Assessing global gas markets: recent trends and future prospects

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SNAM regasification plant in Panigaglia, Italy

Natural gas - a low-carbon, efficient and flexible fuel - is an opportunity for the world as we look for efficient paths to decarbonization. But this is an opportunity that has yet to be fully reaped, because of a combination of concerns on costs, supply security and long-term sustainability.

Indeed, since the IEA famously asked “are we entering a golden age of gas?” (in its World Energy Outlook, special report 2011), the evidence has pointed to a negative answer, with the exception of the US where the scale and resilience of the shale gas revolution exceeded expectations.

Looking forwards, many are now expecting gas consumption to grow significantly. A wide range of industry organizations are predicting that global demand will grow faster than for any other fossil fuel from now through 2030, and that gas will overtake coal as the second “core pillar” of the global energy mix by 2035.

Is this going to happen? To assess the future prospects for gas, and in particular the likelihood that bullish demand forecasts will be achieved, Snam has analyzed - in its inaugural Global Gas Report -  the market’s main recent trends and how they speak to the challenges facing gas.

The analysis highlights that gas may now be approaching an inflection point, and on several counts seems better placed to increase its share in the global energy mix than it was 5 to 10 years ago, thanks to growing LNG (liquefied natural gas) trade, which translates into improved availability and security.

Meanwhile, exciting research is being done on renewable gas technologies, which suggests that gas will be part of the world’s long-term energy future – not just a “transition” fuel but in the context of a permanent shift.

The key barrier to increasing gas adoption - especially in developing markets, which is also where we will see primary energy demand growth - is cost. Gas is still too expensive, especially compared to coal. This means that switching from more polluting fuels to gas, and reaping its global and local benefits in terms of emissions and air quality, imposes an economic burden that the industry needs to work to reduce. This will require a concerted effort and dialogue with stakeholders – from policymakers to suppliers and local communities.

 

Key findings

 

The major developments of 2016 highlight that, after a period of consumption decline in Europe and slower-than-expected adoption in Asia, gas demand is rebounding in key markets. There are also positive signs in terms of greater supply liquidity and cost decline which may support consumption growth going forwards, but key challenges remain, especially in Europe and Asia.

1.         Gas consumption in key markets rebounded, with Europe leading the way. European gas consumption grew by more than 6% in 2016, accelerating the recovery which emerged in 2015 following the significant consumption decline from 2009-2014. This was led by the power sector in particular, where the lower supply cost of gas also coincided with a nuclear outage in France and the increase in the carbon price floor in the UK. Consumption in Asia continued to grow, led by a rebound in India and continuing growth in China, driven by government policies to expand import infrastructure, develop domestic production, and incentivize gas consumption across sectors to reduce pollution.

2.         LNG is continuing to grow, becoming more globalized, and LNG prices continued to decline and converge across regions in 2016. Global LNG trade grew strongly, by 6% in 2016, compared to ca. 1% annual growth over the prior five years, with significant liquefaction capacity coming online as a result of rapidly growing supply. The price for spot cargos fell by a quarter in both Asia and Europe.

3.         Gas availability and market liquidity continue to expand as the market develops. The deployment of new LNG infrastructure and new technologies - such as Floating Storage Regasification Units (FSRUs) - can play a key role in promoting trade. However, rigidity in LNG contracting, domestic supply constraints and regulatory frameworks could continue to restrict demand in some markets. Meanwhile, judging by past trends, maximising domestic production where reserves are available – through a combination of stable and transparent policy and cost-efficient production – is likely to be a strong driver to grow consumption.

4.         The future of gas is inextricably tied up with that of coal, particularly in Asia. Asia is the world’s key growth market for energy consumption, and it is still building coal-fired power generation. It will be no easy feat for gas to gain share from coal in this market. The cheapest LNG plants being built today (US brownfield conversions, converting existing re-gas capacity to liquefaction) cost less than $1000 per tonne of capacity, which supports a gas price in Asia that is still uncompetitive with coal. Assuming coal prices remained steady, making LNG competitive with domestically produced coal for electricity generation in Asia would require a cut of 20-30% in total LNG costs, or a combination of efficiencies and policy interventions to implement a carbon price.

5.         Evolving perceptions of the sustainability of gas may play in its favour. New uses of gas, in areas such as transport, can address local air quality and global CO2 emission issues as cars and heavy vehicles move away from oil-based fuels. Gas’s significantly lower emissions intensity also plays in its favour versus coal in power generation. However, the industry is facing increasing scrutiny over methane fugitive emissions, which operators need to address as a matter of urgency. And gas faces the challenge of developing technology to enable a longer term decarbonisation, with work required on renewable gas (biomethane and syngas) and carbon capture and storage technologies.





Read the Global Gas Report in English


Leggi il Global Gas Report in italiano




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