In our previous article we briefly discussed unconventional gas prospects while in this part, we discuss LNG – an essential player in the age of gas. As seen in the US, increasing domestic unconventional gas supply sharply cut gas import needs, thereby idling many existing LNG import facilities and prompting their conversion towards exports. The first project to materialise in the “lower 48” was Cheniere Energy’s Sabine Pass, which made its first shipment, from Louisiana to Brazil, in February 2016. Many export projects are under further consideration and will likely target major markets in Asia and Europe.
Rise of LNG: The past decade saw heavy investment in LNG projects – around $200 billion in Australia alone, which will make the country the largest LNG supplier in a few years. When the Australian, American and other volumes come online, they are expected to contribute to an already significant LNG supply glut in Asia. In the face of low oil and gas prices and currently lacklustre demand, it is likely to be some years before producers reap the benefits from their capital intensive projects. But the fundamentals for natural gas and LNG remain attractive over the coming decades – especially in Asia. Apart from rising consumption over the long term in the traditional LNG customers including China, Japan and South Korea, gas use is expected to rise sharply in South East Asian nations like Indonesia, Malaysia, Vietnam, Thailand and Singapore.
Following the initiation of Chevron’s massive Gorgon project in Western Australia, over budget at $54 billion and with delays, companies are stressing the importance of technological progress and improved efficiency in order to bring down costs. Options being discussed include better planning and execution across the supply chain and the introduction of flexible technologies like floating LNG.
New thinking may also be needed in producer-consumer relationships. It is likely that pricing mechanisms reflecting the fundamentals of gas will grow in popularity. However, the oil price drop of mid-2014, combined with the excess supply of natural gas and LNG, has brought down both spot and oil-indexed gas prices in Asia to about $4 per million Btu. This demonstrates that theoretical gas-on-gas pricing, desired by some LNG consumers, does not necessarily deliver lower prices compared with oil-linked contracts.
Impact on competing energy forms: With the successful international spread of the unconventional gas boom, expanding LNG/pipeline trade and continued low gas prices, coal producers will face heightened competition from gas. This will lead to a shrinking market and lower coal prices, meaning high-cost coal producers will be forced to close.
Efforts to develop renewables for the purpose of climate stabilisation and energy security will become costlier in consequence of low gas prices. Policies to provide larger subsidies for wind and solar energy will be needed to secure their market position.
In the US, the decline of gas prices resulted in a wholesale decommissioning of coal-fired power facilities and their replacement by plants run on gas. This has reduced US CO2 emissions to levels not seen since 1994. Similar emission reductions can be expected in Asia, as cheaper and cleaner gas replaces coal in power generation, representing a climate benefit of the shale revolution and greater gas trade.
This is part two of a two-part article. Read Part 1.
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