Gas: from dark ages to golden age?
Natural gas has been through a difficult phase, but the industry could be poised for a stronger path
The gas industry is undergoing profound structural change, with liquefied natural gas shifting from a rigid to a far more flexible infrastructure.
That was a key message from the WEC panel session on LNG markets on Tuesday. As panel chair Muqsit Ashraf, Managing Director & Global Head of Energy Practice, Accenture Strategy noted, the industry has moved from an age where only a small fraction of LNG was traded on spot or short-term contracts, to one where one-third is traded in this way. "A lot has happened and unquestionably a lot more change will happen, as the reconfiguration of the market continues," he said.
Roger Bounds, VP, Global Gas, Royal Dutch Shell, noted increasing LNG demand emerging from new markets. "Places that used to export LNG, such as Malaysia, and Indonesia," are now importing. That trend will deepen over time." He said.
Japan has long been at the epicentre of the market, and low prices have impacted the diversification of its supply sources. According to Shigeru Muraki, executive adviser to Tokyo Gas Co, Japan is expecting new supplies to come from the US, Canada, Alaska, East Africa and Russia, to supply the region's largest market.
Muraki was confident that despite the diversification, the oil indexation will remain a constant in future contractual negotiations, though "there will be a price slop introduced gently to reduce the risk of price volatility," he predicted.
The likelihood is that most US LNG- which is free of destination clauses-will continue in this way. Andrew Walker, VP of strategy at Cheniere Marketing acknowledged that the gas sector finds itself grappling with bigger questions reshaping the primary energy industry.
The US is changing the marketplace, he said. Large-scale supply is under development, with some 60 million tonnes of production planned-equivalent to one-quarter of current capacity. Power has been put back in the hands of buyers, who were now setting the agenda for what they need. "Gas is no longer a captive market. It's competing with renewables, in an increasingly liberalised marketplace."
For David Hobbs, Head of Research at King Abdullah Petroleum Studies and Research Centre, the key theme facing gas is dependence. "The challenge for anything trying to grow in this market is the extent to which full cycle costs can compete with marginal costs of whatever is in there already. Looking 20 years ahead, the battle is being fought out today and the consequences will reverberate for a long time."
Hobbs challenged the conception of natural gas as transition fuel. "That is an OECD construct. It's about how does gas survive in what is perceived to be a static market. Europe has seen little energy demand growth in the last decade. The US has also seen little growth in energy demand, even if gas has grown within that. But to industrialising economies, they don't think about transition fuel; they think of it just as fuel."
Natural gas will struggle to be seen as a low cost alternative to coal or renewables. "There's what is fundable by the multilaterals-renewables. Or there is what is cheap-coal," said Hobbs
The panel was optimistic. As Hobbs pointed out, many have underestimated the extent to which the industry can eliminate costs. "While gas has been through the 'new dark ages', this dose of reality is a kicking off point that leads to a future golden age," he said.