The Future of Natural Gas — Bullish or Bearish?
Dr. Carolyn Kissane, Associate Dean and Clinical Professor, NYU SPS Center for Global Affairs
When it comes to the future of natural gas, there’s yet to be a clear answer. Former US Energy Secretary Moniz is unequivocal; gas has a long-term trajectory. “You know, natural gas is not here for five more years, and it’s here for 50 more years,” Moniz said recently at CERA week 2023. Others are less optimistic and see this year’s high natural gas prices and rapid decline in renewable energy costs as reasons to believe natural gas will increasingly be displaced.
In the long term, the future of natural gas is still being determined; underappreciated risks could disrupt the optimistic prospects for continued growth. On the bearish side, some experts forecast natural gas will be eclipsed in favor of renewable energy sources as they continue to come down in price and are more economically competitive than gas and or coal. Globally, the next decade will be decisive. In 2022, the disruption of Russian exports to Europe already stimulated a shift to 50 GW of new solar and wind installations, permanently eliminating 11 bcm of European natural gas demand, according to the International Energy Agency. But in spite of the rapid advance of renewables, many analysts are forecasting that natural gas will continue to play a significant role in the energy mix as a transition fuel and a stable and predictable energy source in electricity generation and power markets.
A potent example of the conundrum of determining future gas demand is the recent communication out of the G-7 meeting; energy ministers settled on deciding not to decide yes or no on gas, but to keep gas on the table as potentially important for energy security while acknowledging the need for hastening the move away from fossil energies. On gas, there was a definitive tone: we don’t want to say yes to gas, but we can’t say no. It is suggested that to accelerate and support decarbonization implies less support for gas. Efforts should be made to reduce demand but investment “can be appropriate to help address potential market shortfalls provoked by the crisis.”
The International Energy Agency’s most recent gas outlook projects that under existing energy and climate policies across the globe, demand will rise this decade, then will peak through 2050. It’s a big if, but if current climate pledges are met, demand would be 10% lower in 2030, and 40% lower in 2050. This uncertainty makes it challenging for policymakers and investors, but doing nothing is not an option. What is looking most likely is that countries will choose the option to have access to gas rather than run the risk of perpetuating a scenario of greater energy insecurity.
The demand picture will likely play out most potently in Asia, where countries still rely on coal for power production; gas could displace the overall 55% of coal in the Asian energy mix. But the alternative scenario where Asia could leapfrog directly to renewables and bypass natural gas is a threat to the overall demand picture. In the United States, it’s been natural gas that has replaced a lot of the retired coal plants. This outcome is hoped to be replicated across the most coal-heavy regions of the world, displacing coal with lower-emitting natural gas. The last decade also brought a massive build-out of LNG capacity, with much of it coming from the US, Qatar, and Australia. Even Russia has managed to export more LNG to Europe this year than ever before but with a dramatic decline in Europe’s imports of Russian piped gas.
Natural gas is a fossil fuel used for decades to generate electricity, heat buildings, and power industry; it is also used as a feedstock for chemical production and as a transportation fuel. While natural gas is the least carbon-intensive fossil fuel, it emits greenhouse gases in combustion, production, and distribution. While natural gas does burn cleaner than other fossil fuels, its main component is the potent greenhouse gas, methane, which can leak into the atmosphere from drilling, processing, shipping, and distribution.
With decarbonization and net-zero ambitions in place across many countries, natural gas expansion is at risk, and decoupling from gas is a possibility, making its growth trajectory complicated.
The energy landscape for gas is fragmented — there’s the piped dry gas that travels through pipelines, and there’s the more expensive gas that goes from dry gas to liquid and then moves via tankers, crossing oceans, something you can’t do with piped gas. Whereas in the 1980s, there were only a handful of LNG producers and a handful of consumers, today, the LNG market is truly global and crosses all continents. Poten & Partners note LNG is the fastest-growing hydrocarbon. They expect the LNG market growth to continue beyond 2030. In 2000, piped natural gas accounted for 75% of trade, while its liquid form, LNG, was only 25%, but by 2021, it was 50–50, illustrating the increasing role of LNG in the international gas trade.
The outlook is still being determined partly by environmental factors. Natural gas contributes to overall greenhouse gas emissions, especially via production and transport infrastructure leaking methane, a more potent and harmful GHG to CO2. The decrease in the cost of renewables and decarbonization of the energy system makes the continued use of natural gas more contentious. The shift towards more renewable energy sources may displace natural gas, but not likely completely, so it is important to recognize this when considering its future. In the United States, solar power accounted for nearly half of new electricity generating capacity, and as older steam and combustion natural gas units retire, there’s a strong case for those to be replaced by renewables rather than installing combined cycle natural gas units which are more efficient than older plants but still less carbon-friendly than solar or wind. This paradigm is important, especially for countries that are either ready to expand electricity generation to support larger populations and increased economic growth, ie, in Asia and Africa, and countries that are keen to replace fossil energies with zero or lower carbon electricity generation.
