Gas rush paints LNG as energy transition’s trump card to low-carbon future

In the midst of the rising climate and energy security concerns, which are dominating the transition story to low-carbon and green energy, the road to net-zero emissions seems like an uphill battle. Against such a backdrop, gas has solidified its position at the top of the energy pyramid, thus, the pursuit for more natural gas and liquefied natural gas (LNG) is in full swing. The U.S. and Qatar are expected to keep their spot at the top, but are there any other countries that could propel the growth in the LNG export market further?

With natural gas being perceived as the perfect candidate to bridge the supply gap in the transition from emission-intensive fossil fuels to renewables during the race to net-zero, many companies are going in hot pursuit of more gas, as hammered home by Shell’s plans to boost its Integrated Gas and Upstream businesses during the decade while pursuing LNG growth.

To this end, the oil major is planning to invest around $13 billion per year in its Integrated Gas and Upstream businesses by 2030. Taking into account the UK player’s announcement about plans to allocate $40 billion to this segment and $10-15 billion from 2023 to 2025 to support the development of low-carbon energy solutions, this brings a total of potentially over $100 billion in investments by the end of this decade. 

Eni is another oil major, which has unveiled its shift towards gas as a stepping stone to net-zero in its energy transition game plan. The Italian giant made up its mind to enlarge its business by adding Neptune’s portfolio of gas-oriented assets and operations in Western Europe, North Africa, Indonesia, and Australia, which it considers to be competitive in terms of cost and low operational emissions.

In addition, the G7 also recently highlighted the role of gas, especially LNG, in propelling the transition to clean energy forward while underlining that ramping up renewable deployment is a key tool in this quest for a sustainable and low-carbon energy future. While oil is still in the game, the crucial role of gas in the coming years was further underscored during Offshore Energy’s interview with James Hill, CEO of MCF Energy, who sees gas as a bridge fuel to a carbon-free world.

Many, along with Didier Holleaux, vice president of Engie and the president of the Eurogas association, urge policymakers to avoid complacency by pointing out that Europe may face several more potentially challenging winters regarding its gas supply.

According to WoodMackenzie, the balance of power is quickly shifting back towards the buyers, as spot prices have dropped 90 per cent since the peak of 2022 while a wave of new LNG supply is set to hit the market from 2025. However, the company is adamant that developers need to keep their eyes on the longer-term prize.

With another 100 mmtpa of capacity required to meet demand growth by the mid-2030s, the firm explains that the outlook for LNG is “bullish,” thus, its gas and LNG experts, Massimo Di-Odoardo, Giles Farrer and Dulles Wang, identified three key challenges developers face.

The first place on this list goes to protecting margins from cost inflation, as the LNG industry is far from immune to the global supply chain crunch and the flood of FIDs in the past two years is driving competition for labour and specialised materials.

This is illustrated by U.S. LNG project development costs, which were below $600/tonne pre-pandemic, and have now shot up to nearer $1,000/tonne. Wood Mackenzie outlines that Qatar is set to pay 30 per cent more to build its new mega-trains at North Field South than it did at North Field East, which was sanctioned only two years ago. This is due to rising build costs being exacerbated by spiralling interest rates.

Bearing this in mind, LNG developers will need to look for low-cost solutions to develop liquefaction – such as FLNG and smaller-scale modularization –  or they can look for revenue upside through augmenting capacity via train rerating and debottlenecking while increasing spot sales exposure is also seen as a way of boosting returns but this comes with downside risk.

The second spot on Wood Mackenzie’s list goes to meeting the growing demand for low-carbon-footprint LNG. With the security of supply concerns fading into the background due to the heatwaves this summer season has brought, buyers and governments are refocusing on lowering CO2 emissions. The company believes that the LNG industry needs to seize this opportunity to reduce upstream, liquefaction and shipping emissions in a bid to prolong LNG demand through the energy transition voyage.

Furthermore, Wood Mackenzie acknowledges that inroads are already being made in this regard with U.S. LNG projects on the lookout to source certified responsibly sourced gas (RSG) to reduce upstream emissions, while QatarEnergy and NextDecade plan to fit carbon capture and storage to liquefaction plants. Many developers are also considering electric-drive turbines sourced from renewables.

Wood Mackenzie warns that the emergence of a two-tier market could turn out to be an unintended consequence of governments’ push to slash CO2 emissions. Therefore, a premium-priced, low-carbon LNG sold by lower-cost developers, such as Qatar and the U.S. would be vying for attention with higher-carbon LNG from suppliers under less government pressure, which avoid investing in decarbonisation.

The third and final item on Wood Mackenzie’s list is doubling down on Asian markets, as Europe’s policy pivot away from gas limits upside for LNG suppliers beyond 2030. Due to this, the LNG game is forecasted to be all about Asia as the region’s developing economies lean more heavily on gas while striving to move away from coal.

