World Enters New Gas Order

Introduction

As the world pushes toward cleaner energy and improved energy storage solutions, global demand for oil and coal is expected to peak between 2025 and 2035.Notably absent from that storyline is natural gas, and more specifically liquified natural gas (LNG). Trends in LNG have market moving, geopolitical landscape reshaping potential that has pivoted our focus today to the evolving data story around LNG.

Last year we saw the demand for natural gas grew at its fastest rate in almost a decade. Several market and technological changes played into this trend, including the booming domestic market in China, the ongoing “gas revolution” in the United States, and expanding global gas trade to serve Asian markets more broadly. And, don’t forget coal-to-gas switching, which not only increases natural gas demand but also further displaces coal-based energy with the least polluting of all fossil fuels – natural gas.

What’s next then for LNG? The LNG boom continues: In just the first nine months of 2019, global LNG investment hit a new all-time record of $50 billion. Already almost half of the world’s traded natural gas is supplied in liquefied form and these new LNG supplies are expected to play an even bigger role in meeting future global gas demand.

And as LNG moves in to claim a greater share of the global energy balance, geopolitical strategies are shifting. Fewer countries are locked into the geopolitical energy relationships that were born out of traditional pipeline trade between contiguous countries. LNG growth creates opportunities for linkages between otherwise geographically separated gas producers and customers and revisions to the economics and geopolitical context of natural gas trade.2

In this article we’ll analyze the most recent data from international agencies and research organizations globally to give you a broad data view of how the emergence of new natural gas suppliers is likely to play out over the coming years and decades. We’ll look closely at global energy and natural gas balances, expansion of LNG facilities, major LNG players on both sides of the market equation, and the geostrategic realities of LNG market growth.

Liquified Natural Gas and the Global Energy Balance

The last 20 years have been transformative for natural gas trade. Growing demand coupled with LNG-friendly market liberalization, diversification of suppliers and markets, and shorter-term and more flexible LNG contracts have reshaped global gas trade and contributed to the rapid growth of today’s global LNG market.3  World gas trade doubled between 2000 and 2018 driven by a 70 percent expansion of LNG trade. Now LNG makes up nearly 50 percent of global inter-region trade of natural gas.

Since this fuel was introduced in the late 1960s, the LNG market has transitioned from local, bilateral trade flows to regional and global markets. Most natural gas was transported historically by pipeline within and between regions, with a small fraction of LNG transported by ship, and even then mainly from a handful of producing countries (led by Qatar and Australia) to a handful of importing countries (led by Japan, China, and South Korea).4 With the expansion of LNG capacity, led off by Qatar and catapulted by the US several years later, a new market blossomed.

Qatar. In the mid-2000s, Qatar emerged as a major LNG supplier after completion of its first wave of liquefaction projects. Global nameplate capacity proceeded to more than double from 180 bcm to 382 bcm between 2002 and 2012, and Qatar led that surge, representing around 40 percent of new capacity.3

The United States. At the tail end of the surge in nameplate capacity led off by Qatar came another game changer: new LNG supply stemming from investment decisions made between 2011 and 2016 to capitalize on the US shale gas revolution. Brokers began to acknowledge US shale gas as a meaningful supply source in 2007 and, just four years later, energy projections were revised in anticipation of the emergence of the United States as a net exporter of LNG by 2016. The US LNG import volumes started to decrease rapidly, after reaching a peak of around 20 bcm in 2007.3 And between 2016 and 2018, the US and Australia added about 30 bcm and 50 bcm of export LNG capacities, respectively.

Looking ahead, no matter the scenario one uses to evaluate the future of global energy, natural gas comes out ahead of other fossil fuels in the global energy balance based on assumptions around global economic growth, energy efficiency, and greenhouse gas emissions.

According to estimates from BP, global energy demand during the next two decades has the potential to increase from 20 to upwards of 65 percent.5 That’s a broad range, and yet even in the most adverse scenario for continued reliance on fossil fuels – the ‘Rapid Transition’ scenario – global demand for natural gas would increase by 38 percent by 2040, while consumption of coal and crude oil would fall by 71 percent and 15 percent, respectively.

