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Natural Gas Demand Detonation Will Push Prices and Transform the Industry

Summertime Surge

Natural gas futures have steadily climbed almost 17% since February, largely due to a frigid, inventory-draining winter that extended into April, enveloping the entire northern hemisphere and leading to record consumption and storage withdrawals. Earlier this month, Wood-Mackenzie issued a report that flagged slowing supply growth as well as a moderate rebalancing of the global market.

Although the winter has passed, extreme temperatures and below-average stocks may be a problem that is here to stay as heaters shut down and A/C units switch on. The amount of energy required to cool US buildings in June is on track for its second highest level since 1981. Meanwhile, the amount of natural gas in storage started June at the lowest level since 2014 for that time of year, and the second lowest level in a decade. Further, EIA end-of-storage index futures indicate bets that October will end with about 3.525 trillion cubic feet of natural gas, which would be the lowest for that time since 2008, in spite of the highest levels of US natural gas production ever.

Liquefied Natural Gas (LNG) supplies in Asia are also being stretched as, last week, spot prices in Asia, a region that makes up around two-thirds of all LNG demand spiked again, reaching $11 per million British thermal units (MMBtu), an increase of some 50% since mid-April and the highest level since mid-January. One of the biggest transformative factors pushing Asian demand is a huge uptick in air conditioner usage. Energy demand from members of the Association of Southeast Asian Nations (ASEAN) climbed 70% from 2000 to 2016, with air-conditioning accounting for a large part of household electricity demand and natural gas taking a larger role.

Wood-Mackenzie also noted that global markets for LNG should remain tight throughout the rest of the year. Even if supply were to increase through next winter, “high seasonal LNG demand in Asia will result in yet another tight winter

Long-Term Demand Factors

Natural gas price gains have the potential to continue over the long term as well. The Paris-based International Energy Agency (IEA) said in its Gas 2018 annual report on Tuesday that global LNG imports will rise to 505 bcm by 2023 from 391 bcm in 2017, an increase of some 114 bcm. Meanwhile, a survey of 813 senior industry professionals found two-thirds of respondents indicated that their organizations are increasing or sustaining investment in gas projects this year, while 86% believe gas will “become an increasingly important component of the global energy mix over the next 10 years,” compared with 77% last year.

This jump will be largely led by China. Chinese demand for natural gas will rise by almost 60% between 2017 and 2023 to 376 billion cubic meters (bcm). This includes a rise in its LNG imports to 93 bcm by 2023 from 51 bcm in 2017. When all of Asia is taken into account, LNG sales in Asia will rise to 75% of all LNG sold globally from 72% last year. LNG imports to China and Pakistan during the first five months of 2018 increased over 50% from last year, while shipments to India, South Korea, Taiwan and Singapore jumped by about 15% to 30%, Reuters said on Monday. Lower LNG storage from the world’s top LNG importer, Japan, and also top LNG importer, India, has also caused more unseasonal demand for LNG. Emerging Asian markets are expected to account for about half of global LNG imports by 2023, a region that has long been dominated by coal.

Demand in the Asian market is expected to be so powerful that Australia, one of the world’s largest exporters,  will have to consider importing gas in the coming years. The country is preparing for a looming shortage, come 2021, and to avoid losing market share, they will not even consider cutting production.

Lack of pipelines will also pose issues for natural gas in North America and Asia. Capacity shortages have plagued the Northeast USA, increasing LNG prices by 60 to 70 times their normal rates. And now, the Permian shale basin in Texas is feeling the squeeze too as Natural gas pipeline capacity has not kept up with the increases in natural gas production there. Due to this, cheap natural gas exports to Mexico could stagnate as a result of bottlenecks and delays in several key pipeline construction projects, meaning the country will have to fill the void with more expensive gas from other regions. MRP recently highlighted this same issue for oil coming out of the Permian, and sufficient new pipeline is not expected for at least a year.

In Asia, China’s pipeline system from Central Asia is rapidly running out of capacity. Plans call for utilizing more than 93% of the Central Asia-China Gas Pipeline (CAGP) system’s capacity this year with increased supplies from Turkmenistan, Uzbekistan and Kazakhstan to meet China’s needs, suggesting that the system will “max out” in early 2019.  Plans to build lines over a new 1,000-kilometer (621-mile) route to China have been in the works since 2013 but have been subject to repeated delays. The most recent reports suggest utilization no sooner than the end of 2022.

Finally, as MRP noted in February, there is the lack of downstream investment, caused by a prolonged downturn in natural gas prices, which could result in a global shortage in the next decade.

Zero Emission Gas?

Finally, and perhaps the most transformative change in the LNG industry, could push natural gas from being seen as a “bridge” to renewables to a final destination.

Natural gas has been a great step in decreasing carbon emissions since it is more environmentally friendly than its predecessor, coal, but not so much as solar and wind. However, that could be about to change as US energy startup, Net Power, has announced that it has successfully fired up its natural-gas plant in La Porte, Texas.

