Some people think that oil demand is nearing its peaka coal consumption is likely to be in a slow but steady decline. Meanwhile, the energy sector is betting hundreds of billions of dollars that the third leading fossil fuel, natural gas, will have a place in the global energy market at least until 2050.
The lifespan of gas in the global energy market depends on the latest stream of investment in huge terminals that liquefy and export super-chilled liquefied natural gas (LNG) for countries that are not yet ready or able to make the transition to renewable energy sources.
According to BloombergNEF, counting only those projects on which construction work has started, more than 200 million tons of new natural gas export capacity will come online in about five years. If additional early-stage projects still awaiting final investment decisions also move forward, Baker Hughes says by 2030, over 300 million tons of new LNG production capacity may be brought into operation.
Compared to the current production capacity, this represents an increase of approximately 70%, which is equivalent to enough gas per year to power half a billion homes.
Increase in total LNG production capacity / Bloomberg
This starts a “third great wave in LNG,” said Anne-Sophie Corbeau of the Center for Global Energy Policy at Columbia University’s School of International and Public Affairs. “By 2028, when everything is basically built, we will have a hell of a lot of LNG in the U.S. and an awful lot of LNG in Qatar,” she added.
In short, it took the global LNG industry 60 years to develop its first several hundred million tons of export capacity; now the industry has the potential to do it again in six years.
LNG boom
The LNG industry was once perceived as a sleepy segment of the energy industry, but the whirlwind of events has intensified the pace of LNG expansion. The development of LNG was particularly influenced by Vladimir Putin’s invasion of Ukraine in February 2022, which shook the energy market. Cheap Russian pipeline gas, which supplied about a third of European demand, dried up virtually overnight. European Union officials began traveling to Qatar and the United States to broker long-term deals, and gas-dependent industries signed deals to directly import LNG for the first time. LNG imports by the bloc increased by approximately 60% in 2022.
“Putin hoped that he could use gas weapons to break up the coalition supporting Ukraine,” said energy historian and vice president of S&P Global Daniel Yergin. “It failed, mainly because of LNG.”
Since 2019, companies, investors and governments have spent around $235 billion globally on new LNG supplies, with more than $55 billion expected to be invested in 2024–2025, Rystad Energy estimates. All this together is approximately equal to Finland’s GDP.
Asia is the first and Europe the second largest recipient of super-chilled fuel in the world / Bloomberg
Gas as a bridge fuel in the energy transformation
Natural gas advocates have long touted it as “bridging fuel” or a less carbon-intensive way to facilitate the transition away from oil and coal. However, this bridge seems to be getting longer. BNEF says solar and wind installations are likely to hit records in 2023, but in many markets renewables are still not being deployed fast enough to replace fossil fuels.
Increasingly common in some circles it is an accepted statement that gas will be needed as a long-term safety net supporting renewable energy, which is a blow to global climate goals.
A large part of the new LNG supplies will go to China. However, the EU also agreed to purchase Qatari LNG supplies after 2050, despite the common bloc’s binding goal of achieving climate neutrality by then.
Europe is building a record number of renewable energy installations and working on hydrogen infrastructure. However, the transition to renewable energy sources is not entirely smooth. The offshore wind industry has been hit by skyrocketing commodity prices, higher borrowing costs and long-term supply chain problems.
Annual natural gas export capacity for facilities under construction or planned by country / Bloomberg
According to Marc Howson, head of the Asian section at Welligence Energy Analytics, Europe is somewhat shocked by the lack of energy security.
According to the International Energy Agency, the EU paid more than $300 billion for natural gas imports in 2022, a threefold increase compared to the average of the previous five years.
Is gas the cleanest fossil fuel?
Compared to coal, gas has long been considered relatively ecological. Replacing coal with gas reduces emissions by 50% on average. in the case of electricity production and 33 percent in the case of heat generationas reported by the International Energy Agency (MEA) in 2019. However, data from satellite observations and new research suggest that the gas sector has a much greater impact on the climate than many government and industry officials claim.
Methane, the main component of natural gas, is an extremely potent greenhouse gas. When it’s released without combustion, it retains over 80 times more heat in the atmosphere than carbon dioxide. According to a study published by the National Academy of Sciences, emissions leaks from gas wells and downstream operations likely exceed the 3.2% threshold beyond which gas actually becomes worse for the climate than coal over a period of time. Scientists using satellite observations from 2018 to 2020 estimate that the average methane intensity in the most prolific U.S. shale region was 4.6%, significantly higher than the industry target of less than 0.2%.
According to the 2022 IEA model, the short-term climate impact of the world’s existing LNG supply chains, including final combustion of the fuel, is approximately 1.5 billion metric tons of carbon dioxide equivalent per year.
Applying the same metric to the 300 million tonnes of new LNG to be introduced into the network would add another 1.2 billion tonnes of CO2 equivalent each year. This exceeds the annual CO2 emissions of Japan, the world’s fifth-largest polluter.
LNG demand and production capacity. More capacity needed to meet long-term demand / Bloomberg
Environmentalists are sounding the alarm
A group of Democratic lawmakers recently called on the Biden administration to put more scrutiny on the long-term impact of U.S. projects on climate change. Bill McKibben, who galvanized the public to block the Keystone XL oil pipeline, is pushing U.S. energy regulators to reject any LNG permits currently under consideration.
“You can’t continue to allow things like this in good conscience. No one can sign a document saying it’s time to transition away from fossil fuels and then allow new US projects that will increase global emissions,” McKibben said.
The dilemma of LNG producers
As with all commodity markets, LNG producers are in a difficult situation. On the one hand, they activate too much capacity too quickly, risking that production will be too high. On the other hand, there is a risk that production will ramp up too slowly, leading the world to turn to alternative fuels such as coal.
If operators’ forecasts turn out to be wrong and gas demand begins to weaken after the initial long-term contracts expire, there is a risk that LNG installations will become one of the most expensive and underutilized assets in the world.
Morgan Stanley predicts that next year the increase in supply will begin to exceed demand. Meanwhile, Wood Mackenzie estimates that LNG demand will peak only in 2045.
Will these predictions come true? Time will tell. Currently, the demand for LNG is still high. According to BNEF data, since the beginning of 2022, Chinese companies have signed more long-term contracts than any other country. Europe is not far behind, with some major importers including Shell and Eni investing in expanding fields in Qatar and agreeing to source fuel from the project until at least 2052. Dozens of countries, from Poland to Japan, have signed long-term contracts for the purchase of LNG.
