“Cautiously optimistic”—that’s how one of the natural gas speakers at Institute of Petroleum (IP) Week in London expressed his outlook on where the global natural gas industry would be in 12 months. “Cautiously optimistic” is probably a good description of the Gas Grows Up report. At first glance, it could be perceived as a story of decline. After all, demand for LNG has been declining in Japan and South Korea, and has not been as high as expected in China.
In Japan, energy efficiency, the restart of nuclear, more renewables and higher efficiency coal are reducing NG demand in generation. The latest figure from MITEI estimate that by 2030, 40 percent of generation demand in Japan will be met by energy conservation and renewables. South Korea’s demand has declined slightly and is expected to stay flat or even decline. In all 3 markets, high efficiency coal (45 percent efficiency compared to a global average of 33 percent) and renewables (accounted for 25 percent of China’s electricity in 2014) are competing against natural gas. In addition, China’s NG demand growth is highly uncertain. A key question is what will be the NG demand growth rate? The difference between 5 percent annual growth in NG demand vs. 8 percent growth by 2020 is ~50bcm (i.e. 250 bcm vs. 300bcm). There is also a domestic production target of 185 bcm by 2020, and over 100 bcm of pipeline import capacity under construction.
But what we are really seeing in the LNG market is a move from few sources of supply and demand to many. The shale to LNG exports out of the U.S. (~63 MTPA capacity, ~1/4 global LNG market in 2014) is very different from any supply we have seen before because of the smooth supply curve. Not only because shale gas more and more competitive (e.g. <$30/bbl BE in Marcellus and Utica), but also because it can come on-stream very quickly and with every dollar increase in oil price, more wells will come onstream. For example, there are an estimated 2000-4000 wells drilled but not completed. Wells that are drilled but not completed could, theoretically, be brought on stream in a month.
So what is the “cautiously optimistic” part of the report? There is a very long tail of markets who import LNG and also a potential for new applications. There are already over 30 countries with regasification capacity. Today, Japan, South Korea and China make up~60 percent, so there is a very long tail of almost 30 countries. Will the low NG price stimulate demand in some of these countries? We think yes. For example, India has ambitious targets to almost triple its LNG imports. Whether the size of the estimates is too optimistic is not really the point. The point is that, at the right price and provided the midstream infrastructure is developed, India could grow significantly. Also, let’s not forget Europe. In Western Europe, there is already ~180 bcm import capacity, and there is also growth in other parts of Europe like the Baltics and Eastern Europe (Lithuania and Poland). Finally, generation dominates the NG conversation, but other applications for natural gas, e.g., city gas and industrial (e.g. fertilizer and steel plants) can be significant, and even new applications like heavy duty trucks and marine, which will not be significant in terms of volumes in the short-term, could grow.
The main message is that the natural gas market is evolving and will look very different than it does today with many more buyers and sellers and increased competition that is good for the consumer. Producers and marketers need to act now to increase their competitiveness in a market where supply will exceed demand, where markets are more global (we are already seeing the influence of Henry Hub contract structures and pricing) and where customers are geographically diverse and numerous. They will succeed if they can bring LNG to the market in a cost-competitive way, optimize their contract and asset portfolios, encourage new applications for natural gas, and are agile enough to take advantage of the next opportunities.
Reflections from IP week: Shaping the gas landscape
Buyers stand taller and reshape the global LNG market
To expand global LNG demand, think small
Russian gas comes out fighting with strong support from the industry