Upstream gas investments remain necessary, says IEA ahead of G7 meeting

Global natural gas demand is expected to grow at a slower rate or decline in the mid-to-long term, but new investments in upstream gas supply remain necessary to offset production declines from existing fields, the International Energy Agency said, marking a turnaround in its view on upstream investments.

In its latest report released just days ahead of the G7 climate and energy ministerial meeting in Japan, the IEA said "additional upstream investment" is required both in its flat or declining gas demand scenarios as it reviews a role for gas in the current energy crisis as well as for energy transition.

The role of LNG will be discussed by delegates at the G7 Ministers' Meeting on Climate, Energy and Environment at Sapporo over April 15-16, which will happen against the backdrop of energy security challenges and an urgency to make progress toward carbon neutrality.

"In the midst of a global energy crisis in which shortages of natural gas have played a central role, fundamental questions are now being asked about the long-term future of natural gas," the IEA said in its report on gas markets and investment.

"The crisis has reminded policy makers and energy consumers of the immediate importance of stable and affordable natural gas supplies. The traditional arguments in favor of gas -- its role as a reliable partner to the clean energy transition and its ability to step in to fill the gap left by declining coal and oil -- are also being tested."

The IEA added that natural gas prices in Europe and Asia are "likely to remain increasingly volatile and in relatively high ranges over the next few years" because Europe's drive to reduce its Russian imports will keep global gas markets tight with rebalancing expected from the start of new LNG supply in the mid-2020s.

Scenarios

The latest IEA report explores the role of natural gas based on scenarios underpinning its World Energy Outlook 2022, it said.

"The Stated Policies Scenario (STEPS) shows the trajectory implied by today's policy settings; the Announced Pledges Scenario (APS) assumes that all aspirational targets announced by governments are met on time and in full, including their long‐term net zero and energy access goals.; [and] the Net Zero Emissions by 2050 Scenario (NZE) maps out a way to achieve a 1.5 degrees Celsius stabilization in the rise in global average temperatures, alongside universal access to modern energy by 2030," it added.

The IEA expects natural gas demand to decline in advanced economies across the three scenarios on the back of growing policy support, and incentives for clean energy and efficiency.

In the US, the Inflation Reduction Act gives significant tax incentives and other forms of support to renewables, nuclear and biogases -- alongside efficiency and heat pumps, the IEA said.

In Japan, the long-term focus on low-emissions fuels such as ammonia and hydrogen, alongside the planned restart of nuclear in the medium term, translates into a rapid reduction in LNG demand, to as much as 40% below 2021 levels by 2030, with the pace of reduction dependent on the pace of deployment and implementation of new energy and nuclear energy initiatives, it said.

In the EU, the full implementation of Fit for 55 and additional ambitions in the RePowerEU communication mean natural gas demand falls 20% below 2021 levels, it added.

In emerging economies, the IEA said natural gas demand in the STEPS rises by 110 Bcm between 2021 and 2030, at around one-fifth of the growth rate seen in the previous decade.

It added that affordability concerns in some parts of Asia, particularly Pakistan and Bangladesh, alongside maturing domestic production and persistent hurdles to building import infrastructure in Southeast Asia, all dampen the momentum behind gas.

Upstream investments

Despite flat or declining natural gas demand in the STEPS and APS, the IEA said "additional upstream investment is nonetheless required to offset declines from existing fields."

It said recently approved projects would add around 400 Bcm/year to global gas supply by the end of the 2020s, with this leaving around 720 Bcm of new upstream supply for meeting gas demand in the STEPS by 2030.

It added that this new supply requirement falls to just under 500 Bcm in the APS, and "the reductions in natural gas demand are sufficiently steep that it is possible to meet them, in aggregate, by continued investment in existing assets and already approved projects, but without any new long lead time upstream conventional projects" in the NZE Scenario.

The total investment requirement in natural gas supply and transport for the rest of the decade is $280 billion per year, on average, in the STEPS and $240 billion in the APS, the IEA said.

Around $200 billion is required to maintain output at existing levels and commission already approved fields in the NZE Scenario, the IEA added.

It said slower gas demand growth in emerging markets and developing economies along with accelerating declines in advanced economies in WEO scenarios marks "the end of an era of rapid growth in global demand."

"However, even with flat or declining natural gas demand in the STEPS and APS, new investments in upstream gas supply remain necessary in these scenarios," the IEA said.

"Projected demand growth in emerging and developing economies also means that investment in new LNG infrastructure is needed in these scenarios, albeit in different amounts."

The IEA's latest report on gas investment came after it released its "Net Zero by 2050" report in May 2021, outlining a pathway to hit net-zero carbon emissions by 2050, under which no new oil and gas developments are required.