Gas Demand Destruction to Give Way to More Renewable Energy Development
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07 December 2022 – by Tim Daiss
Gas Demand Destruction 2022
Gas demand destruction is happening. Despite the current push by the global natural gas and LNG sector, as well as major producing nations like Qatar, Australia, the US, Russia and others, the cost of the fuel used mostly to power the energy and industrial sectors could be devising its own downfall due to demand destruction.
High Gas Prices
Liquefied natural gas prices on the spot market breached the cost prohibitive USD 100/MMBtu price point in early March 2022. The price is a record high by a ratio of more than two to one. While fuel prices pared gains and mostly hovered in the USD 30/MMBtu range since then, they are still out of the reach of most developing nations that had pegged their hopes on the fuel.
European Gas Prices
In Europe, year-on-year non-household gas prices in the first half of 2022 increased in all 25 EU member states that reported them. According to Eurostat statistics, the increase ranged from 67% to 271%.
However, before the war in Ukraine began in late February, global LNG supply had already pivoted in around three years from a supply overhang that was projected to last until the end of the decade due to a shortage in fuel.
Much of that shortage was due to a lack of new investment in greenfield projects. Governments, funding agencies and advisories in most developed countries discouraged more LNG infrastructure development.
Gas Development is Asia
However, less developed Asian countries like the Philippines, Vietnam, Bangladesh, Sri Lanka, Pakistan and even Cambodia looked into LNG funding and development plans. Nations met with international oil companies (IOCs) and major traders and utilities, like Tokyo Gas and JERA, to do so.
The funding rationale was that gas would replace coal as the major fuel needed for power generation in Asia. The argument favoured gas, since it emits around 50% less carbon emissions than coal. However, that rationalisation falls short, given that LNG is still a fossil fuel. It not only emits carbon emissions across its entire value chain, including in transportation, but is also a major methane emitter. This is a problem that the COP26 summit in Glasgow addressed in 2021.
Meanwhile,methane is a short-lived climate pollutant that accounts for about half the net rise in global average temperatures since the pre-industrial era.
Defunding Gas Has Lost Its Momentum
In May 2021, the International Energy Agency (IEA) advocated no further investment in new fossil fuel projects. This includes gas and LNG development.
“The contraction of oil and natural gas production will have far-reaching implications for all the countries and companies that produce these fuels,” it said. “No new oil and natural gas fields are needed in the net zero pathway, and supplies become increasingly concentrated in a small number of low-cost producers,” it added.
However, the IEA’s recommendations have seemingly fallen to the wayside. LNG producers appear to have a green light to develop their respective LNG production capacity even more and as quickly as possible.
Qatar, which recently dropped behind Australia as the world’s largest LNG exporter, will further develop its North Field East expansion. The project will increase its liquefaction capacity from 77 million to some 126 million tonnes per annum (mtpa) by 2027.
A wide range of global energy players are already investing in the massive project. Investors include UK-based crude oil and gas major Shell, the world’s largest publicly owned LNG trader, French-based energy giant TotalEnergies and Italy’s gas giant Eni.
US-based major ExxonMobil and smaller rival ConocoPhillips are also investing billions in the project. Meanwhile, these energy companies are also claiming their respective pivots to clean energy. Some even have their own net-zero goals.
The US LNG sector has been emboldened by the gas crisis in Europe and Asian demand for the fuel. The country could bypass even Qatar if all of the projects already approved on the federal level are built.
Counting both approved and under construction projects, as well as approved but not yet under construction, brings the total number of US projects as high as 15. This adds to the seven already operational projects for a total of 22, according to the US Federal Energy Regulatory Commission (FERC).
As such, US LNG production could spike to some 100 mtpa by 2025 and could even double by 2030.
LNG Producers Play the Long Game
Yet, pricing dynamics before these collective new projects complete their construction will see the fuel fall out of favour. The decline will begin with developing and even developed countries due to more demand destruction. This will, therefore, pose challenges for LNG producers’ plans.
LNG producers, however, are playing the long game while realising that the fuel has reached cost-prohibitive levels for several countries. The corresponding demand destruction will also take place, particularly in South and Southeast Asia. In August, this dynamic prompted the Institute for Energy Economics and Financial Analysis (IEEFA) to suggest that the economic case for LNG was crumbling.
Producers are, nonetheless, hedging that with an abundance of LNG again by the end of the decade, prices will return to earlier levels. These prices averaged between USD 4/MMBtu and USD 9MMBtu in 2019, but still above break-even production costs. As such, profitable, especially uncontracted, cargoes sold for a premium on the spot market.
At least in their playbook, these price points ensure the fuel’s survival as one of the main choices in the world’s power generation mix for several more decades.
This development, however, would jeopardise the world’s collective net zero by 2050 goals since gas, when used for power generation, does, as the sector claims, produce around 50% less carbon emissions than coal.
About 53 kg of CO2 are produced per MMBtu equivalent of natural gas, compared to more than 90 kg of CO2 per MMBtu of coal and more than 72 kg per MMBtu of distillate fuel oil. However, comparing gas to coal, the world’s dirtiest-burning fossil fuel, is a misleading comparison.
Renewable Developers Will Have The Advantage
Going forward, the LNG sector’s hedge could fall apart. The price of developing renewable energy will have not only reached cost parity with gas and LNG development by the time their massive LNG projects become operational. But, it will be cheaper for usage, compared to oil and gas prices, in most sectors and regions in the world.
If that scenario develops, countries that are now investing in LNG infrastructure and gas-to-power plants could inherit stranded assets. Meanwhile, those investing in solar, wind, green hydrogen and other renewables will reap both the financial and environmental benefits.
by Tim Daiss
Tim has been working in energy markets in the Asia-Pacific region for more than ten years. He was trained as an LNG and oil markets analyst and writer then switched to working in sustainable energy, including solar and wind power project financing and due diligence. He’s performed regulatory, geopolitical and market due diligence for energy projects in Vietnam, Thailand and Indonesia. He’s also worked as a consultant/advisor for US, UK and Singapore-based energy consultancies including Wood Mackenzie, Enerdata, S&P Global, KBR, Critical Resource, and others. He is the Chief Marketing Officer (CMO) for US-based lithium-sulfur EV battery start-up Bemp Research Corp.Read more