Natural Gas Supply Glut? Don't Count On It

Wednesday, 26 Jun 2013 | 6:00 AM ET
Workers install a natural gas pipeline.
Justin Solomon | CNBC
Workers install a natural gas pipeline.

While some observers are warning that surging shale development and new natural gas discoveries could spawn a potential glut, most energy market watchers say strong demand makes natgas oversupply a remote prospect.

Natural gas development is growing by leaps and bounds, especially in the United States. In the throes of what the International Energy Agency expects will be a 2.4 percent per year growth spurt in natgas through 2018, Exxon Mobil estimates global daily production of natural gas—helped in large measure by the U.S. shale boom—will exceed 500 billion cubic feet per day by 2040.

Yet Jason Bordoff, the director of Columbia University's Center on Global Energy Policy, views the situation differently. He noted that global liquefied natural gas (LNG) trade fell last year, and markets are currently experiencing "unprecedented tightness" as traditional fuel gradually cedes ground to natgas.

"We are far from a global supply glut," said Bordoff, a former White House aide on energy policy. "The LNG market will loosen as new projects come online in a few years, and we will need that increased capacity to meet rapidly rising demand in Asian markets that are thirsty for more LNG."

One of those critical Asian markets is Japan, currently the world's largest natural gas importer, which brought in more than 7 million tons of the fuel in April. In the aftermath of a crippling nuclear disaster, the world's third-largest economy is heavily reliant on energy imports—a situation that some observers say could play to the U.S.'s advantage.

"There's still huge demand for natural gas in Asia, primarily driven by the Japanese shutdown of nuclear plants," said John Felmy, chief economist of the American Petroleum Institute. "With Germany shutting down their nuclear plants, we can see more demand" even as countries manufacture more supply, he said.

Still, "outside the U.S., production is not likely to move as fast for a couple reasons," Felmy added. That is because the laws that govern resource development in other countries are far more restrictive than in the United States.

The U.S. has been slow to export its natural gas bounty, but it could become a natgas powerhouse once exporting takes flight. There are currently 19 export applications awaiting government approval.

In the future, "there will be more competition among new LNG projects to capture contracts in growing markets given how much new LNG supply is currently being planned in North America, Australia and East Africa," said Columbia's Bordoff.

"That is why it is important that [the Department of Energy] move expeditiously through the pending LNG export permit applications to avoid the possibility that U.S. projects miss the window to capture long-term contracts overseas," he added.

Some Still See a Glut

Cramer's Mad Dash: Cashing in on Natural Gas
Jim Cramer explains how developing the nation's natural gas resources will create jobs.

Despite all that, not everyone agrees that demand will continue to outstrip supply globally.

Against that backdrop, countries like Canada, Israel and Australia are moving at full speed to export the fuel source. Earlier this week, Israel approved exporting 40 percent of its newly discovered natgas reserves. Even more noteworthy is that all three countries are close allies of the United States, which could throw a wrench in their trade ties as the world's largest economy ramps up its own exports.

(Read More: US Hears Footsteps of Global Challengers in NatGas Boom)

With other regions including Africa lining up to produce the increasingly in-demand fuel source, questions have risen about a possible glut.

In a recent research note, Bloomberg New Energy Finance noted several projects under way in Canada that will produce and ship LNG to key parts of the globe.

But BNEF also stated that some Canadian developments are being held up "because the gas is not needed"—raising the possibility that Canada, and perhaps other countries, are producing far more LNG than the market currently needs.

"The world will not need all the LNG that is on offer," BNEF wrote in its report. "We believe that these Canadian projects will compete most directly with … projects in East Africa [Mozambique and Tanzania] and Australia," and in any event may not be able to fend off stiff competition from U.S. production, the firm added.

—By CNBC's Javier David.

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