The Fuse

U.S. Poised to Play a Dominant Role in Global Gas Markets for the Foreseeable Future

by Nick Cunningham | July 18, 2017

The global natural gas market “is undergoing a major transformation driven by new supplies coming from the United States to meet growing demand in developing economies.”

The U.S. shale gas revolution, despite a number of bumps over the years, will continue to persist. According to the International Energy Agency (IEA), the surge in shale gas production is poised to shake up the global market for the foreseeable future.

In a new report, Gas 2017, the Paris-based agency says that the global natural gas market “is undergoing a major transformation driven by new supplies coming from the United States to meet growing demand in developing economies.” The growing volumes of liquefied natural gas (LNG) for export are opening new opportunities for consumers worldwide, with China in particular set to drive demand growth over the next five years, the IEA says.

Global gas demand driven by developing countries

With natural gas increasingly available from more sources, prices have remained relatively low, a situation that should remain for some time. In fact, the LNG market could be oversupplied well into the 2020s, a boon for consumers, the IEA says.

Global gas consumption will expand at an annual rate of 1.6 percent between now and 2022, with almost all of the growth occurring in developing countries. According to the IEA, 90 percent of the incremental demand through 2022 will take place in non-OECD countries, with China accounting for nearly 40 percent of the total increase over that timeframe.

IEAgasdemand

Intriguingly, however, demand growth won’t come from power generation as much as industrial growth. Cheap gas is fueling a boom in petrochemicals and fertilizers, particularly in North America and the Middle East.

The IEA also notes that policy reform in a handful of countries is aimed at attracting investment in gas, even if the motivations vary, accelerating the transition toward natural gas. Liberalization reforms in Mexico and Egypt, for example, are aimed at boosting gas production in order to meet domestic energy needs. In China, on the other hand, the government is intent on displacing coal with cleaner-burning natural gas in order to improve air quality problems in many cities.

The upshot is that more and more countries are seeking to increase their consumption of natural gas, putting gas on track to play a central role in the global energy mix for years to come.

U.S. to be top LNG supplier

The U.S. shale gas revolution over the past decade led to a tidal wave of gas supply, which eliminated any need for sizable gas imports, helped fuel a petrochemical and industrial renaissance, displaced a large portion of coal in the electric power sector, and even opened new opportunities to export in the form of LNG.

The U.S. is set to become one of the largest LNG exporters in the world by 2022, the IEA estimates, rivaling Qatar and Australia for the top spot.

Against this backdrop, the U.S. is set to become one of the largest LNG exporters in the world by 2022, the IEA estimates, rivaling Qatar and Australia for the top spot. The U.S. will account for 40 percent of the total increase in gas supply over that timeframe, more than any other country. That is a notable conclusion: It suggests the faltering U.S. production levels in 2016 were an aberration, a side effect of both low natural gas prices and the collapse of oil prices, which cut the output of associated gas.

Recent data from the EIA seems to back up this theory. After topping out at 18.58 billion cubic feet per day (Bcf/d) in February 2016, the Marcellus Shale contracted by 6 percent over the next eight months. This corresponded with the nadir of both the oil and natural gas market, as hundreds of rigs were sidelined and oil and gas prices slumped. However, that now appears to be a brief hiatus in a decade-long boom in shale gas production. Marcellus gas output resumed its upward trajectory at the end of last year, with production expected to hit 19.75 Bcf/d in August 2017, a jump of 13 percent since October 2016.

marcellusproduction

A large buildout in pipeline capacity is opening new markets for the largest shale gas play in the country. Marcellus gas can now reach a growing number of places, including parts of the U.S. Northeast, Mid-Atlantic, and Gulf Coast, while proposed pipelines would connect even more of the country to domestic gas supplies. At the same time, the U.S. began exporting gas in 2016 through Cheniere Energy’s Sabine Pass LNG export terminal, with more export facilities in the offing. In particular, Dominion Energy’s Cove Point facility in Maryland, strategically located close to the Marcellus Shale, will allow Marcellus gas to be exported abroad when it comes online later this year. By 2022, the IEA estimates the U.S. will produce 890 billion cubic meters (bcm), or 22 percent of total global gas production. Half of the output increase over that timeframe will be exported, the IEA says, putting the U.S. “well on course to challenging Australia and Qatar for global leadership among LNG exporters.”

Rival LNG exporter Australia offers a cautionary tale for the U.S. as it races to export gas. Australia has succeeded in attracting tens of billions of dollars of investment for a series of massive LNG export terminals, including Chevron’s Gorgon and Wheatstone LNG projects, BG Group’s Queensland Curtis LNG (now owned by Royal Dutch Shell), and Inpex’s Ichthys LNG terminal, among others. The purpose of these projects is to meet strong and growing demand for LNG in East Asia.

However, as exports surged, Australia’s domestic market has been hit with a series of blackouts due to domestic supplies falling short. Natural gas prices in Australia have spiked, jumping from $1 per MMBtu at a low point in 2014 to well above $7/MMBtu recently. State governments in Australia have ordered manufacturing facilities to scale back their operations to avoid blackouts, the Wall Street Journal reported earlier this month. Meanwhile, the federal government put in place export controls to curb gas flows abroad in order to ensure domestic needs are met.

Such a situation is unlikely in the U.S. for several reasons. First, the U.S. has ample supplies of gas on hand, making shortages unlikely, at least for the foreseeable future. The U.S. also has a more extensive and comprehensive pipeline network, allowing gas to easily flow, for the most part, to where it is needed. Moreover, as the WSJ notes, U.S. exporters have also managed to avoid locking themselves in to rigid long-term supply contracts. Finally, with domestic supply expected to grow strongly, producers should be able to keep up with exports.

Peak gas demand?

Natural gas is expected to take on a growing role in global energy supplies, and the largest oil companies have bet their future on that trend.

  • Chevron spent heavily in recent years on LNG export terminals in Australia
  • Royal Dutch Shell spent more than $50 billion on its acquisition of BG Group, a major LNG exporter
  • ExxonMobil is already large natural gas producer—its purchase of XTO Energy about a decade ago made it one of the largest gas producers in the United States. It also has a large LNG export presence in Papua New Guinea.
  • Total SA has major LNG investments in Russia’s Yamal peninsula and Australia, while recently agreeing to spend $4.8 billion in Iran’s South Pars gas field.
  • Eni is moving quickly to develop gas resources in the Eastern Mediterranean

These examples are just some high-profile plans, highlighting that in one way or another, the oil majors are increasingly pivoting toward natural gas as a long-term strategic play.

While the majors view natural gas as a way of hedging against the risk of an uncertain future in the oil market, talk of the prospects of “peak gas demand” has also gained traction as of late.

However, while the oil majors view natural gas as a way of hedging against the risk of an uncertain future in the oil market, talk of the prospects of “peak gas demand” has also gained traction as of late. Bloomberg New Energy Finance predicts that natural gas will lose market share in the electric power sector over time, dropping to just 16 percent in 2040 from 23 percent last year. “Wind and solar are just getting too cheap, too fast,” said Seb Henbest, author of the BNEF report.

That echoes the views of the IEA, which said in its report that rapidly falling costs for renewable energy are already cutting into the market share for natural gas. Gas consumption in the power sector will grow at 0.9 percent per year through 2022, half the rate of growth in the previous six-year period.

For now, however, the oil majors are not all that concerned. Peak gas demand is perceived as much further off than peak oil demand: Royal Dutch Shell’s CEO Ben van Beurden, for instance, doesn’t see gas consumption hitting a peak until the 2040s, “if not in the 50s.”

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