Huge increase in LNG to change the structure of global gas trade

Image: BP

Rapid electrification and industrialization in Asia and the developing world will drive long-term demand for natural gas, according to two energy outlooks released early this year.

This growing demand will result in a huge increase in the trade of LNG and change the current structure of the global gas market.

But how large the gas market will grow will depend on how fast coal-fired generation can be phased out and renewables can gain market share.

The International Energy Agency (IEA) is forecasting gas demand to grow at an annual rate of 1.5 per cent until 2040. It expects the LNG trade to double in the same time period, supporting the expanded role of gas in the global energy mix.

The IEA says gas consumption will increase almost everywhere over the next two decades, but China and the Middle East will be the largest sources of growth.

Competition on the supply side is expected to heat up as a result of a currently over-supplied global gas market.

“Our outlook assumes a marked change from the previous system of strong, fixed-term relationships between suppliers and a defined group of customers in favour of more competitive and flexible arrangements, including greater reliance on prices set by gas-to-gas competition,” the IEA notes.

“This shift is catalyzed by the increasing availability of footloose U.S. LNG cargoes and the arrival in the 2020s of other new exporters, notably in East Africa, as well as the diversity brought to global supply by the continued, if uneven, spread of the unconventional gas revolution,” it continues.

Floating storage and regasification units help to unlock new and smaller markets for LNG, says the IEA. It adds that the overall share in long-distance gas trade grows from 42 per cent of trade in 2014 to 53 per cent in 2040. But uncertainty over the direction of this commercial transition could delay decisions on new upstream and transportation projects, posing the risk of a hard landing for markets once the current oversupply is absorbed.

“Export-oriented producers have to work hard to control costs in the face of strong competition on from other fuels, especially in the power sector. In the mid-2020s in gas-importing countries in Asia, new gas plants would be a cheaper option than new coal plants for base-load generation only if coal prices were $150/tonne—[double the anticipated 2025 price]. The space for gas-fired generation is also squeezed by the rising deployment and falling costs of renewables,” says the IEA.

BP sees a similar positive outlook for natural gas in its 2017 energy outlook. BP expects gas demand to grow by 1.6 per cent annually to 2035 in its base case forecast. Shale production, which is expected to grow 5.4 per cent per annum, accounts for around two-thirds of the increase in gas supplies, driven by the U.S., where shale output more than doubles to 43 bcf/d. Approaching 2035, China emerges as the second-largest shale supplier. Shale gas accounts for around one-quarter of total gas production by 2035.

The main centres of demand growth are China, where gas is gaining share in industry and power, and the Middle East and the U.S., where increased availability of gas helps boost demand within the power sector.

In China, growth in gas consumption rises 5.4 per cent annually, outstripping growing domestic production. As a result, the share of imported gas rises to nearly 40 per cent by 2035, up from 30 per cent in 2015.

BP expects around half of these increased imports to be met by LNG, with rising pipeline imports from Russia and other Russian Commonwealth countries providing the remainder.

In Europe, domestic production is set to decline sharply by around 3.2 per cent annually as existing fields mature and production is not replaced. As a result, the share of imported gas rises from around 50 per cent in 2015 to nearly 80 per cent by 2035.

LNG imports are expected to supply around two-thirds of the increase in imports, with rising pipeline imports from Russia providing the remainder.

BP is expecting LNG to grow seven times faster than pipeline gas trade. By 2035, it expects LNG to account for around half of all globally traded gas—up from 32 per cent now.

“The significance of the growing importance of LNG-based trade is that, unlike pipeline gas, LNG cargoes can be redirected to different parts of the world in response to regional fluctuations in demand and supply. As a result, gas markets are likely to become increasingly integrated across the world,” BP notes. “In particular, if prices move further apart than is warranted by transportation costs, there will be an incentive for LNG supplies to be redirected until prices move back into line.”

BP couches its gas forecast by saying there are a number of risks that could limit demand, mostly surrounding greenhouse gas emission reduction targets.

“Demand growth could be slower if less priority is attached to moving away from coal,” it explains. “The strength of natural gas demand partly reflects gas gaining share from coal, helped by government policies encouraging a shift away from coal and supporting growth in gas. It is also possible that the growth of natural gas may be threatened if there is less government support encouraging a switch from coal into gas.”

BP says a faster transition to renewables in the power market could also hit gas demand.

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