Let me start by thanking the International Gas Union (IGU) for its Global Gas Report 2019.
The IGU report is a must read for anyone interested in energy, especially since gas is becoming the world’s go-to fuel to cut greenhouse gas emissions while also backing up intermittent wind and solar. I could really make 50 takeaways here but let me focus on just six – in no particular order.
1. The constant advance of natural gas innovation and technology continues to go under-appreciated. Per BP, the world now has over 7,000 trillion cubic feet of proven natural gas, and IGU reports that 70% are in fields with an average breakeven price of less than $3 per MMBtu. Such an immense, low cost gas resource base encourages rapid growth across the production, transport, and trading, and consumption chain. Especially since more gas use is essential to mitigating climate change and local pollution, this “lower costs locking-in more infrastructure and future demand” reality predictably gets ignored by too many. Reminder, the Yellow Vest riots in Paris show how not even rich Westerners will accept the higher energy costs that some of our politicians want to saddle us with to reduce emissions.
2. With global gas demand rising 35% over the past decade alone, the conveyor belt of investment in infrastructure continues to grow. Global investment in gas infrastructure totaled ~$360 billion in 2018, but annual investment needs to amount to ~$470 billion per year to meet rising needs. Fast-growing Asia is the key to sustaining investment in infrastructure, with access to gas being too limited in the region. Investment in the development of mid- and downstream infrastructure is especially falling short. The U.S. Department of Energy has non-OECD Asia adding an astounding ~73 Bcf/d of new demand in the three decades ahead, or about what the U.S. used last year.
3. IGU credits at least three factors in explaining why gas has become the cornerstone of energy strategies around the world: 1) cost competitiveness of gas versus other energy sources, 2) more security of supply in terms of infrastructure and delivery and use flexibility, and 3) gas as a sustainable resource that can mitigate climate change and lower localized pollution (i.e., clear notoriously hazy skies in the still developing nations). Indeed, the “anti-gasers” should realize that their goal for carbon pricing will inevitably mean more gas because it has 50% less CO2 emissions than coal and 30% less than oil. The three fossil fuels supply 80% of the world’s energy and are powerfully incumbent technologies greatly favored by “system inertia.”
4. The positive growth trends for gas supply and demand are clear, but not without issues. One problem is that new production continues to be driven by the U.S. and Russia (~70% of 2018 growth), with new consumption led by the U.S. and China (~60% of 2018 growth). Other nations are helping to expand the market, but more focus is needed. IGU says that diversifying the supply and demand chain for gas requires at least three things: “cost innovation, infrastructure investment, and enabling policies.” For example, although more challenging in the less mature markets where new demand is fastest, a consistent IGU theme is that supportive policies must promote fuel-switching to gas from coal and oil.
5. Globalizing the gas market to be more like petroleum, the LNG trade is the essential diversifying force for buyers. LNG is rapidly adding a security of supply that is encouraging more importers, now around 45 nations. In 2018, 5-6 Bcf/d of new LNG export capacity additions in Australia, Russia, and the U.S. added some 7-8% to global liquefaction capacity. Yet, global liquefaction utilization remained unchanged at ~77%. More spare liquefaction capacity will give the LNG market even greater liquidity and flexibility. Fading “destination clauses” and more short-term contracts selling smaller volumes is also enhancing the market. The fast entrance of the U.S. to a major exporter is helping: some 60-80% of U.S. LNG sales in 2018 were on the spot market.
6. IGU notes that “more liquid pricing instruments allow LNG customers to rapidly respond to market developments,” as we saw with the drop in spot prices in late-2018 and early-2019. Importers were able to stock up, and inventories are overflowing for the coming unpredictable winter. Further, growing liquidity is allowing LNG to readily compete with pipeline and domestic gas supply. This is helping to bring down costs for all gas customers, an especially vital concept for the developing nations seeking gas since their citizens have little capacity to absorb higher cost energy. In China and India, for instance, where coal has dominated and gas has been more expensive, gas premiums to coal are swiftly declining. Incorporating the current social cost of carbon of $40 per ton would make gas cheaper than coal in key markets.