Discussions at the World Gas Conference 2018 on a variety of gas-related themes—from its competitiveness to its “cleanliness” to its monetization potential—reaffirmed what we have long believed: natural gas is poised to hold a dominant position in the energy mix. Seven shifts will usher in the golden age of gas.
- From being a transition fuel to being an integral part of the energy transition
Demand for natural gas will continue to climb in the coming decades—up nearly 50 percent by 2050.1 Gas may not grow as fast as renewables, but it will play a critical role in the energy mix throughout our lifetimes. For traditional oil and gas companies, investment strategies should focus not on gas OR renewables, but on supplementing gas with renewables and optimizing the mix of the two.
- From outcompeting renewables to competing head-on
The future will see fierce competition between gas and solar/wind. Renewables are expected to represent the cheapest “fuel” for generation 2 (see Figure 1), thanks to technical advances that will reduce the cost of solar- and wind-generated electricity by nearly 50 percent by 2050.3 The growth in energy consumption and structural constraints, such as solar/wind intermittency, will mean that gas and renewables will co-exist and, at a micro level, fight for share. That is reason enough not to be complacent—even at $3 per mmbtu.
- From being a cleaner hydrocarbon-based energy source to one that cleans emissions left in its wake
Methane is a more potent heat-trapping gas than carbon dioxide, and natural gas systems (wells to pipeline to powerplants) are some of the largest sources, ranging from 2 to 5+ percent.4 At 2 percent, methane emissions are an economic and environmental scourge. At 5 percent, the climate benefits associated with retiring coal-fired power plants in favor of natural gas plants disappear.
- From under supply to oversupply and back again
The current state of oversupply does not mean gas is unattractive. As demand rises and the impact of the weak CapEx inflow over the past few years kicks in, we could be in a supply shortage. The ramping up of US LNG capacity, technical advances and modular LNG facilities will provide respite. But the industry cannot shift its attention from the supply crunch likely to emerge in the next 10 years. Gas investors need to view their plans through a medium-term lens.
- From supply security to demand creation
Supply ubiquity alone will not drive gas market share over an extended period. A lot will hinge on demand. While demand growth for gas in the United States and Europe is less than 1 percent, demand from China and India is expected to grow by 5 percent annually. Growth in tail markets such as Africa, the Middle East and Southeast Asia will grow by 3 percent per year.5 Going forward, the health of the gas industry will rest on its ability to create demand in tail markets, through downstream expansion and infrastructure investments, and through new uses.
- From being a local (or secondary) resource to being a “liquid” global commodity
For much of this century, oil’s positive price spread on gas skewed operators’ interests toward liquids. The tide is turning. Though price differentials still favor oil, the prominence of gas has increased—not just because gas is a cleaner hydrocarbon, but because interconnected and liquid gas markets have solidified gas’s position as a critical fuel of the future. For example, LNG is expected to grow seven times faster than piped gas. By 2035 it will account for almost half of all globally traded – up from close to third in 2017.6
- From liquefaction-based monetization to integration-based value maximization
The globalization of gas, growth of LNG, and the proliferation of spot and short-term trading have begun to transform pricing across different regions. Additionally, regional constraints on piped gas have put pressure on netbacks. The result is that monetization of gas molecules has become relatively unattractive. But there is value in the integrated value chain. Payback on a gas field could take 10-20 years, but only five to 10 years on a power generation plant and less than five years on a methanol plant.7 Realizing value in the future will come from the extended value chain and new end products and uses.
Our next article in this series will explore how companies can take advantage of these shifts and turn the promise of gas into reality.
1 EIA Annual Energy Outlook 2018
2 BP Energy Outlook 2017, Accenture Strategy analysis 2018
3 Bloomberg New Energy Outlook 2018
4 Alvarez et al., “Assessment of methane emissions from the U.S. oil and gas supply chain,” Science, June 21, 2018.
5 EIA World Energy Outlook 2017, Accenture Strategy analysis 2018
6 BP Energy Outlook 2017
7 Japan Ministry of Economy, Trade & Industry, Accenture Strategy analysis 2018