The LNG Market Story is Unfinished

As alluded to already, the LNG story is shifting from one about growth in the market share of LNG – which today is less than 3% of global energy demand – to one about a more globally integrated market system. Over the next two decades, global LNG demand is expected to more than double and the number of LNG importing countries will increase from roughly to 40 to more than 70. This new larger, globally integrated natural gas market system will balance economic resilience, environmental imperatives, and geopolitical alliances as never before.4

Cargoes of LNG are available now from a wide variety of producers worldwide and governments recognize that access to liquid gas markets makes their economies far more resilient to supply disruptions than conventional pipeline-based arrangements.Given these benefits, demand will propel this transition and guide the heavy investment in LNG supply and trade globally.

Under the pressure of mounting environmental regulations, natural gas is gradually replacing coal and crude oil in the global energy balance. Natural gas is primarily methane (CH4), which has a higher energy content relative to other fuels, and thus, relatively lower CO2-to-energy content. Energy generated from coal and liquid fuels is associated with 1.8-2 and 1.34-1.38 times more CO2 emissions, respectively, than the same amount of energy produced from natural gas.This matters in the real world! For example, coal-to-gas switching led to a 78 percent improvement in Beijing’s winter air quality over the last five years.8

Environmental related targets and policies are not the only factors driving demand for natural gas. Population growth, economic expansion, and further electrification, especially in developing Asia, are also building seemingly insatiable energy demand. And, here is where LNG will increasingly come into play – mitigating energy supply risks that governments will rely on for healthy economies and thriving populations. Because of the great distances between many energy supply and demand centers, for many countries importing LNG remains the only way to meet growing domestic energy and gas demand. How else, for example, could the abundance of shale gas in the United States reach markets as diverse as Europe, India and China?9

It’s only possible because the US shale gas revolution was accompanied by the investment to process and transport that gas to new markets well beyond its borders.9

Checking the Compass on LNG Supply-Demand Trends

A new market system needs gas production to fuel it. Public information indicates that projects currently under construction or in pre-construction have the potential to more than triple global LNG export capacity. If fully implemented, these projects would increase the share of LNG in overall gas production to 20 percent by 2030.4

  • New LNG export capacity is under development in 20 countries, with the vast majority concentrated in North America, including 352.7 million tonnes per annum (mpta) in the US and 281.6 mpta in Canada (or, 74% of all export capacity in development globally).4
  • Capital expenditures required for LNG facilities in development amount to $1.3 trillion, with US export terminals under development representing $914.5 billion (70 percent) of estimated capital expenditures.
  • Export terminals make up majority of the proposed capital expenditures within the LNG industry.On a tonne-for-tonne basis, the process of liquefaction for LNG export is more expensive than regasification due to the massive cooling and pressurization processes required.

The market will also see new entrants, particularly on the import side. Expansion of LNG import capacity is more widely distributed than is export capacity, including 65.6 million tonnes per annum of new capacity in 22 countries that currently have no import capacity.

  • Projects under development collectively would increase the number of countries with LNG import capacity from 40 to 62 by 2030.4
  • Import terminal capacity under development is most heavily concentrated in the Asia Pacific region, led by China with 87.1 mpta and India with 39.5 mpta.
  • Japan, the current leading LNG importer, has comparatively modest expansion plans, with only 11.7 mpta in development.4

LNG Market: The Influence of US and China

The United States and China are influencing LNG market dynamics due to their size and impressive growth potential.

The United States played a crucial role in the structural change of the LNG market more than a decade ago but the means to accomplish this have been underway for much longer.

Deregulation of the US natural gas market in the 1980s and 1990s stimulated upstream investments. This had two notable consequence. First, the US emerged as a potential importer, which triggered large investments in liquefaction infrastructure, especially in Qatar, rapid innovation of lexible import solutions, such as floating storage and regasification units (FSRUs). Second, deregulation boosted domestic production and ultimately reduced import requirements during the last decade to the point that the US became a net LNG exporter in 2016. Fast forward just two years and the, in 2018, the US become the fourth largest LNG exporter after Qatar, Australia, and Malaysia.3

China’s rise as a natural gas importer is backed by domestic policies designed to improve air quality in large cities. Natural gas has and will continue for the foreseeable future help enable China to reduce the share of coal in domestic heat and power generation, particularly in the industrial and residential sectors.

