Natural gas demand is likely to fall for the first time in 50-years in 2009, while some 60-billion cubic metres of liquid natural gas (LNG) capacity were planned to come online this year, the International Energy Association (IEA) said on Monday.

The IEA, which released the ‘The Natural Gas Market Review 2009’ and ‘Medium-Term Oil Market Report 2009’, stated that the natural gas sector had moved from a “tight” supply and demand balance with high gas prices to an easing one with plummeting prices.

Demand from the Organisation of Economic Cooperation and Development (OECD) increased by 1% in 2008, but fell by 4% during the first quarter of 2009 and was expected to further decline through the year.

The agency said that the combination of weak demand and lower prices could undermine future investments.

Despite the expected relief on engineering, procurement and construction costs, project sponsors face both financing problems and increasing uncertainty about when and at what pace the economy, and therefore gas demand, would recover.

“If investments in production and supply infrastructure are delayed, there is a risk in the medium-term of tightening markets when demand recovers,” the IEA stated.

It noted that liquefaction capacity would see an unprecedented growth of 50% between 2009 and 2013, but stated that there would be a dearth of new capacity in the period after 2013 unless new projects were approved in 2009/10.

The world’s largest producer, Russia, faced considerable challenges, both technical and financial, already leading to project delays, the IEA said.

The severe gas disruption in Europe at the beginning of 2009, following a dispute between Russia and Ukraine, highlighted the importance of diversified suppliers and supply routes, it added.

“Critical improvements need to be made in developing cross-border interconnections and market functioning,” said IEA executive director Nobuo Tanaka.

He noted that the global oil and gas sector faced “enormous uncertainty”.

Tanaka said that two years of global oil demand contraction in 2008 and 2009 reflected the worst economic recession in over 50 years.

“Oil prices are around half the level seen last year in July, when they peaked at $147, even though they have strengthened again recently, partly owing to a perception that economic recovery may be just around the corner.”

Tanaka warned that if oil prices increased too rapidly it could damage any such recovery.

“Both markets [oil and gas] face enormous uncertainty surrounding the timing, pace and extent of any economic rebound, which affects all prognoses for oil and gas market fundamentals over the next five years,” he said.

For the oil sector, the ‘Medium-Term Oil Market Report 2009’ deals with this uncertainty through divergent scenarios showing the risk of a rapidly tightening oil market from 2012 onwards on the one hand, counterbalanced by another scenario which shows the Organisation of Petroleum Exporting Countries (Opec) spare capacity remaining around a more comfortable six-million barrels a day for the entire outlook period.

“Whether we end up facing a supply crunch again by mid-decade, or with a more comfortable buffer of supply flexibility, depends largely on the pace of economic recovery and government action on efficiency,” said Tanaka.

Oil demand is seen to grow at between 0,4% and 1,4% a year after 2009, depending on the pace of global economic recovery and mid-term gross domestic product trend growth levels.  The higher growth scenario results in 2014 demand of 89-million barrels a day, which was four-million barrels a day above the lower growth case.

The IEA stated that for either scenario, however, demand contraction so far in 2008/9, plus early signs of structural shifts result in projections at least three-million tons a year lower for the outlook period than those generated last December.

The IEA stated that it might be too early to cite a definitive structural downshift in oil use, but said that events such as General Motors and Chrysler filing for bankruptcy protection in the US, and further rationalisation affecting transport and power generation fuel use provided some hints that it would occur.

However some key trends persist, with Asia and the Middle East generating the bulk of demand growth and non-OECD demand potentially eclipsing that within the OECD by 2014.

Oil supply capacity would grow by four-million barrels a day between 2008 and 2014, which was around 1,5-million barrels a day less than in the previous outlook a year ago. However, the bulk of this growth comes from Opec crude capacity, Opec gas liquids and global biofuels.

Spending curbs and endemic new project slippage see total non-Opec supply levelling off at between 50-million barrels a day and 51-million barrels a day during the outlook period.

The IEA said that above ground constraints, not resource limitations, underpinned this sluggish performance.

Supply could be lower still were upstream spending curbs to extend beyond 2009.

“Yet, producer and consumer governments can also influence the path that oil markets take,” Tanaka said. “A level investment playing field would help ensure the development of sufficient supplies. Consumer governments can also position fuel diversity, energy efficiency and a lower carbon future at the forefront of attempts to kick-start economic recovery. A return to razor-thin crude oil spare capacity and resultant price volatility are in the interests of neither producers nor consumers.”