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The Rise of LNG

Natural gas, often hailed as the bridge to an energy future that will include greater demand for alternative energy supplies, may be poised to overtake oil as the globe’s primary fuel source in the next decade.

While the 20th century was the Age of Oil, the 21st century will be a combination of both old and new energy sources, Shell executive Maarten Wetselaar said at the recent CERA energy conference in Houston. Oil must now share the stage with gas and a variety of fuels, said Wetselaar, who is the company’s integrated gas and new energies director.

The use of coal is projected to decrease in several developing countries trying to reduce carbon emissions, paving the way for increased use of gas and renewable energy for electricity. The European Union is threatening to fine its member nations that do not implement a carbon emissions strategy, and China is in the third year of a 5-year plan designed to limit fossil fuel consumption. Many other Asian countries are following suit.

BP’s most recent Statistical Review of World Energy stated that in 2018 gas accounted for the largest gain in world energy consumption, followed by renewables and then oil. These developments, along with new supplies of gas produced by the US shale sector, is raising the status of gas from a regional fuel to a global commodity. Gas trade grew 6% last year, according to BP, with LNG trade surpassing traditional pipeline transactions.  

Historically, most gas has been transported by pipeline. But vast new sources of gas, from offshore Australia and US shale, have led to the building of LNG ports for export and the creation of new trade routes, principally to Asia. Four new liquefaction plants are being built along the Gulf Coast in the US, which only exported its first LNG cargo in 2016. In addition, Qatar plans to increase LNG output by more than 40% over the next 5 years, building four new LNG trains, according to consultancy DNV-GL. Global demand for LNG rose by 27 million tonnes last year to 319 million tonnes, according to Shell’s LNG Outlook. Demand is forecast to reach 384 million tonnes by 2020.

But LNG buyers and sellers are still struggling with pricing. Gas has generally been sold through long-term contracts because of the absence of a spot trade. LNG has often been sold on oil-indices contracts, but the wide swings in oil prices don’t reflect LNG economics. Buyers would like more transparency to reflect regional supply/demand dynamics. A proposed gas cartel formed by some of the world’s largest gas producers—kind of a gas OPEC—has never gotten off the ground. An oil pricing service has introduced the Japan Korean Marker as a possibility, to be used for pricing Asian spot cargoes. And Cheniere and CME Group plan to develop a Henry Hub-indexed futures contract with physical delivery to the US Gulf Coast. The use of any nonoil-indexed mechanism will only increase the stature of LNG as a viable energy commodity.

To contact JPT’s editor, email jdonnelly@spe.org.

The Rise of LNG

John Donnelly, JPT Editor

01 May 2019

Volume: 71 | Issue: 5

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