During the last two decades, natural gas steadily increases its share in the global energy mix. Characteristically, the average growth of natural gas demand was 3.5% per year, compared to 2% for crude oil. In countries such as the USA, Canada, Germany, Russia, Saudi Arabia and Iran natural gas consumption overtakes that of oil, with at least 30% in the energy mix. On the other hand, in Asia-Pacific region, 10% of the energy consumption comes from gas and more than 50% comes from coal. However, the numerous projects in the industry show how interested are governments and oil majors to the potential growth of natural gas consumption, particularly in countries such as India and China. For example, the CAPEX for Petronas’ PFLNG Satu was almost 10 billion USD while for Chevron’s Gorgon gas project cost was more than 50 billion USD and for the FLNG Prelude of Shell was more than 10 billion USD.
Natural gas reserves grew from 70 trillion cm in 1980 to almost 190 trillion cm in 2017. The prospects for the future depend on the development of non-conventional gas reserves, particularly shale gas reserves. Usually, every country gives mining rights to landowners but in the USA every landowner has automatically the mining right. This process accelerated the US production and today 1/3 of the gas produced in the country comes from shale. This was a structural change since it modified the industry dynamics and altered the direction of trade flows especially in the Atlantic Ocean. Countries which also have huge shale gas reserves are China, Argentina and Algeria. However, it remains to be seen if it will make economic sense to monetize those reserves in the future.
The problem that has arisen in the natural gas market is that demand growth does not meet the supply growth. The result of this gas abundance was the collapse of prices (US prices) from 13 USD/MMBTU in 2008 to around 3 USD/MMBTU in November 2017. This glut of gas imposes a threat at the capital-intensive LNG projects, as prices remain at the current low levels. For example, Petronas in July 2017, announced that it would not proceed with a 36 billion USD project (Pacific NorthWest LNG) in Canada, due to weak prices. Therefore, countries with recent discoveries, such as Egypt, are finding hard to secure deals to develop gas extraction. However, cheap gas also means that it is now more competitive against coal for power generation, against naphtha in the petrochemical industry, against diesel for powering trucks and against fuel oil for bunkers on ships.
Regarding logistical issues, natural gas can be transported either through a pipeline or by a ship in LNG form. The 1/3 of the total world production enters the international markets while the 2/3 is consumed domestically. World trade accounts for more than 1,000 billion cm per year, 2/3 of which is exported through pipelines and the rest 1/3 by seaborne transportation. Pipelines are more suitable when the distances are less than 5,000 km. However, laying a pipeline means that long-term contracts should be agreed, and crucial geopolitical decisions should be made.
For example, Nord Stream pipeline was constructed in order to avoid Belarus and Poland, since Yamal pipeline passes from those countries. At the same time, several western companies are willing to participate in the Nord Stream 2 project which will further increase the ability of Russia to export natural gas to Europe through the Baltic Sea. Moreover, EU argues that it should increase its energy security by diversifying its gas supplies with the construction of regasification terminals and pipelines. An example of such a pipeline is TAP (Trans Adriatic Pipeline) which will bring natural gas to Europe from Azerbaijan.
On the other hand, LNG transportation brings remote gas reserves to distant markets. Qatar is currently the largest LNG exporter and it has invested huge amounts of money in its liquefaction plants to monetize its reserves. In the USA, some of the abundant gas finds its way to the international markets through LNG exports which are expected to considerably increase in the coming years. Cheniere’s Sabine Pas liquefaction plant on the US Gulf coast serves this purpose and the cargoes exported from this terminal reach mainly the Latin American and the Asian markets. In addition, Cheniere currently builds another LNG export terminal at the port of Corpus Christi.
The LNG projects are extremely capital intensive and are usually involve long-term contracts. However, over the last decade, we have witnessed a steady increase in short-term LNG trading. Trading LNG could also grow considering that a large derivatives market could develop as the market becomes more liquid. Already, the large oil traders, such as Vitol, Trafigura and Gunvor are increasing their participation in LNG trading and also invest in LNG infrastructure. For example, Trafigura plans to reopen, in 2018, an LNG import terminal in Teesside as natural gas increases its share in the UK energy mix and the domestic production from the North Sea declines.
Crucially, as LNG trading grows, the prospect of natural gas to play a leading role in the energy mix increases. An essential factor towards this goal is the continuation of the numerous investments that the LNG market needs in order to achieve a global reach and to enhance the diversification of gas suppliers. Therefore, it remains to be seen how the economic and political environment will affect the supply and demand forces in this dynamic and expanding industry.