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IEA Forecasts U.S. Gas Prices to Average $10 in 2008

Even with the recent sharp price declines, U.S. natural gas prices should average around $10/MMBtu this year, the International Energy Agency (IEA) stated in its third annual Natural Gas Market Review. The review, which assessed projected changes in the global gas economy over the next five to seven years, studied 40 gas markets worldwide and found that rising demand for gas will enable liquefied natural gas (LNG) to further link markets on a global scale.

The last 18 months have been tumultuous for the energy sector in general, IEA noted in the review, which was issued Thursday. Natural gas prices were found to be high and volatile in all of the regional markets studied in 2007 and through the first half of 2008. At the same time, demand continuously grew, and that growth enabled LNG to more globally integrate the gas markets, said IEA Executive Director Nobuo Tanaka.

"Flexible LNG, spot and short-term, played a greater role in interregional market balancing in 2007 and into 2008," said Tanaka. "While this growth may not be as rapid as previously anticipated, LNG is increasingly linking different regional markets, providing resilience and adding security...Countries must become part of this global network to benefit from the security and diversity offered by LNG."

More flexibility in trades, multiple routes and modes of transportation enable "wider exchanges of gas," he said. Cargoes are shifting away from traditional shipping patterns and moving gas across the Atlantic or the Pacific to where the demand is.

All of IEA's 27-member countries -- including the United States -- are planning to import more gas "from distant and expensive gas sources" over the coming years, according to IEA. However, outside the United States, IEA found "insufficient investment, particularly in the years beyond 2010, together with project delays threatening security of supply." Escalating costs for engineering, procurement and construction, a tight engineering market and risks in producing countries were listed as the main causes for the delays.

"High natural gas prices are not only a reflection of higher demand, but also a delayed supply response," said Tanaka. "Past gas market reviews expressed concern about insufficient investment, and these concerns remain. Investment uncertainties, cost increases and delays continue to be a major problem in most gas markets and are continuing to constitute a threat to long-term security of supply."

Progress on major pipeline projects outside the United States is slow, he noted. To address this issue, "IEA member and nonmember governments need to streamline regulation, improve market functioning through, for example, greater transparency, and increase domestic production. Improvements to market functioning are especially urgent in Europe, given the region's growing demand for imported gas."

The United Kingdom, "after a period of low gas prices last year, is now seeing prices well above US$10/MMBtu, and in the Pacific, spot prices are more than US$15 for LNG cargoes," Tanaka noted. Higher oil prices, weather conditions and supply and demand imbalance all played a role in raising gas prices over the past year and a half, he said.

Even with the rising gas prices, gas demand for power generation continues to climb, particularly in industrialized countries, the review found. Gas-fired power demand also is up in several major producing and consuming nations.

"High gas prices can and are quickly translating into higher electricity prices," the review noted. "Thus consumers are being hit with high oil, gas and electricity prices in quick succession." Increased use of gas-fired power may provide "beneficial environmental outcomes," but it raises security and affordability issues.

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