Increases in demand for natural gas, especially LNG, were expected from the developing world as its overall energy demand continues to increase as more people are lifted out of poverty. Driven by economic growth and increased energy access in the global south, the IEA predicts natural gas consumption will increase by nearly 50% between now and 2050. And what complicates both the demand and supply picture for LNG is the price. The events of 2022 exposed the impact of volatile gas price risk. Producers planning to add capacity and build out new infrastructure are discovering they need to recruit gas takers and buyers, and reliance on spot market forecasts don’t satisfy bankers for greenlighting finance for investment in new builds. In the end, greenfield production and investment are still most likely to need long-term contracts. A look at the last year in price volatility tells the story. As Europe sought to replace Russian pipeline gas, sudden demand for LNG rapidly increased in the summer of 2022 hitting $90 mmbtu in Europe, $70 in Asia, and then as high prices rendered LNG too expensive for many buyers and a milder than expected winter emerged, prices fell to $13 in Europe and Asia. In the United States, the price dropped from $10 to $2.
Russia’s reinvasion of Ukraine has ushered in a reassessment of the challenges and opportunities of natural gas in the global energy mix. Many countries previously planned to add LNG to their national energy mix to reduce coal consumption and serve as a bridge to low-carbon energy. But the picture is now in flux in light of the war as last summer’s price spikes in spot LNG markets forced some buyers like Pakistan, India, Argentina, and Sri Lanka to back away from natural gas purchases temporarily. Now the question is, as the world moves to greater electrification, is the increase in the demand for natural gas still a given? Europe, for example, is accelerating targets for renewables and green hydrogen while downgrading the future role of LNG. India is doing the same.
Until the aggression on Ukraine, Russia sent nearly 75% of its gas exports to Europe. Though trade between Russia and Europe has not fallen to zero, there has been a sharp reduction in piped gas by almost 70%. Russia has tried to push out more LNG exports, though that increase is small overall. There’s a big story to tell about how and with what Europe was able to manage such a quick pivot off of piped Russian gas. One big salvo was a dramatic increase in LNG from the United States with Europe being able to afford the high spot prices that ensued for the first 8 months of the war. The continent was also able to increase piped gas from Norway and from Algeria.
Historically, Europe, and especially Germany, developed an over-reliance and dependency on Russia for piped gas — it took Russia going into Ukraine for the second time in 8 years for Germany to admit finally that relying on Russia for its gas was a bad idea. It was only after the Ukraine reinvasion that Germany canceled the built and ready-to-operate NordStream 2 pipeline, now a striking example of a multi-billion dollar stranded asset.
In response to its own energy demand, Germany has pivoted from relying on piped gas from Russia to LNG from the United States — going so far as to commission 6 new import facilities, 4 FSRUs, and two liquefaction terminals, which would have been hard to imagine even 14 months ago. Still, war and economic insecurity can change policies. Germany, a new LNG importer, is rushing to import LNG to replace Russian gas; it is an industrial imperative as its economy requires reliable and ideally affordable fuel for power generation. Since the outbreak of war, achieving reliability has been a scramble. Europe has turned to the United States for LNG, with the number of contracts signed at an all-time high. To note is the number of 15–20-year contracts signed in the last six months with US firms, but with the option to resell, suggesting European buyers are willing to pay a high price to ensure gas can be available if needed, but also with the option to not use if the transition to lower carbon energy materializes to the point, a sharp reduction is gas is no longer required. European buyers see a future for gas beyond the next two decades, but also that it may not be in Europe, so they are contracting gas for 15–20 years. If they need it, they have the gas, but they also can resell it; it’s an expensive insurance policy that acknowledges the tricky demand outlook for gas across Europe.
Not all Russian gas molecules have been replaced, and Russian LNG continues to come into Europe, but Russia’s piped gas has drastically decreased, and the big question is what happens next. Moving forward, the big question for Europe beyond the next year or two is what will form the basis of Europe’s energy security and what role does natural gas play in the future? Is Europe’s move away from Russian gas permanent, will Russia’s molecules eventually play an insignificant role and be replaced by LNG from the US and piped gas from Norway and Algeria, and will gas further decrease in the transition to renewable energy, or will gas continue to be a foundation for Europe’s power system; a lot depends on policies and regulations over the next 2–5 years.
