Written by: Ethan Rome
The advent of the COVID pandemic has accelerated some market trends in the LNG market. The liquefied natural gas sector is experiencing oversupply and lower pricing at the moment. But even before the pandemic occurred, the LNG industry was set for oversupplies with new projects for growing the capacity beyond a steady growth of demand. There are other challenges as well such as a sustained period of low oil prices and more competition among the sources supplying the gas. But the long-term prospects for LNG are pretty good and better than fossil fuels. Here are some factors that will create an opportunity for greater demand growth, especially in Asia.
1. Better economic conditions: The economics of LNG related to coal and oil in most countries consuming the LNG has improved significantly in the past decade. Between 2000 and 2018 LNG used to have a small discount compared to the oil. You could get a small discount of between 10 to 20%. This discount has doubled in the last couple of years and the short-term supplies in the spot markets offered as much as 50% savings compared to the prevailing oil prices. With a rise in discounts, people are more tempted to switch from oil to gas if possible. This is a huge incentive for industrial consumers due to their scale. Joseph Sigelman the CEO and Chair of AG&P commented that there is a huge demand especially in Asian countries for LNG and his company will be keen to extend its services in these places.
2. A greater role in power mix: Although most power systems are capable of accommodating a small quantity of intermittent power generation, renewable power needs firming capacity. Gas, by far is the most inexpensive source in the power system for improving firming capacity. The coal-fired power plants are not suitable for flexible energy because their thermal efficiency gets lower and there are heavier maintenance costs when they are operating in flexible peaking roles. Another thing is that more carbon emissions from coal-fired plants usually cancel out the advantages of renewable power.
3. Better air quality: According to the WHO or World Health Organization, ambient air pollution is responsible for close to 4.2 million deaths every year. The liquid fuels and coal-fired power fuels for marine and road transport both develop air pollution, especially SO2 and NOx. Making a switch to gas will reduce air pollution significantly. Gas consumption produces only a negligible amount of SO2 and particulates. If you switch from coal to gas for the power generation sector, you can get reduced NOx emissions by close to 50% and close to 80% for the transport sector.
4. Easier access: Over a decade ago, there were 23 countries with access to LNG. The import terminals were expensive to build and it took years to develop supply contacts for the widespread adoption of gas. Although you can see attractive near-term economics for LNG, there are some concerns raised about the geopolitical risks involved in dependence on LNG. The market is changing though and there are more than 40 countries importing LNG these days.
5. More demand in Asia: With the gas price premium on coal narrowing down, and other advantages of gas such as firming and lesser emissions over coal is getting apparent, many markets in Asia are rebalancing their energy mix for gas. Asia is the world's biggest energy-consuming area and it is also dependent on coal for energy production. Almost 50% of energy consumption in Asia is met with coal. The next one on the list is Africa with 23% dependence on coal. Gas on the other hand gives just 12% of primary energy consumption in the Asian region while it accounts for 20% of the consumers globally.
The COVID pandemic provided a shock to the worldwide gas market. It accelerated several trends that were in any event already changing the LNG sector dynamics. However, these disruptions also provided opportunities for change. All the industry leaders need to take a close look at their processes and operations to identify the opportunities for growth and improvement. If the sector takes bold steps in the upcoming years LNG will become a significant source of low-carbon and reliable energy supply.
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