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Regional Gas Price Differences Will Remain Beyond 2035, IEA Says

Natural gas prices will vary across regions until more flexible supply terms develop and a global market is formed to narrow the gaps, according to the International Energy Agency.

For prices to converge, contracts for liquefied natural gas supplies and oil-indexed pricing need to be loosened, spurred by accelerated gas-market reforms in Asia and LNG exports from North America, the Paris-based IEA said today in its World Energy Outlook 2013 report.

“Although gas price differentials have come down from the extraordinary levels seen in mid-2012, natural gas in the U.S. still trades at one-third of the import prices to Europe and one-fifth of those to Japan,” the IEA said. “While regional differences in natural gas prices narrow in our central scenario, they nonetheless remain large through to 2035.”

Next-month gas in the U.S. averaged $3.66 per million British thermal units in the past year on the New York Mercantile Exchange. The comparable price in the U.K. was 66.5 pence a therm, equivalent to $10.62 a million Btu, on the ICE Futures Europe exchange. LNG for delivery to Northeast Asia in four to eight weeks averaged $16.09, according to assessments by World Gas Intelligence.

While gas demand is expected to rise in Asia and the Middle East by 2035, led by a quadrupling in China, it will struggle to return to 2010 levels in the European Union amid competition from a rising share of renewables and more profitable coal in power generation, the IEA said.

China and parts of Latin America and Europe could replicate U.S. success in developing unconventional gas resources “at smaller scale,” the IEA said.

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