The impact of shale revolution on the LNG market
Although there are still divergent views about the role of natural gas, the universal support for natural gas is significant.
Emergence of LNG
Natural gas has the potential to capture 30 percent of the world’s total primary energy supply by 2025, rising further to 35 percent by 2035. Today’s share of fossil fuels in the global energy mix is 82 percent. The strong rise of renewables only reduces this to around 75 percent in 2035. Conventional gas currently dominates worldwide natural gas production, accounting for 85 percent of total marketed output today. The share of unconventional gas will account for 30 percent by 2035.
There has been ample evidence that LNG is changing the characteristics of global gas markets. LNG will represent 14 percent of global gas consumption by 2020, up from 9 percent in 2010.
Global LNG capacity will increase by 61 percent by 2020. Thanks to shale revolution, North America will be a net gas exporter by 2015 and could become a net oil exporter by 2035.
Changes in global gas flows
From 1945 until 2010, the conventional natural gas market was structured around the import-export flow between producing regions - the former USSR and the Middle East - and major consumers: the US, Europe and China. The fulcrum of world oil and gas trade has shifted decisively onto a Middle East–Asia axis.
Contractual and Pricing changes
In the past, LNG was bought and sold in the same way as cross-border pipeline gas. Buyers would agree to purchase gas from a supplier for a long period – usually 20 to 25 years. The supplier in turn would use a fleet of ships to ferry the gas from the country of production to the country of consumption.
Historically, gas prices have been tied to oil prices. Power stations used oil to generate electricity, so it seemed logical to base gas prices on the cost of a competitive fuel that was traded in a liquid market. Today, however, oil is no longer used to generate electricity. And yet, oil indexation remains the predominant means to price gas – a situation regarded by many observers as anachronistic.
Destination flexibility and a spot market
In the past, LNG ships went back and forth between country A and country B without any deviation. Today, because a more liquid spot market is emerging, exports are becoming less tied to particular markets and are increasingly “destination flexible”.
- The Economist, “Hub or hubris?: The outlook for natural gas in Asia? May 2013.