Time for the revival
After a rough couple of years, new pockets of demand and new methods of consumption will lift prospects for gas exporters
The wave of new gas production, transport and power-generation underscores the important role of natural gas in the transition to a cleaner energy mix. It offers an affordable, reliable and plentiful fuel source that produces lower carbon emissions than other fossil fuels, while its versatility to complement the rapidly expanding renewable energy. In 2017, these benefits will again become plain.
In many ways, gas has been a victim of producer success. Technical and logistical hurdles faced the industry, from stranded offshore reserves to reservoirs locked in tight or impermeable geological formations - and producers responded. New pipelines and liquefied natural gas facilities have sprung up. Suffice to say, supply is no longer the problem.
The spectacular growth in LNG is not over yet. About 30m tonnes of new capacity will be on the market in 2016 and another 40m tonnes in 2017, which means LNG capacity will have grown by more than a quarter in just two years. Russia, among others, is adding to extensive pipeline networks serving Asia and Europe.
2017 will see floating LNG go mainstream. Shell's giant 3.6m-tonnes-a-year Prelude facility, mounted on a 488-metre-long vessel, has drawn attention simply because of its scale. Expect it to begin operating next year. It won't, though, be the world's first FLNG project: Petronas was already testing its 1.2m-t/y PFLNG Satu facility on the Kanowit field, 180km offshore Sarawak, in 2016.
If these pioneers are successful, then a new LNG era will dawn: one in which far-flung offshore reserves are no longer beyond reach and gas can be produced without costly pipelines and onshore infrastructure, and leave a smaller environmental footprint than a regular LNG plant. Oil and gas is no stranger to innovation, but FLNG raises the bar again.
But look at the consumer markets too. A plethora of floating storage and regasification units and other gas-import facilities are being installed around the world, from Latin America to India and China. FSRUs do for small markets what FLNG does for producers: they bring gas within reach, cheaply and flexibly.
Now producers must crack another puzzle and, in 2017, redouble their efforts to promote gas in new markets. Consumption hasn't kept the same pace as the rise in supply. It grew by just 1% a year from 2012 to 2015. In the coming years, says the International Energy Agency, this will improve, rising annually by 1.5% until 2021. That will add a big chunk - 340bn cubic metres - of consumption within five years. Still, it's beneath the trend 2% growth seen in the past decade. In 2017, producers need to do more to perk up consumption again.
Doing so probably means adding a bit of evangelism to the campaign. Above all, it means producers must play their part in the big debates of the era. Climate change ought to be a slam dunk for natural gas: one of the easiest sources of power generation to scale up quickly, while emitting half the CO2 of coal. Security of supply? The past few years - from the US shale patch to Australian LNG - have answered that one. Cost? Natural gas prices haven't been as consumer-friendly in years.
Yet for all these benefits, the gas message is often hard to pick up. While the impact of the US coal lobby is widely known, the gas industry has a much lower profile.
"In developing countries, where access to power is important and demand is growing, it is for the gas producers to persuade governments that gas has a place," wrote Chatham House analysts John Mitchell and Beth Mitchell in a recent report. This is especially true where coal is cheap.
There are some signs that the industry is getting proactive. A venture between Qatar, Shell and Maersk is seeking to make a market for Qatari gas by creating a Middle East hub to provide LNG fuel for shipping. LNG fuel, which has much lower SOx and NOx emissions than marine oil, should be on the cusp of real market-share growth, thanks to the introduction of tighter maritime emissions regulations across the world. But the same efforts need to happen on land, too. Compressed natural gas and LNG both offer a cleaner and cheaper alternative to diesel in the heavy-duty-vehicle market.
Above all, gas leaders in 2017 must use the opportunity offered by the Paris Agreement. The coming 12 months will see the deal move from words to action, as countries begin implementing measures and enacting legislation to meet their self-declared emission targets. The gas industry must be part of this process, calling for policy that favours cleaner-burning natural gas over coal. Above all, 2017 should be when the gas industry shakes off the "fossil fuel" designation. A fuel that can help be part of the climate change solution must not be mistaken as part of the problem.
Price is another opportunity. No one in the industry likes selling at a small margin. But the gas sector can also use the period of market weakness to its advantage. It makes the fuel more competitive - especially once coal and oil have to factor in the carbon cost. But this demands some willingness on the part of producers to be flexible, and above all respond to consumer behaviour.
Some of the biggest gas suppliers in the world are seizing the initiative. Qatar, for example, has revised terms with some importers, adopting more versatile pricing structures to boost market share in growing demand centres, such as India.
Even in older, saturated markets like Japan and South Korea, where demand has slowed recently, LNG exporters should be patient. Buyers aren't going away, as coal is not a long-term option for them. And while today's glut is an opportunity for importers to strike bargain deals, large buyers want security of supply in the long term.
Credible, established exporters can guarantee that. But only if buyers also look beyond the current glut, recognising that the innovation needed to keep future supplies ticking along will also require demand security in the form of long-term commitments. Today's abundant supply, after all, was only made possible because producers and consumers made long-standing and mutually beneficial partnerships. Forward-thinking importers will not jeopardise that.
Next year, the underlying trends that bring the next phase of demand growth will be confirmed. India is already pushing a gasification strategy in its economy, while the domestic market inefficiencies that stunted Chinese gas demand last year have been resolved. Alongside smaller Asian consumers, such as Bangladesh and Pakistan, these two heavyweights will be prime targets for gas exporters willing to be flexible. Likewise, Europe's established market provides another opportunity, especially as new interconnections within the continent clear some internal gas bottlenecks.
The industry shouldn't be defensive about renewable energy, either. Post-Paris, the sector has a major opportunity to restate its case: if the need to cut emissions is to be balanced with the imperative to supply energy to the world, natural gas is the best generation fuel to use in tandem with intermittent renewable energy. Not only can it provide affordable baseload fuel, but it can do it quickly too. For Western governments worried about big capital projects, this is an important argument.
Next to finding more markets - geographical as well as sectoral - the other aim for gas producers in 2017 will be to consolidate its cost advantage. Keeping upstream expenses down will be critical to the long-term profitability of the sector and its appeal to consumers. If prices remain low, the industry should be ready for them.
That means adopting more efficient practices into design, engineering and construction, and introducing a greater degree of standardisation. This is underway already. Next year, it must become a habit that is not shaken.
The end of the glut is already visible. Cheap, abundant supply and the battle against climate change should lay the seeds of demand growth in future - in maritime shipping, long-haul-vehicle fleets, in power generation, and across developing energy-hungry nations. But gas firms shouldn't just wait for these seeds to sprout organically; in 2017, they should start driving to fertilise them.
As for gas buyers, they need to do their part too. It's in their interest that a market for clean and abundant energy thrives, now and for decades. The financial and environmental advantages of gasification are obvious. Wise governments and enterprising companies will use 2017 to create new markets that put gas at the centre of their economies.
This article is part of Outlook 2017, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here