The era of cheap natural gas is over, giving way to an era of much more expensive energy that will create ripple effects in the global economy.
Natural gas, used to generate electricity and heat homes, was plentiful and cheap for most of the past decade, as part of a supply boom from the United States to Australia. It came to a halt this year as demand significantly exceeded new supply. European gas tariffs hit a record last week, while deliveries of liquefied fuel to Asia are near a record high for this time of year.
With few other options, the world should depend more on cleaner burning gas as an alternative to coal to help meet short-term green goals. But as producers limit investments in new supplies amid calls from climate-conscious investors and governments, it becomes clear that expensive energy is here to stay.
“No matter how you look at it, gas will be the transitional fuel for decades to come as major economies commit to meeting carbon emissions targets,” said Chris Weafer, CEO of Macro-Advisory Ltd , based in Moscow. “The price of gas is more likely to remain high in the medium term and increase in the longer term.
By 2024, demand is expected to jump 7% from pre-COVID-19 levels, according to the International Energy Agency. Longer term, appetite for liquefied natural gas is expected to grow 3.4% per year through 2035, overtaking other fossil fuels, according to an analysis by McKinsey & Co.
Soaring natural gas prices mean it will be more expensive to power factories or produce petrochemicals, shaking every corner of the global economy and fueling fears of inflation. For consumers, this will result in higher monthly energy and gas bills. It will cost more to power a washing machine, take a hot shower, and cook dinner.
This is particularly bad news for poorer countries like Pakistan and Bangladesh who have reworked entire energy policies on the assumption that fuel prices will be lower for longer.
European natural gas tariffs have jumped more than 1,000% from a record low in May 2020 due to the pandemic, while Asian LNG tariffs have increased six-fold in the past year. Even prices in the United States, where the shale revolution dramatically increased fuel production, hit their highest for this time of year in a decade.
While there are several one-off factors that have pushed gas prices up, such as supply disruptions, the global economic rebound, and a lull in new LNG export plants, there is a growing consensus. on the fact that the world is facing a structural change, driven by the energy transition.
Ten years ago, the IEA declared that the world could enter a “golden age” of growth in demand for natural gas due to the historic expansion of supply at low prices. Indeed, between 2009 and 2020, global gas consumption jumped 30%, with utilities and industries benefiting from booming production.
Countries have championed gas as a way to quickly reduce their carbon footprint. The switch to natural gas can be done relatively quickly with a limited deployment of capital, while still having a significant impact on reducing emissions, according to James Taverner, analyst at IHS Markit. Natural gas is the cleanest fossil fuel and emits almost 50% less CO2 than coal. Meanwhile, alternatives to non-fossil fuels such as wind and solar are at a relatively early stage of the energy transition.
Demand shows no signs of slowing down.
European utilities are turning to cleaner burning gas due to sky-high carbon prices, governments in South and Southeast Asia are planning dozens of new gas-fired power plants to meet increased electricity needs, and China is poised to depend on gas more than ever. because it seeks to reach a peak in coal consumption.
Even though prices are expected to increase over the next decade, they won’t be high enough to significantly reduce fuel demand, according to Gavin Thompson, vice president Asia-Pacific of Wood Mackenzie Ltd. support, we don’t see demand destruction, ”he said.
Normally, robust demand would encourage a rush to invest in new export facilities. But an important factor in the rise in gas prices is the lack of fresh capital to increase supply. Growing anti-gas sentiment and the scrutiny of dirty methane emissions have stalled projects and forced energy majors to rethink their plans. The IEA, which heralded natural gas as a transitional fuel to a low-carbon future, drew public attention earlier this year when it said investments in new upstream fields should stop if the world wanted to reach net zero emissions by 2050.
Without new investment, LNG consumption in Asia – the engine of future growth in gas demand – will exceed supply by 160 million tonnes by 2035, according to WoodMac’s Thompson. By comparison, Asia imported around 250 million tonnes of LNG last year.
Already, there are signs around the world that supplies will be insufficient:
m Beyond a massive expansion in Qatar, few new LNG export projects have been authorized since early 2020.
m End users have been less willing to take stakes in upstream projects or sign long-term supply agreements due to uncertainty surrounding government-led efforts to reduce emissions.
m U.S. shale drillers don’t immediately respond with additional production as they come under pressure from investors to cut spending and avoid creating a new glut, while major pipeline projects struggle to move forward.
Mark Gyetvay, deputy managing director of Russian LNG exporter Novatek PJSC, warns that the green move could disrupt the provision of adequate and affordable supply to consumers.
“The lack of capital investment in future natural gas projects is not leading us to an energy transition, but rather leads us on an inevitable path to an energy crisis,” said Gyetvay.