While responding to the question of who is best positioned to deliver the next wave of LNG growth, Wood Mackenzie underlines that the competition will be fierce, though Qatar and the U.S., with 40 per cent of global supply between them, are expected to be the front-runners by a mile.

Both of these LNG giants have an abundance of low-cost gas, competitive pricing, and astute commercial partnering, thus, their combined market share is expected to exceed 60 per cent by 2040 while Russia and Mozambique are unlikely to make headway anytime soon. For Wood Mackenzie, West Canada is a dark horse due to the challenges of building out new capacity, as construction costs are high.

However, Canada still has a lot of potential, including huge RSG resources, multiple producers eager to monetise, and a local benchmark, AECO, that trades at a healthy discount to Henry Hub. Canada’s competitive advantage also comes from its proximity to North Asian markets, avoiding the constraints of the Panama Canal and cutting shipping costs by more than $2/mmbtu compared with U.S. Gulf Coast projects.

​During the LNG2023 Conference & Exhibition in Vancouver, which is held every three years alternating between exporting and importing countries, Saad Sherida Al-Kaabi, Qatar’s Minister of State for Energy Affairs, President and CEO of QatarEnergy, emphasised that “gas will always be needed as the cleanest fossil fuel for the base-load required for electricity production and for powering industrial and manufacturing factories,” while “40 per cent of all the new LNG that will come to the market by 2029, when all our projects are up and running, is going to be from QatarEnergy.” 

While discussing QatarEnergy’s efforts to deal with the energy trilemma of energy security, affordability, and sustainability by providing the world with the cleaner energy it needs for a responsible energy transition, Al-Kaabi outlined: “We have to have a balance between what we need for humanity and how we can manage it properly. And if you look at what we are doing in Qatar, we are increasing production to 126 million tons per annum (MTPA) and we have another 16-18 MTPA out of the U.S. coming online next year. We are doing it in the most responsible way as far as emissions are concerned with CO2 sequestration.”

Focusing on Qatar’s role in this, QatarEnergy’s CEO says: “Qatar has the largest sequestration site in the MENA region today. We are injecting more than 2 MTPA of sequestered CO2 today and we are going to go to 11 MTPA in a few years. We are using solar power to power some of our new LNG production. Qatar’s LNG carbon intensity is probably the lowest in the world.”

When it comes to the energy transition tale, Qatar’s Minister of State for Energy Affairs called for a responsible dialogue and realistic goals, as demonizing oil and gas has led to sizeable declines in investments in the sector, adding: “On average, there was a 25 per cent reduction of investment over the past ten years from a normal investment cycle that we would expect.

“Today, the only reason we are not seeing this affecting the market tremendously is a globally warm winter in 2022-2023 and the filled storage in Europe. But that storage is not going to be replenished easily and investments are still not coming in as we think it should.

“People talk about transition and the need to stop oil and gas and forget that we can’t be selfish by calling to cancel oil and gas when you have a billion people that are deprived of the basic electricity that we all enjoy every day. And by 2050 you’re going to have north of 2 billion people coming on earth that need energy, and more people in the developing nations will need better standards of living, which means energy.”

While going over Qatar’s bold gas investments, Al-Kaabi stated: “When we took our investments decision a few years back there were a lot of people doubting our move saying we do not need that kind of an investment and that kind of volume. And I think people realise now the need for oil and gas in general.” 

Qatar will host the next LNG Conference & Exhibition in 2026, coinciding with the start-up of the North Field LNG expansion project and the commissioning of one of the largest carbon capture and storage schemes in the world. The four-day event is organised by the International Gas Union, the Gas Technology Institute, and the International Institute of Refrigeration.

While speaking at the LNG2023 conference, Dulles Wang, Director, Americas Gas & LNG at Wood Mackenzie, pointed out that Canada could be positioned to play a much bigger role in global LNG exports with the alignment of several market dynamics.

Wang explained: “There will certainly be challenges in building out new LNG capacity in Canada, but the country has much in its favour and could play a larger role in meeting global demand in the near future, especially in Asia. Canada could be well-positioned due to its strategic location for shipping advantages to Asia, support from Canadian First Nations, and forward-thinking emissions regulations.

“Sustained LNG demand in Asia will drive new opportunities in the market and Canada is well-positioned to capitalise. Cost of LNG shipping is spiralling northwards with the emission intensity of the LNG fleet coming under intensified scrutiny. The shipping advantage for Canada to Asia increases substantially if ships from the U.S. Gulf Coast need to go the long way round to reach the Asian market, due to rising congestion at the Panama Canal.” 

