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What Can Go Wrong With World Gas Demand Forecasts?
28/07/1994
Given that the world cannot be described as one global market for gas, it is a brave task indeed to undertake to forecast its gas demand out to the year 2010. The world of gas is made up of so many different smaller regional, local and sectoral worlds, many of them very small indeed, that any attempt to generalise on the future of world gas is beset with traps. But two of the leading lights at Paris-based gas statisticians Cedigaz, Sylvie Cornot-Gandolphe and Marie-Françoise Chabrelie have bravely attempted this very task in a paper given to the Gas Processors’ Association and now published by Cedigaz*. A brief description of the demand forecast appears in this month’s Gas Brief, page X. Though I would put different slants on some of the commentary and take issue with certain areas of the paper, it identifies and tackles most of the issues and pressures which will affect gas development within the distinct areas of gas, including regional demand trends, sectoral potential, reserves and production, trade prospects and investment requirements and oil versus gas costs and prices. I recommend it as instructive and thought-provoking reading for the internationalist.
Consensus Cedigaz, being one of the best dispensers of gas numbers in the world, of course provides figures and charts in reasonable abundance (one of which, the demand table, is in Gas Brief). I do not wish to quibble with the numbers, which I assume are as good a consensus as any that will be found of the wide array of views which shower down on Cedigaz in the process of its data collection efforts. But it does lead me to ask, what can go wrong with such forecasts? Are there obvious fundamental cautions which should be thrown up against the consensus? I offer three thoughts, and invite more from readers.
Hungry or greedy Firstly, what does the gas business really mean by the word "demand"? Once, at a conference in Jakarta, Mobil’s Herb Gammons coined what I think is a very under-utilised distinction; he said "demand" is not the same as "appetite". Most gas forecasts are of appetite. But perhaps another distinction needs to be made. Cedigaz plots historical gas use, and by and large most "demand projections" are in fact only extensions of existing use patterns. Were gas to live in perfect markets with supply and use simply matched by free price movements we could all then accept that "demand" and "use" are synonymous. Yet we know this to be untrue of any gas market, even if the US market comes close. Demand is far more fluid and unpredictable.
Wide of mark India and Pakistan have both given large figures for their national gas "demands", which are not only unlikely to be met for many years but would also be considerably affected by price levels. Undoubtedly appetite will stay ahead of potential demand, which in turn looks likely to stay well ahead of actual use. The term "demand" is often used interchangeably for all three of these concepts. There are many sets of figures purporting to give "LNG demand" in Far Eastern markets, but the buyers look askance at many of these figures which are only true under very specific price and cost circumstances which are often underplayed. LNG suppliers take the same figures and express great concern about the prospect of the " demand forecasts" failing because supply could not come forward on acceptable terms. The two sides are using the same words but talking about different worlds.
Unsatisfied But so far we are talking about demand in existing markets. With gas, a more important measure is "unsatisfied demand" and that measure is also elastic because it will vary with the price which can be offered in the market. Indeed in many parts of the world there is no "unsatisfied demand" for gas, simply because the cost of getting the gas to the market would make it unsaleable. But just as soon as a gas reserve is found within striking distance of an energy market a good deal of "unsatisfied demand" can be instantly created and potentially satisfied.
Both ends now Must such an event always remain a surprise, never to be foretold, only to be recounted later? Consider the question from both ends; trying to connect "unsatisfied demand" with the "economic radius" of a given gas resource is the best shot. The "economic radius" is obviously also individual to each gas resource and depends on the costs, taxes, volumes, economic return required and so on attached to any project. Sadly, the economic radius of many (most) gas reserves is zero, though this is more often a result of location than of size; a conclusion which is hard for oil experienced people to accept. But these two freaks of gas supply and demand do indeed go bump in the night, and more attention needs to be given to the likelihood of such events in future.
More usual These arguments are not mere semantics; however expressed. More and more governments are seeing "unsatisfied demand" in their own countries, and the dilemma if not the solution is recognised by an increasing number of E & P companies looking for new gas pastures. Whereas the traditional aims of both have been to find and produce oil, and licence agreements reflected these aims very clearly, many populous developing countries are now very actively encouraging exploration for gas to be produced for domestic use and providing incentives and protections for foreign capital and expertise to go looking for gas. The resulting "partnerships" will, in my view, have a large impact on the search for gas close to markets which could use it and, thus, on growth of gas "use".
Distilled problem So much for demand which might take off but has not yet been identified. The big boom in most forecasts comes from combined cycle power generation. We all know it will provide a rapidly growing market for gas, even if Japan appears to be bucking the trend by concentrating on coal-fired plant for new thermal capacity. But what most forecasters fail to mention is that combined cycle plant can be operated very satisfactorily on any clean distillate fuel and under extreme circumstances on dirtier oil products – at a price.
Surprise As usual, gas is not the only option and it would surprise us if, as the oil market barrel becomes more and more concentrated on middle distillates, there were not significant competition from LPG and light distillates for power generation in combined cycle plant, particularly if oil prices keeping falling in real terms. Of course oil supply and pricing arrangements would have to depart from oil tradition to be market sensitive, i.e. offer long term supply and indexation to coal but indexation to coal does not mean priced like coal; the value would be the same as for gas, in the region of $4.50/MMBtu. Does this mean there is a cloud by this silver lining for gas? Not necessarily, because the multi-fuel options open up many more potential sites for combined cycle power; gas will never be everywhere but oil can be. It is just that this wonder market for gas is too often taken for granted by people who ought to know better.
Liquid fuels synthesis from gas. Counter steal However, if oil can steal some tasty gas market, so too can gas steal some oil market, only this time the oil price has to head the other way. Perhaps this is why this particular upset to traditional demand projections is often ignored (nor is it mentioned in the Cedigaz paper). The potential for synthetic fuel production from gas remains a strong contender. There are several "proven" two stage routes, including one Exxon and one Shell process working on a semi-commercial basis. Once it becomes cost competitive, the synthesis route for gas use has inherently more attraction for gas which has no clear pipeline market but is less suitable for LNG, e.g. gas with high CO2 content, politically landlocked or far distant by sea from market.
Come now These are a vital issues, but perhaps demand heresies are only whispered inside the big companies in gas. Who will venture a more public utterance?
*The Development of International Gas Markets, Sylvie Cornot-Gandolphe and Marie-Françoise Chabrelie, Cedigaz, fax + 33 1 47 52 72 20.