Its new facility is the first fossil-fuel power plant that promises to capture all its emissions effectively at zero extra cost. Making the economic case for similar plants even stronger, the US government has passed the FUTURE Act, which provides tax credits of up to $50 for each metric ton of emissions captured and stored by a power plant or chemical factory. If Net Power can get the pilot plant fully operational and producing energy―it can generate 25 MW of electricity―Net Power will scale it up to a full-size power plant that can produce up to 300 MW of electricity, as soon as 2021.

Even in the event of 50% renewable proliferation by 2050, BNEF projects 1,002 gigawatts of added peaker gas capacity worldwide, which will remain a “cheaper, more nimble alternative” to large-scale combined cycle gas plants. BNEF also speculates that plenty of natural gas demand is already baked into the 2020s.

Investors can gain exposure to LNG via the United States Natural Gas Fund ETF (UNG).

We’ve also summarized the following articles related to this topic…

 

LNG: China Is About To Disrupt Natural Gas Markets

The Paris-based International Energy Agency (IEA) said in its Gas 2018 annual report on Tuesday that China will become the world’s top natural gas importer, boosted by liquefied natural gas (LNG) imports, by next year. The increase comes as China replaces dirtier burning coal used for power generation with cleaner burning natural gas. Per government mandate, gas must make up around 10 percent of the country’s power generation energy mix by 2020, with further earmarks by 2030.

The Asia-Pacific region, which accounts nearly two-thirds of all global LNG demand, will hold that lead going forward. When all of Asia is taken into account, according to the IEA, LNG sales in Asia will rise to 75 percent of all LNG sold globally from 72 percent last year. Japan is the world’s top LNG importer, followed by China, which bypassed South Korea at the end of last year, then South Korea, India and Taiwan. OP

 

LNG: China set to drive global gas demand rise of 1.6%/year to 2023: IEA

Global gas demand is set to increase by 1.6% annually to 2023, to reach some 4.1 trillion cu m, the International Energy Agency (IEA) said Tuesday, driven by surging consumption in the Asia-Pacific region, and particularly China. China — the IEA argues — is the defining story in global gas market growth in the coming years.

China, whose market grew by an astonishing 15% in 2017 with a strong coal-to-gas switching program in the residential and industrial sectors, is set to continue to lead the trend with an expected average annual growth rate of 8% for the next five years. Other emerging Asian economies such as India, Bangladesh and Pakistan are also expected to see sustained demand growth during the forecast period.

The IEA also said that the global gas market was shifting in terms of which sectors drive growth, with industry set to take the lead from power generation as the main driver of global demand growth. Industrial gas demand also grows in major producing regions, such as North America and the Middle East, to support expansion of their petrochemicals sectors. Platts

 

LNG: DNV GL Study Finds Natural Gas Headed for Global Dominance

In a global energy market now dominated by the transition to lower-carbon fuels, natural gas is on track to supplant oil as the leading energy source worldwide by the mid-2030s. The “Transition in Motion” report incorporates the view of 813 senior industry professionals.

Two-thirds of the respondents (64%) indicated that their organizations are increasing or sustaining investment in gas projects this year, while 86% believe gas will “become an increasingly important component of the global energy mix over the next 10 years,” compared with 77% last year. Another 44% indicated their organizations are preparing for the gas transition and a less carbon-intensive energy mix. Survey results also indicated a primary driver for investment in liquefied natural gas (LNG) and other gas projects is the global energy transition.

The 2017 transition outlook forecast of global energy to 2050 by DNV GL predicts global oil demand will plateau during the next 15 years, peaking in the early 2020s, while gas demand will keep growing for another two decades, peaking in the mid-2030s. “By then, gas demand will be around 15% greater than it was in 2017 and gas will have overtaken oil to become the world’s largest energy source,” according to the report. NGIntel

 

LNG: What a Summer Scorcher Means for Natural-Gas Prices

Low supplies of natural gas could lead to higher prices this summer, as Americans begin to flip on their air-conditioning units, boosting demand for the energy source. Stockpiles of natural gas―made plentiful by the U.S. shale boom―have become depleted after an extended winter this year increased demand for heating homes. Booming U.S. exports of gas also have absorbed excess inventories, and analysts say cheap prices have made it more popular for power generation, compared with more expensive sources like coal.

Already, a significantly hot month of June has pushed natural gas futures near the closely watched level of $3 a million British thermal units, recently hitting the highest price since January.

And natural gas prices haven’t surged higher because the market is still counting on producers to replenish stores ahead of another demand boost next winter. Shale drillers capitalizing on higher oil prices also could flood the market with more supply, as they produce more natural gas as a byproduct. Earlier this year, volatility in the natural gas market fell to a 22-year-low.

But as prices have stabilized near $3, some investors have regained confidence in U.S. natural gas producers. In the past three months, shares of companies Chesapeake Energy Corp. and Southwestern Energy Co. have gained 61% and 21%, respectively. WSJ

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