During an interview with Tim Egan, CEO of the Canadian Gas Association, Mike Rose, Tourmaline Oil’s CEO, underscores that some of the cost estimates to get off fossil fuels being tossed around for the world’s energy transition are in the range of $150 trillion while the total capital expenditure for Shale Revolution in the U.S. between 2010 and 2020 was $1.3 trillion.

“We really did figure out how to create an enormous amount of abundant low-cost energy; we just ironically killed our own supply-demand equation. That’s $1.3 trillion between 2010 and 2020, but to completely get off fossil fuels the think tanks are saying $150 trillion. And we don’t have a plan on how to actually accomplish this, and neither does the United States and neither do any of the Western governments,” added Rose.

Moreover, Jason Klein, the CEO of LNG Canada, the Shell-led consortium developing a 14mn tonnes/year project on BC’s northern coast, highlighted during the LNG2023 Conference that Canada would join the global LNG market in 2025 when the world’s cleanest LNG would hit Asian markets. Klein says that cargoes from the project will be 50 per cent less emissions intense than the global average, and 35 per cent less than the best plants operating now.

“We are watching very closely our good friends at Haisla who are leading the Cedar project and I’m very excited about the prospect of LNG carriers leaving Cedar, around the corner from LNG Canada, and travelling the Douglas Channel. The world needs more reliable and responsible energy and we have the opportunity, here on the doorsteps of Asia, to deliver LNG that can displace coal, that can improve global emissions, and that can help hundreds of millions of people out of energy poverty,” elaborated Klein.

https://twitter.com/OilGasCanada/status/1679127545332080640

In line with views on gas as the key energy transition fuel, Cynthia Hansen, Executive Vice President and President, Gas Transmission and Midstream at Enbridge, stated: “Natural gas is a clean, reliable and affordable energy source essential to the energy transition. It will provide global energy security and help countries meet their carbon emission reduction commitments by displacing coal as a fuel for energy generation and backstop the intermittency of renewables.”

While the U.S. is considered to be the top natural gas exporter, the U.S. Energy Information Administration (EIA) forecasts record-high natural gas consumption in the United States for electricity generation in July and August, as outlined within its July Short-Term Energy Outlook (STEO). This is about 4 per cent more than in the same months of 2022.

Therefore, natural gas will provide about 46 per cent of U.S. electricity for those two months and provide 41 per cent of U.S. electricity for the year, while a 6 per cent increase in electricity generation from renewables and a 2 per cent increase in generation from nuclear energy are also expected compared to 2022.

Joe DeCarolis, EIA Administrator, remarked: “This is an interesting time to monitor the United States’ electricity mix. As coal provides less and less power to the grid, we expect the contributions of natural gas and renewables in particular to increase. We still expect significant growth in renewable diesel production, but changes to the Renewable Fuel Standard slightly lower the growth rate in the short term.”

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Natural gas prices remain relatively low compared with last year, and about 6,000 megawatts of new combined-cycle natural gas turbine capacity has come online in 2023, making electricity generation from natural gas more economical than it has been in the past. U.S. operators have also added nearly 15,000 megawatts of capacity from wind and solar so far this year.

In line with other countries in the world that are benefiting from LNG demand, the Australian Petroleum Production & Exploration Association (APPEA) points to a new report, which shows that Australia’s oil and gas industry is “continuing to help drive the national economy, supporting thousands of jobs and delivering tens of billions of dollars of economic benefits to Australians.” Based on the report, oil exports in 2022-23 totalled $13 billion and were expected to climb to $14 billion this year before recording $12 billion the following year.

Within the Federal Government’s Resources & Energy Quarterly, LNG export earnings were revised up to a record $92 billion over the past financial year – up from $70 billion the previous year – as part of a $460 billion return for the resources sector. The report indicates that gas exports are forecast to total $68 billion this financial year as overall resources exports come off record highs to a total of $390 billion. LNG exports are expected to total $60 billion the following year.

Samantha McCulloch, APPEA Chief Executive, outlined: “The Australian oil and gas industry is committed to domestic supply but the importance of exports is once again in the spotlight. The industry’s $400 billion investment in LNG projects over the past 15 years underpins the nation’s domestic energy security and delivers substantial economic benefits to Australia.

“This export income supports thousands of jobs; produces direct government revenues which rose to $16 billion in the past financial year; and expenditure such as the $45 billion the industry spent on goods and services with Australian businesses last financial year.

“Even with a slowing of export returns in the cycle across the resources sector, gas is still a reliable and significant economic driver in the nation’s fortunes at a time when the economy is facing headwinds and uncertainty.”

Multiple energy organisations, companies, and politicians believe that natural gas will take the reins in the energy transition story, as all roads seem to lead to LNG. This is perceived to be a key contributing factor to low-carbon sources of supply while the world strives to put all pieces of the net-zero puzzle in place.

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