Natural Gas to Strengthen Position as Hydrocarbon of Choice

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Oxford Analytica expects natural gas to strengthen its position as the hydrocarbon of choice, even though the international economic slowdown has shaken the outlook for gas markets.

Until 2008, it appeared that demand in natural gas would grow strongly in the future, supporting the huge investment the industry was experiencing, OxAn says in a new report.

Several factors supported this view:

  • Gas has relatively low emissions compared with coal. Low emissions means that gas is a less risky investment in terms of future emissions legislation.
  • Gas as a replacement for oil remains a cheaper option.
  • With the international rejuvenation of the liquefied natural gas (LNG) industry, gas became more widely available and the diversification of gas suppliers enhanced the fuel’s attractiveness as a means of increasing security of energy supply.
  • The power sector has led the increase in demand for gas and this reflects the evolution of combined cycle gas turbine technology (CCGT).

However, the outlook for gas has changed, at least in the short term:

  • Europe’s economic slowdown is reducing both industrial demand for gas and demand for power more broadly. At the same time, new gas infrastructure has and is being commissioned.
  • In Asia, industrial demand is also falling.
  • In the United States, the gas market is experiencing strong supply growth on the one hand, and declining demand on the other.

The weakness of LNG, which can be taken as a proxy for a global gas market, was evident during the Russia-Ukraine crisis, which happened at the same time as major disruptions in LNG production.

Yet the Russia-Ukraine crisis had little impact on spot LNG prices. This was partly because, with the exception of Greece and Turkey, eastern and southeastern Europe has no LNG regasification capacity. Western Europe was much less affected and the ability to pipe gas from LNG plants in western Europe to eastern Europe is poor. With no spot buying in either Asia or North America, the Russia-Ukraine crisis created little extra demand for LNG. The crisis drove European hub prices sharply higher, but probably simply has served to mask temporarily European gas markets’ move towards a period dominated by surplus supply.

While it may seem strange to expand LNG import facilities at a time of surplus gas supply, there are reasons to suggest the trend will continue:

  • High LNG prices in an increasingly competitive market place caused some countries to slow investment in LNG receiving terminals. Falling prices may reverse this trend.
  • The Ukraine-Russia crisis will cause European countries to firm up plans already being considered for LNG regasification facilities for security of supply reasons.
  • Gas is still cleaner than coal and for countries like China and India represents a diversification of supply.

While falling industrial demand for gas will cause prices to fall, those lower prices will also consolidate natural gas’s position as the hydrocarbon fuel of choice. Lower prices will also spur the development of LNG regasification capacity on security of supply grounds.