IEA: Drop in Global Gas Demand, LNG Capacity Spike Will Squeeze U.S. Production

An unprecedented increase in liquefied natural gas capacity, lower prices and the first drop in global demand in 50 years spells trouble for unconventional gas production here in the United States.

The International Energy Agency, which released Monday its natural gas review in conjunction with its Medium-Term Oil Market report, outlines a gloomy picture for natural gas.

In the first half of 2008, the outlook was rosy. There was tight supply and demand balance with rising energy prices, according to the IEA report. Weakening demand, falling spot prices and a global recession capped off 2008. The theme has continued -- and has even darkened -- in 2009.

OECD gas demand fell by 4 percent in the first quarter of 2009 and is expected to drop even further through the year, according to IEA projections. At the same time, 60 billion cubic meters of LNG capacity is expected to come online. [OECD or Organization for Economic Co-Cooperation and Development has 30 member countries, which includes the U.S., Mexico, Australia and European nations.]

What does this mean? Well, the IEA anticipates unconventional gas production in the United States will likely bear the brunt of falling demand, increased LNG capacity and low spot prices. In IEA's report, it's not a matter of if, but when and how fast.

"The question for 2009 is how rapidly U.S. unconventional gas production -- which is generally higher cost and therefore less competitive -- will decline," the IEA said in a press release about the report.

A report earlier this month from the Potential Gas Committee, showed natural gas reserves are about 39 percent more than originally estimated two years ago. The increase was due in large part to companies accessing harder-to-reach shale gas such as the Marcellus play, which stretches from New York to Ohio.

Natural gas producers, reeling from weak demand and lower prices, may pull back on future investments. This of course, sets consumers up for a price spike as recovering demand is met by stagnating capacity due to delayed investments in production and supply infrastructure.

This impending tightening of the market will largely depend on whether new LNG projects are approved, IEA said. LNG capacity will grow an unprecedented 50 percent between 2009 and 2013, according to the report. But, the Paris-based agency expects a scarcity of new capacity after 2013 unless projects are approved in 2009-10.

ExxonMobil is among those adding to the global LNG capacity. The company has three LNG projects in Qatar, slated to start up this year. The projects would produce more than three billion cubic feet a day of natural gas, according to the WSJ.

Exxon also is leading a $12.5 billion Papua New Guinea LNG project, expected to produce 6 million metric tons a year of LNG for shipment to international markets.

Companies heavily vested in unconventional gas production, such as shale, could experience further pressure if LNG supplies intended for Asia and Europe, end up coming to an already oversupplied U.S. market.