For the first time in 50 years, this year will mark the first to see a decline in global natural gas demand, the International Energy Agency (IEA) reported Monday.

The IEA’s forecast is in its latest annual report, “Natural Gas Market Review 2009,” which was published in conjunction with the agency’s medium-term global oil market report. Major developments and challenges in different parts of the gas value chain were analyzed in the United States, Canada, Spain, Norway, the Netherlands and Turkey, as well as in the Middle East, North Africa, Southeast Asia and China.

The IEA concluded that the outlook for energy markets is “very uncertain” as oil markets rebound and worldwide gas demand dips.

“The global financial crisis has turned the economic landscape upside down, with huge implications for the oil and gas sector,” said IEA Executive Director Nobuo Tanaka. Since the release of IEA’s annual reports in 2008, “the context has changed dramatically, with two years of global oil demand contraction in 2008-2009 reflecting the worst economic recession in more than half a century.”

The IEA chief noted that “oil prices are around half the level seen last year in July, when they peaked at US$147, even though they have strengthened again recently, partly due to a perception that economic recovery may be just around the corner.” However, he warned that if oil prices rose too rapidly, it could damage any such recovery.

“”In the natural gas sector, we have moved from a tight supply and demand balance with extremely high gas prices to an easing one with plummeting prices,” Tanaka noted. “Both markets face enormous uncertainty surrounding the timing, pace and extent of any economic rebound, which affects all prognoses for oil and gas market fundamentals over the next five years.”

Like the oil sector in 2008, the gas sector “was neatly divided into two halves: a tight supply and demand balance with rising energy prices was followed by demand weakening and spot prices plummeting,” said researchers. “2009 bears the legacy of this last period as the world goes through the unprecedented combination of a global recession and financial crisis.”

Following a 1% increase in 2008, gas demand in the major world economies — members of the Organization for Economic Cooperation and Development (OECD) — dropped by 4% in the first three months of 2009 “and is expected to further decline through the year.”

On the supply side, 60 billion cubic meters (bcm) of liquefied natural gas (LNG) capacity “are planned to come on-line this year,” the IEA reported. “Yet with spot prices in the United States bottoming out at below US$4/MBtu, the question for 2009 is how rapidly U.S. unconventional gas production — which is generally higher cost and therefore less competitive — will decline.”

The combination of weak gas demand and lower prices could undermine future investments, said the report.

“Despite the expected relief on engineering, procurement and construction costs, project sponsors face both financing problems and increasing uncertainty about when and at what pace the economy and therefore gas demand will recover,” IEA researchers wrote. “Besides the recession, the increasing awareness of climate change issues puts a question mark on the future role of gas. Increased energy efficiency and renewables could put downward pressure on gas demand, but increased wind capacity calls for gas-fired plants as reserve capacity.”

If investments in gas production and supply infrastructure are delayed, “there is a risk in the medium term of tightening markets when demand recovers,” said the energy agency. “While liquefaction capacity will see an unprecedented growth of 50% between 2009 and 2013, there will be a dearth of new capacity in the period after 2013 unless new projects are approved in 2009-10. The world’s largest producer, Russia, faces considerable challenges, both technical and financial, already leading to project delays.”

Severe gas disruptions in Europe following a dispute between Russia and Ukraine “highlighted once again the importance of diversified suppliers and supply routes,” said the report. Gas storage facilities were considered key to replacing the missing 5 bcm, along with increased supplies from pipeline and LNG suppliers, as well as alternative Russian supply routes.

Worldwide, “it remains to be seen how these demand and supply pressures will play out, particularly in the pivotal power sector, in both OECD and non-OECD countries,” said the IEA.

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