Only recently, the global natural gas industry faced a daunting challenge: how to supply enough gas to satisfy growing world demand, especially in China, India and other emerging markets and, at the same time, replace declining production in North America and the North Sea. The industry did more than find a solution--it created a revolution.
Vast supplies of gas have found new markets through expansion of LNG trade. Global liquefaction capacity roughly doubled in the last 10 years and regasification and shipping capacity underwent corresponding growth.
At the same time, technology innovation brought about a flood of new supply from shale gas in North America, setting off a race to explore and commercialize shale resources in other parts of the world.
For all these reasons, natural gas is a fuel on the upswing. And yet the gas industry still faces challenges in realising this new potential.
Gas abundance: A whole new ball game
The surge of new gas supply in the last three years is unprecedented. Such a surge developing in the midst of a global economic downturn compounded the challenge for industry and consumers. The new abundance of gas raises new opportunities for gas markets, but may also require the development of new methods for doing business.
In particular, the new abundance of gas has challenged the structure of many long-term contracts around the world. Long-term contracts will remain a central strategy, especially in the gas markets of Europe and Asia, to provide security of supply and demand and to fund infrastructure construction.
However, recent events have shifted the balance in the marketplace. Suppliers have adjusted the oil-linked prices and take-or-pay volumes in many gas contracts to reflect this new balance.
Demand in much of the world is already recovering after the recession, particularly in the non-OECD world. As the surplus in gas production unwinds and new supplies of LNG and unconventional gas reach the marketplace, gas markets will continue to evolve. Spot markets in Europe are here to stay and greater flexibility in long-term contracts is already appearing in Europe and to a lesser degree in Asia.
The challenge of demand
The gas industry does not expect a revolution in demand to match the revolution that is occurring in supply. The primary uses for gas remain the same--space and water heating in residential and commercial applications, fuel and feedstock for industrial applications and power generation.
Only the transportation sector provides the opportunity for substantial new uses for gas, in NGVs or in EVs that use electricity generated from natural gas. The opportunity for sizeable contribution to gas demand from the transportation sector is at least 10 to 15 years away, however.
In OECD countries with mature gas distribution infrastructure, the most robust growth is expected to come from power generation. In the developing world, gas demand is projected to grow across all sectors, owing to economic growth and an expanding gas delivery infrastructure.
The imperative to reduce GHG emissions provides immediate opportunities for gas in the power sector.
Natural gas is the cleanest fossil fuel, with the lowest emissions of GHGs and other pollutants. For this reason, gas-fired power plants have the potential to help the power sector reduce its GHG emissions by replacing ageing coal-fired plants and by becoming the partner to renewables like wind and solar.
Natural gas power generation is cost competitive today. The revolution in unconventional gas production means that gas is likely to be a secure and reliable energy source in the future, although power companies and industrial consumers who have lived through previous gas price cycles may still need some additional persuading that they can rely on stable supply and stable prices.
However, the natural gas industry is curiously underrepresented in many policy debates around the world. It is, in some ways, a "fuel without a voice". Europe’s 20-20-20 policy and US stimulus funding and portfolio standards focus on technologies that produce zero GHG emissions, including nuclear, wind, solar and coal with CCS.
These technologies will be crucial as the world moves towards a lower emissions future. Nonetheless, gas has an important role to play in reducing emissions in the near term. Natural gas is a critical and important part of an economically and environmentally sound energy mix to meet future needs.
But to have that impact, the "voice of gas" needs to be articulated and heard. The lack of a strong voice for the gas industry in policy circles extends beyond discussions of GHG emissions reduction.
The ability to develop unconventional gas resources in North America and around the world depends on a policy environment willing to support such development. Industry and policymakers must work together to understand and resolve concerns about drilling and pipeline safety and water.
Such cooperation will allow the world to gain the GHG and economic advantages that gas offers while protecting other environmental resources.
The gas supply shuffle
The nature of the infrastructure needed to transport gas makes geography much more important in gas markets than in those for other fuels. The ongoing revolution in unconventional gas production is changing some long-held assumptions about how gas will move from producing to consuming areas.
LNG producers ramped up production to supply North America and replace declining domestic production there. But shale gas obviated the need for LNG imports into North America, changing the strategy of large LNG exporters worldwide and the direction of their exports.
The first scene for this supply shuffle is Europe. Pipelines from Russia provide a great deal of Europe’s gas, but face greater competition than anticipated from LNG, particularly the LNG originally slated for North America that is now looking for new markets.The potential for unconventional gas in Europe also plays into this competition.
Only time will tell how unconventional gas supply will fit into Europe’s supply picture. One consequence of unconventional gas development in Europe could be to increase confidence in the stability of gas and expand the overall gas market, especially in power generation.
The supply shuffle is also spreading to Asia
Growing Asian markets are soaking up much of the world’s incremental LNG supply. LNG supplies from the Middle East to both Europe and Asia provide a link in market dynamics.
Will increasing demand in the developing markets of Asia begin to pull up LNG prices in Europe"font-size: medium;">Questions for the future
The answers to the following key questions will shape the future of the gas industry.
Policy
- How should policy-makers think about gas as part of the future energy mix, particularly in the power sector"voice" commensurate with its role as the provider of one-quarter of the world’s energy
- How can industry and government work together to develop unconventional gas resources while protecting water resources and the local environment?
- Will technologies developed in North American shale plays carry over into unconventional gas resources in other parts of the world
By: Daniel Yergin, Samantha Gross, Graham Spence, Roberto Bocca and Pawel Konzal