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LNG growth hinges on price, say buyers and sellers

The biggest opportunity for LNG growth—coal-to-gas switching in Asia—will materialise only if LNG is realistically priced

The LNG industry remains surprisingly bullish about its future, despite the Covid-19 pandemic, record low spot prices over the past year and—most importantly of all—the growing environmental imperative to reach carbon neutrality by 2050.

There is, however, a proviso; LNG will need to be priced at a level where it becomes the fuel of choice to push coal out of the energy mix, especially in Asia.

A striking feature of last week’s Gastech Virtual Summit was that this message came not just from buyers and traders but also from producers—an alignment of views that has been rare until now.

70mn t/yr – Novatek’s maximum production capacity by 2030

Leading the charge for the producers was Mark Gyetvay, CFO and deputy chairman at Novatek. The Russian company is already a major LNG producer with its flagship Yamal project and has a strategy to produce up to 70mn t/yr by 2030.

For LNG demand to come in at the high end of forecasts, prices need to remain low. “First and foremost we are talking about price. If we return to an era where price is high—$8-12/mn Btu of delivered gas to key markets—we are not going to see the transition from coal to gas.”

Asian demand

Gyetvay’s focus on price was reinforced by Steve Hill, executive vice-president for gas and energy marketing and trading at Shell, the industry’s largest portfolio player by far.

“The answer to the question of how to achieve strong growth projections has not changed in the 25 years that I have been in the industry,” he says. “It is simply displacing coal in Asia. More affordable gas prices will support this.

“I am sitting in Europe today where we are seeing extensive coal-to-gas switching activity and a considerable focus on making the future of the gas industry greener. But let us remember, emissions from coal in Asia are more than ten times greater than emissions from gas in Europe today.”

He adds that “if only 15pc of Asia’s projected coal-fired capacity were to be switched to natural gas by 2030, gas-fired generation in Asia would be 50pc higher than current projected expectations”.

Bullish expectations for the future of LNG are supported by the resilience of LNG demand during 2020 in the face of the pandemic. The emerging markets of China and India saw a quick recovery from the initial impacts of Covid-19, but even established consuming countries such as Taiwan have seen demand grow this year.

“LNG demand is still going up,” says Jane Liao, CEO of the natural gas division at Taiwan’s CPC Corporation. “Power demand remains stable and for 2020 we need to purchase 60 more cargoes on a spot or strip basis.” More cargoes will also be needed in 2021, in addition to long-term and mid-term contract volumes.

Net zero 2050

While price was a preoccupation at Gastech, there was no getting away from the environmental imperative of carbon neutrality by 2050, a significant intensification from last year’s Gastech in Houston.

“If only 15pc of Asia’s projected coal-fired capacity were to be switched to natural gas by 2030, gas-fired generation in Asia would be 50pc higher than current projected expectations” Steve Hill, Shell

“Net-zero 2050 is a major global trend,” says Jun Nishizawa, CEO of the natural gas group at Mitsubishi Corporation, a Japanese company active all along the gas value chain. “No one, in developed or undeveloped economies, is allowed to keep distance from it. We know this is not an easy task—but having and sharing the same goal with all stakeholders is required as a global citizen.”

He cautions that, despite investment of $4tn over two decades, solar, wind, biomass and biofuels account for a tiny proportion of global primary energy supply, while hydrocarbons still account for 80pc.

“Asian developing economies will be core to global economic growth in the future, so we need realistic pathways for Asian economies to achieve economic growth and net zero [by] 2050,” he says.

He is calling for immediate action to accelerate coal-to-gas and oil-to-gas switching, the use of ammonia and hydrogen in coal-fired and gas-fired power generation, and, eventually, the use of hydrogen alone in power generation.

Carbon-neutral LNG

The carbon footprint of LNG was also a major talking point at Gastech, with Gyetvay stressing the customer-driven efforts Novatek is making to reduce specific carbon emissions along its production and shipping chain. Shell’s Hill also stresses the growing importance of so-called “carbon-neutral LNG”.

“In terms of carbon-neutral LNG, we do not have a route to zero emissions today—[but] we do have a route to net-zero emissions,” says Hill. “You take the cleanest fuel and combine it with a sink of some sort.

“We believe in nature-based sinks. So we combine our LNG sales to customers who are interested with offset products to produce a net-zero carbon solution—using our investment to preserve sinks in nature or to develop new sinks. And then our customers can use that with their own customers.

“Our Japanese LNG-importer customers are now selling net-zero carbon products to their customers. And in China our customers are offering net-zero carbon natural gas on the Shanghai exchange.”

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