Moving the energy economy to net zero emissions is timely and costly, and the world now faces another dilemma: a natural gas market under “tremendous pressure” ahead of winter, the International Energy Agency (IEA) said Wednesday.

IEA

In launching its annual World Energy Outlook (WEO-2021), the global energy watchdog acknowledged that winter 2021/2022 is opening with “record high seasonal gas prices, as the combination of a strong recovery in demand, extreme weather events and unplanned supply outages have led to tighter markets. 

“Such tensions are a reminder that security of supply remains a major topic for gas markets, only a year after a record drop in demand and oversupplied markets.”

The global outlook for gas this year also “remains subject to significant uncertainty,” said IEA researchers.

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There are questions concerning “not only electricity demand and industrial production, but also the price evolution of gas versus coal in key markets such as the United States, as well as in regard to the weather across the Northern Hemisphere toward the end of 2021.”

Thirsty World

In 2021, IEA is forecasting that the thirst for gas worldwide should climb by around 3.2% year/year, erasing the 1.9% downturn in 2020. Consumption is likely to be 1.3% above 2019 levels.

“This recovery in gas demand has been driven mainly by fast-growing markets — primarily in Asia and, to a lesser extent, the Middle East — and subject to uncertainties regarding industrial rebound or fuel price competitiveness,” researchers said.

European Union gas consumption is forecast to rebound to levels on par with 2019.

For the United States, however, gas demand growth should be more gradual, with consumption in 2021 unlikely returning to the pre-pandemic levels of 2019.

Global gas consumption declined year/year in 2020 by 75 billion cubic meters (Bcm), or 1.9%, according to researchers. The decline represented “the largest recorded drop in gas demand in absolute terms, but it would be on a par with 2009 in relative terms.”

Still, gas demand last year declined less than other fossil fuels, IEA noted. In addition, gas consumption began to progressively recover during 3Q2020 as lockdown measures eased, while seasonal electricity demand and competitive prices pushed up gas consumption.

“This relative resilience can be partly explained by fuel switching in electricity generation,” according to IEA. “The switch was particularly remarkable in the United States, where gas demand for electricity generation increased by around 2% year/year in spite of a declining electricity demand, while in Europe, gas-fired generation benefited from low prices and a sharp recovery in carbon prices in the second half of 2020.”

Overall gas demand got a huge boost early this year as colder-than-normal temperatures bombarded the Northern Hemisphere, researchers noted. Winter storms created “extreme supply-demand tensions and price spikes, first in January in Northeast Asia and then in February in North America, notably in Texas,” following Winter Storm Uri.

Meager U.S. Gas Growth

As prices have risen, gas is being “challenged” in the electricity generation mix, IEA’s team noted. U.S. consumption in the first three months was lower than in 1Q2020.

“Across the year, higher gas prices are expected to keep gas demand in the United States close to 2020 levels and around 2% below 2019 levels,” researchers said.

In the European Union, higher carbon prices are providing “some support to gas vis-à-vis coal.” Preliminary data for 1Q2021 showed an 8% year/year increase in European gas demand.

“The picture is very different across developing Asia, where demand in 2021 is expected to increase by 7% on 2020 levels, putting demand 8.5% above 2019 levels.”

China is leading the increase in global gas consumption, with demand in 2021 expected to be “more than 14% (or 44 Bcm) higher than 2019 levels.”

Gas consumption this year is forecast to be led by the industry and buildings sectors, each up around 5% year/year, according to IEA.

Industry gas demand is projected to climb as worldwide output and trade volumes recover. China, India and other fast-growing Asian markets are driving the growth, IEA noted.

In the buildings sector, the growth in gas consumption for the year is traced to the colder temperatures in the first three months.

However, gas use for electricity generation “is expected to grow just 1%” because of “low electricity demand growth, increasing renewable capacity and tougher price competition from coal.” 

Is The Energy Transition Slowing Down?

Moving the world to zero carbon emissions by 2050 is slow going, IEA acknowledged. The sputtering progress highlights the need for an “unmistakable signal of ambition and action from governments.”

The WEO “shows that while climate ambitions have never been higher, energy transitions have a long way to go,” said Executive Director Fatih Birol. Governments meeting in November in Scotland to discuss climate change “must give the signal…that they will drive a wave of investment” toward a net-zero emissions future.

The United Nations (UN) Climate Change Conference of the Parties, aka COP26, is scheduled next month in Glasgow. The summit is bringing together countries that signed the UN Framework Convention on Climate Change, a treaty that came into force in 1994. The WEO “is designed as a handbook” for COP26, Birol noted.