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(Christopher Furlong/2006 Getty Images)
(Christopher Furlong/2006 Getty Images)

Market Blog

A golden age for natural gas? Add to ...

The words "natural gas" and "golden age" don't usually go together. Gas prices are mired close to multiyear lows, and are at about half the level they were before the financial crisis and recession.

And while some business people - notably, U.S. energy baron T. Boone Pickens - hope to use natural gas to power the U.S. trucking fleet, the energy source for now suffers from a rare condition among commodities: There's too much of it.

However, according to the International Energy Agency, natural gas could play a much larger role in the world's future energy mix as some countries veer away from the perceived dangers of nuclear energy after Japan's crisis, and see it as a cheaper alternative to renewable energy sources like wind and solar. The IEA has even come up with an acronym to describe the uptrend: GAS - as in, Golden Age of Gas Scenario (apparently, the G gets dropped).

"If the policy and market drivers of the GAS Scenario develop as projected, then gas would grow to more than a quarter of global energy demand by 2035," Nobuo Tanaka, executive director of IEA, said in a release. "Surely that would qualify as a golden age."

Bullish predictions on natural gas have been heard plenty of times before, of course. But their frequency has been falling recently, partly given that North America's shale gas boom has increased the resource base to the point where it can sustain current global consumption levels for the next 250 years (no shortages here), and partly because gas prices are close to where they were a decade ago.

Despite this bearish backdrop, the IEA sees a scenario in which global gas demand rises to 5.1 trillion cubic metres by 2035. At that level, the share of gas in the global energy mix would rise to 25 per cent from 21 per cent and overtake coal. Most of this increase in demand would come from developing economies.

In particular, China's natural gas demand - currently representing just 3 per cent of its total energy demand - would equal that of the entire European Union. India's demand would quadruple.

"Power generation remains the dominant sector for gas demand and, in the GAS Scenario, gas replaces some coal in power generation in China, India and the United States," the IEA said in its report.

Conventional sources of natural gas will provide about 60 per cent of global production, while unconventional sources grow to about a 40 per cent share. Meanwhile, trade doubles, with the increase split between natural gas pipelines and liquefied natural gas.

Of course, a golden age for natural gas producers - and therefore investors - would likely have to involve higher prices. In New York, natural gas traded on Monday at just $4.80 (U.S.) per million British thermal units, not far from the floor of $4 per MBtu established over the past two years and well below $15 in 2005.

As the IEA acknowledges, the current attractiveness of natural gas comes largely from its cheapness relative to fuel alternatives like oil and coal, suggesting that prices will have to stay relatively low for the golden age to unfold.

Still, it is hard to imagine rising demand for natural gas hurting producers. And the IEA estimates that the current glut in natural gas supplies should dissipate before 2015, which should also help producers.

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