscaled its outlook for unconventional gas production from 60-100 bcm (billion cubic meters) per year to just 30 bcm. So far “only one promising shale play has been identified”, notes the IEA. The hoped-for shale gas development in Sichuan, where more than half the country’s shale gas resources are located, will prove “challenging”, as a result of “complex geology” and “high population density”. Drilling tests by Shell have led to disappointing results.

This means that the North American shale gas revolution has still not been replicated anywhere else in the world and doubts are growing about a possible worldwide shale gas revolution. As Laszlo Varro, the lead author of the report, noted in Paris: “North America has been exceptionally lucky.” For the gas industry this is bad news, because if shale gas does not spread beyond US and Canadian borders, the number of gas suppliers in the world will remain limited. This will not increase confidence in the energy security afforded by gas usage.

Despite this gloom, the IEA report still expects global gas use to grow by 2% per year until 2020. And who knows what vistas might open up after that. As Van der Hoeven put it the start of her presentation, citing Heraclitus: “The only thing that is constant is change”.