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File photo of a proposed LNG project, in British ColumbiaRafal Gerszak/The Globe and Mail

Canadian gas producers face grim prospects with lower-than-expected Asian demand, slower oil sands growth and increased competition in the U.S. market, the International Energy Agency says in report issued Thursday.

The Paris-based agency said Asia is not the Mecca for liquefied natural gas (LNG) that producers had hoped.

"One of the key – and largely unexpected – developments of 2014 was weak Asian demand," said IEA executive director Maria van der Hoeven said.

"Indeed, the belief that Asia will take whatever quantity of gas at whatever price is no longer a given. The experience of the past two years has opened the gas industry's eyes to a harsh reality: In a world of very cheap coal and falling costs for renewables, it was difficult for gas to compete."

The weaker demand and rush to supply the Asian markets have transformed the market from one of "extreme tightness to oversupply."

The agency – which advises rich countries on energy markets – has reduced its forecast for global demand growth over the next five years to two per cent a year from 2.3 per cent.

British Columbia Premier Christy Clark has touted her province's proposed LNG production as a key economic driver, but the IEA said Thursday it doesn't expect any projects to begin production there until after 2020.

Global LNG export capacity is due to increase by more than 40 per cent by 2020, with 90 per cent of the additions coming from Australia and the United States, it said. Lower oil prices pose little risk to the timing of projects already under construction.

At the same time, Canadian gas producers have lost considerable ground in their traditional export market in the U.S. Northeast, and face growing competition from U.S. shale gas in the American Midwest and eastern Canada.

"For Canadian production, the main issue is how fast and how competitively U.S. Northeast gas can penetrate the Midwest market (which accounts for about a quarter of total U.S. gas consumption) and possibly Central and Eastern Canada," the IEA said. "Further displacement seems likely when judging from the pipeline of new projects."

As well, the slump in oil prices has meant a reduction in capital expenditures in the oil sands, slowing the growth in demand for gas that is used in steam-assisted, gravity-drainage projects.

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