While the globalization of natural gas has been boosted by the rise of LNG market, the energy security implications of this development have been less scrutinized.
In its Global Gas Security Review, International Energy Agency is looking to provide more transparency into the LNG market, following an analysis of global gas data.
“There is no doubt that global gas markets are well supplied today,” IEA said in a statement on Thursday.
However, while this is positive for global gas security, the report released in Tokyo, issues a warning that “LNG markets are less flexible than is commonly believed.”
A share of LNG production capacity that is going offline, due to lack of feedgas is growing, but security and technical problems also contribute to this issue, the statement reads. This resulted in the market having less extra capacity than assumed.
Between 2011 and 2016, the level of unusable export capacity has doubled, disabling about 65 bcm of gas, which is equal to the combined exports of Malaysia and Indonesia, the world’s third- and fifth-largest exporters. A period of low oil and gas prices could further worsen the situation, IEA said.
The report, however, finds that LNG contracts are becoming more flexible increasing market liquidity.
In 2015, about 40 percent of LNG contracts had fixed destination terms, down from 60 percent for contracts signed up to the year 2014.
The short-term contracts are becoming more common, however, buyers are entering long-term contracts in exchange for increased flexibility in the final destination in order to better respond to market conditions. Flexible contract structures underpin gas security as they enable to aggregate gas volumes at a lower cost from various regions.
LNG share of the global gas market is set to increase in the coming years. LNG supplies have grown at a faster pace than the gas consumption.
“The growth in the global gas trade, along with the diversification of supply sources, is improving the security of supply,” said Fatih Birol, the executive director of the International Energy Agency. “But there is still a need to be vigilant on gas security as the changing nature of the market means that regional demand and supply shocks may now be felt in more distant places than ever before.”
The report, that provides case studies on Japan and Europe, shows that for Japan, the factors that made the market’s reaction to the loss of nuclear power after the Fukushima disaster relatively effective, might not be counted on in the future.