China started to import LNG in 2006 and due to rapid domestic demand growth for natural gas by 2017 it had become one of the world’s largest LNG importers, second only to Japan. China’s rise as a major LNG importer also reverberated throughout Asia, with the region consuming 75 percent of all global exports in 2019.3 By 2024, this trend will strengthen; China is expected to surpass Japan with LNG imports growing by another 50 percent compared to 2018.

Geostrategy of the “New Gas Order”

Looking back, it is remarkable how the entrance of the United States with its first LNG export terminal gave birth to a new energy market paradigm in the span of just a few years. Now, the US has four export terminals and slated investments that will further erode the traditional natural gas regime and mark the beginning of what some have termed a ‘New Gas Order’.10

What is the new Gas Order, you ask? It is characterized by:

  • US natural gas and energy self-sufficiency
  • A market shift to increasingly competitive pricing and contract models with entry of many mid-size and potentially low volume LNG importers
  • Downward pricing pressure in the long-term as well as decoupling of gas and oil prices
  • The rise of the global gas market within primary energy demand
  • Politicization of LNG trade

Let’s play out some of these factors using the US as our case study. The US natural gas production boom offers energy security and provides the US with geopolitical leverage. We have seen that US supplies of natural gas to Europe already undermine the stability of Russian gas exports. Threatened by US LNG supplies, Russian Gazprom had to cut prices in mid-2019, which has encouraged some political rhetoric suggesting that US could potentially displace Russian gas in Europe and even parts of Asia.10

The growing share of LNG exports from the US also promotes a more flexible contractual framework and competitive pricing model. This contractual framework is revolutionary for natural gas trade because it has induced some importers to renegotiate their existing contracts and has stimulated LNG spot trading.10 Integration between regional gas markets based on growing LNG supply and an increasing proportion of spot or short-term sales has the power to reduce large regional differences in natural gas prices and lead to the decoupling of gas and oil prices.10

The question then becomes will already tense diplomatic relations threaten to spoil the energy market and security opportunities that LNG represents if consuming markets get caught in the middle and their energy security threatened?

Present geopolitical tensions between the US and Russia make it almost impossible for major gas exporters to coordinate, which actually strengthens competition and lowers prices.11

Yet, the world is far from static and the intense rate of innovation in the space that has made LNG available to many countries also provides new opportunities to fuel economic growth. Mid-size importers such as Brazil, Argentina, Egypt, and Israel joined the global gas market due to developments of floating storage and regasification units (FSRU) which are cheaper substitutes for traditional capital-intensive terminals.10 And, as already stated, more entrants are on the way to shape the future dynamics of the market.

Conclusion

LNG represents one of the fastest growing sectors in the energy industry and will only play an increasingly important role in the global energy mix, driven by its environmentally friendly characteristics, versatility, and relatively low price. The drastic change in availability, in particular the emergence of the US as a major player in the space, has been the impetus for countries to shift their business models and form new alliances to achieve energy security and supply diversification.10

The emergence of new major export and import players has altered the patterns of the international gas trade and introduced a new geopolitical dimension to LNG trade, yes, but perhaps more to the point, a new dimension to energy security and foreign policy as well.10

Geopolitical tensions between major gas exporters in the New Gas Order will likely lead to relatively low prices in the long-term. At low long-term prices, the position of exporters in the global gas market will depend highly on intensity of innovations in extraction, liquefaction and transportation technologies. In the short term, however, importers will be forced to continue to delicately manage dueling suppliers via existing pipeline connections and newer LNG import terminals to take advantage of competitive pricing.

References

  1. Global gas and LNG outlook to 2035. McKinsey, September 2019. Link
  2. Paula Stern, April 2019. The LNG moment: How US production could change more than just markets. Atlantic Council. Link
  3. LNG Market Trends and Their Implications. IEA, June 2019. Link
  4. The New Gas Boom. Global Energy Monitor, June 2019. Link
  5. Energy Outlook 2019. BP, May 2019. Link
  6. Liquefied Natural Gas. European Commission, August 2019. Link
  7. How much carbon dioxide is produced when different fuels are burned? EIA. Link
  8. Shell LNG Outlook 2019. Link
  9. Global LNG Report 2019. A Review of Demand, Supply and Financing Issues. DLA Piper, 2019. Link

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