[This article was orginally posted on the Wall Street Journal Experts blog https://blogs.wsj.com/experts/2017/05/25/how-liquefied-natural-gas-will-…
While the history of the energy sector turns on disruptive changes that have the power to transform the world, perhaps never before have so many forces converged on the industry simultaneously. The rise of shale oil has shifted the outlook from scarcity to abundance and poses an existential threat to OPEC. Renewable energy increasingly competes on cost with hydrocarbons. Autonomous, shared, electric vehicles promise to transform mobility as we know it.
One of the less widely appreciated—but by no means less revolutionary—transformations is under way in the global natural gas market.
Natural gas is a unique fuel in its diversity of applications. It is widely used in the power and manufacturing sectors, for heating and cooking in homes, and to a lesser but growing degree, as a transportation fuel. Natural gas emits far fewer local pollutants than oil or coal, and fewer greenhouse gas emissions, assuming methane leaks associated with extraction are minimized.
Natural gas was once considered so worthless when discovered far from markets that the adage in the oil industry was: “Find gas once and you’re forgiven; find it twice and you’re fired.” Unlike oil or coal, which can be moved easily between any two ports, natural gas has been far less flexible, requiring pipelines between two fixed points, creating unique energy security risks for gas-consuming countries dependent on gas suppliers. But once liquefied through super-cooling, natural gas can be moved by special tanker and becomes more flexible, leading to today’s growing trade by ship.
U.S. natural gas use rose sharply in the 1950s and 1960s, and then again after the price deregulation of the 1980s, ultimately reaching levels that eclipsed domestic production. In 2005, the U.S. Energy Information Administration projected that by 2017 the U.S. would import more than a quarter of its gas—a volume roughly twice that exported by Qatar, the largest LNG exporter in the world. Most analysts projected global gas trade would be dominated by Iran, Qatar and Russia. These countries not only held the largest reserves but were also intent on using their growing market power for geopolitical leverage, and considered forming a “gas OPEC.”
The U.S. shale revolution turned that outlook on its head, as domestic gas production shot up 50% from 2005 to 2015. The U.S. is now projected to be one of the top three natural-gas exporters in the world by 2020. And although the development of shale resources faces greater obstacles elsewhere in the world, the recent experience in Argentina, which dramatically improved its shale-oil and gas production, demonstrates potential.
The surge in gas supplies is driving more gas to sea, and by 2040, the majority of the world’s long-distance gas trade will be via LNG rather than pipeline, according to the International Energy Agency. In addition, growing LNG supply from the U.S. means more competition, liquidity and supply diversity that will make global gas markets more flexible, efficient and secure. Gas will trade more like oil, meaning market forces will determine price and where supply flows.
An integrated market improves energy security by reducing the leverage of dominant pipeline gas suppliers, helping Europe implement its Energy Union package goals to reduce vulnerability to Russian gas dependence through market integration, interconnectivity and diversification. Just before Lithuania started operating its LNG import terminal, aptly named “Independence,” it negotiated a more than 20% discount off its gas bill from Gazprom. Poland’s new LNG terminal will allow it to achieve its strategic objective to replace Russian gas imports with alternatives. And growing competition from LNG helped encourage Gazprom to settle the EU Commission’s long-running antitrust caseagainst the company.
Moreover, increased LNG supply enables gas to respond to changing market conditions more easily, such as Japan’s demand surge following the Fukushima disaster, enhancing energy security through more interconnected markets. It is also encouraging the emergence of an integrated global gas market. U.S. LNG, which can be sold anywhere in the world at market-based spot prices, will accelerate this trend. Just over one year after the first exports of LNG from the lower-48 states, most of the shipments have gone to Latin America, not Asia as had been expected, as changing market conditions rather than geopolitics determine where the gas is sold. The Trump administration recently reinforced this dynamic by reassuring China it could sign gas deals with the U.S.
There are questions about whether the world will want all this natural gas, especially LNG from the U.S. Market analysts project a glut in the global gas market that will weigh on prices for several years to come. Five years after the International Energy Agency heralded the arrival of a “Golden Age of Gas,” global gas demand growth is slowing. Gas is under pressure from cheap coal, falling renewable prices, increased efficiency, and policy that disfavors gas for geopolitical reasons or fails to adequately price carbon. Opposition to shale-gas production techniques such as hydraulic fracturing and horizontal drilling remains strong at home and abroad, reinforcing the need for sensible regulations to not only ensure that gas is developed safely and responsibly, but also to build public trust and confidence.
However, even with these uncertainties, LNG should act as another transformative factor for global energy markets over the coming decades. The U.S. will emerge as a global gas superpower, helping reshape global energy trade patterns, enhancing energy security for consumer countries, weakening the power of pipeline politics and a small group of dominant gas suppliers, expanding access to energy, and helping countries struggling with severe air pollution.
Global gas markets are experiencing a period of unprecedented tightness that has worsened since the Russian invasion of Ukraine in February 2022, as illustrated by the record spot prices of well above $50/million British thermal unit (mmBtu) in Asia and Europe as of early September 2022.
Since Russia’s invasion of Ukraine, the dynamics of natural gas markets and, especially, Europe’s heavy...