Short-term outlook — next 5 years
Global gas demand is set to rise by 140 billion cubic meters (bcm) between 2021 and 2025, according to the new Gas Market Report — less than half the amount previously forecasted and smaller than the 170 cm increase seen in 2021 alone. The downward revision in gas demand growth in the coming years is mostly the result of weaker economic activity and less switching from coal or oil to gas. Demand from China is still a question mark. During the COVID lockdown that lasted almost 3 years, China saw reduced gas demand and left more LNG on the market in 2022 to be redirected to Europe. With China’s reopening and expected industrial stimulus and growth of upwards of 5%, analysts expect China’s gas demand to go up. An important caveat on that growth is the opportunity for China to take more pipeline gas from Russia, which could hit its imports of LNG.
Two countries where natural gas production is certain to increase are the United States and Qatar, and both are seeing increasing demand for the LNG they produce from their abundant natural gas resources. Qatar began producing natural gas in the 1980s with the discovery of the North Field, the world’s largest non-associated natural gas field. Qatar’s natural gas industry is dominated by the state-owned company Qatar Petroleum. The revenues from Qatar’s exports of LNG account for a significant portion of the country’s GDP and government revenues. The country is effectively utilizing its exports of LNG as a means of wielding economic statecraft through its deployment of aid, investment, and support in the region and beyond.
Qatar hosted the FIFA World Cup this year, positioning itself as a stable regional cultural and economic powerhouse. It is backed by its extraordinary wealth from gas in how it taps its sovereign wealth fund and its increasingly close relationship with the United States around international security. For Qatar, the focus is not on piped gas but on the production of liquefied natural gas (LNG), exported primarily to their main market, Asia. Japan, South Korea, India, and China are significant takers of Qatari gas.
The United States rose to the top of the natural gas pyramid with the shale oil and gas revolution today as the world’s largest producer. It is also moving into the largest producer and exporter of LNG, unimaginable a decade or more ago. According to the US Energy Information Administration (EIA), U.S. gas production is on track to hit 100.67 billion cubic feet per day (bcfd) this year, up from last year’s record of 98.09 bcfd. About a third of gas production in the United States is associated gas — produced from oil wells, which continue to seek higher capacity to take advantage of higher oil prices. So far, low gas prices are not slowing down gas production, at least not yet. There is an expected 14% increase in U.S. liquefied natural gas (LNG) exports this year, suggesting the market for LNG remains strong, a lot of demand hopes rest in Asia, especially in China with the reopening after COVID lockdowns and the assumption LNG imports will increase over the next few years. The US exports LNG to China, and even amid tense trade rhetoric and deteriorating diplomatic relations, China continues to be a taker of US LNG.
US producers are bullish on global gas demand. The United States has the most shovel-ready projects in the world, with more than 20 projects either under construction, approved, or proposed. New gas is expected to come online between 2025–2027.
Natural gas demand in China will likely grow this year as the economy recovers, but whether the country’s imports of liquefied natural gas (LNG) rebound will depend on spot prices, an executive of PetroChina International said recently. China is expected to take more pipeline gas from Russia over the next 1–3 years as an existing pipeline reaches its maximum throughput. Beyond 2025, a lot rides on China’s build-out of renewable energy infrastructure and electrification, already the largest deployment in the world. Analysts expect China to continue to need more gas rather than less, but the trajectory and outlook remain volatile, though a review of agreed-upon deals suggests China is looking to gas for the next 2–3 decades.
Demand challenges and uncertainty
How should we understand underappreciated risks to global natural gas demand? While many analysts expect a steady rise in the demand for natural gas, others caution and offer an alternative to expanding a carbon-emitting hydrocarbon emitting the GHG methane. Though countries pledged to control methane leaks at prior global climate meetings, 18 months after the agreement, methane remains a serious environmental challenge. The idea that natural gas is lower carbon-emitting than oil and coal loses some of its strength because of the negative impacts of methane leakage.
The Biden administration is holding talks with global energy companies and foreign officials to set standards for certified natural gas, a form of the fuel producers’ marketing scheme to brand their gas as climate-friendly.
The supply chain challenges that started during COVID and that have worsened under deteriorating US-China relations are a risk to solar, wind, and even batteries. Constraints on the solar panel supply chain could potentially be a factor. Battery storage is a competitor to natural gas but supply has to be diversified away from over-reliance on China which currently dominates inputs into the battery market.
Like other forms of energy, the future of natural gas will depend on various factors, including technological development, environmental policies, and economic factors. My outlook is more natural gas demand, not less, and I see the years between now and 2040 as volatile for energy markets, and for demand and supply, but natural gas will remain a critical edge energy — and a necessary input for global energy security.
For all those who read this post, I’d welcome your thoughts — where do you see natural gas demand going? Is it like Former Secretary Moniz around for the next 50 years or maybe even longer, or will we see demand peak earlier and consumption decline in the next ten to fifteen years. Please share your thoughts, questions, and comments.
