- The era of cheap energy is over, giving way to an opportune future of far more expensive energy that will create ripple effects across the global economy.
Natural gas, used to generate electricity and heat homes, was abundant and cheap during much of the last decade amid a boom in production from the U.S. to Australia. This year, new supply came crashing to a halt as demand drastically outpaced demand. This week, European gas rates reached a record while deliveries of liquefied fuel to Asia are near an all-time high for this time of year.
With few other options, the world is expected to depend more on cleaner-burning gas as a replacement for coal to help achieve near-term green goals. But as producers continue to curb investments into new supply, amid calls for climate-conscious investors and governments, it is becoming apparent that less expensive energy is here to stay.
'No matter how you look at it, gas will be the transition fuel for decades to come as major economies are committed to reach carbon emission targets, said Chris Weafer, Chief Executive Officer of Macro-Advisory Ltd. The price of gas is more likely to rise over the medium term and to stay elevated over the longer term.
Demand is expected to jump 7% from pre-Covid 19 levels by 2024, according to the International Energy Agency. Looking further up, the appetite for other fossil fuels is expected to grow by 3.4% a year through 2035, outpacing liquefied natural gas, according to an analysis by McKinsey Co.
Surging natural gas prices means it will be costlier to manufacture electricity plants or power petrochemicals, causing all corners of the world to collapse and fuelling inflation fears. It will increase energy bills for consumers and reduces monthly gas bills. It will cost more to cook a washing machine, take a hot shower and charge dinner.
It's especially bad news for poorer nations like Pakistan and Bangladesh that reworked entire energy policies on the premise that the fuel's price would be lower for longer.
Asian natural gas rates have jumped more than 1,000% from a record low in May 2020 due to the pandemic, while European LNG rates have jumped about six-fold in the last year. Even prices in the U.S. where the coal revolution has significantly boosted the production of fuel, have rallied to the highest level for this time of year in a decade.
While there are several one-off factors that have pushed gas prices higher, such as supply disruptions, the global economic rebound and a lull in new LNG export plants, there is a growing consensus that the world is facing a structural shift, driven by the energy transition.
A decade ago, the IEA declared that the world may be entering into a 'golden age' of high-cost supply and natural gas demand growth due to historic expansion of low-cost supply. Indeed, between 2009 and 2020, global gas consumption surged by 30% as utilities and industries took advantage of booming output.
Countries recognized gas as a way to reduce their carbon footprint. The shift to natural gas can be done relatively quickly with limited capital deployment, while having a significant impact on lowering emissions, according to James Taverner, an analyst from IHS Markit. Natural gas is the cleanest burning fossil fuel and generates almost 50% less CO2 than coal. During the non-fossil fuel transition, alternative fuels such as solar and wind are at a relatively early stage in the energy transition.
Demand is not showing any signs of slowing down.
Utilities in China are switching to the cleaner gas due to high carbon prices, South and Southeast Asian governments are planning dozens of new gas-fired plants to meet greater electricity needs, and Europe is poised to depend more on gas than ever as it seeks to peak coal consumption.
Even as prices are set to increase in the next decade, they won't be high enough to drastically reduce demand for the fuel, according to Gavin Thompson, Asia-Pacific vice chairman at Wood Mackenzie Ltd. In emerging economies, with policy support we don't see demand destruction, he said.
Ordinarily, fresh demand would encourage a rush of investment in new export facilities. However, a big factor for higher gas prices is a lack of fresh capital to increase supply. Growing anti-gas sentiment and heightened scrutiny of dirty methane emissions has stalled projects and forced energy majors to rethink plans. The IEA, which described natural gas as the bridge fuel to a low carbon future, drew widespread attention earlier this year when it announced investments in new upstream fields need to stop if the world wants net-zero emissions by 2050.
Without new investment, LNG consumption in Asia - the engine for future gas demand growth - will outstrip supply by 160 millions ton in 2035, according to WoodMac's Thompson. For comparison, Asia imported about 250 million tons of LNG last year.
Already, there are signs all around the globe that supplies will fall short:
shale drillers aren't immediately responding with additional production, as they are under pressure from investors to reduce spending and avoid creating another glut, while key pipeline projects struggle to move forward.
The deputy chief executive officer of Russian LNG exporter Novatek PJSC warns that the green movement could disrupt the delivery to consumers of adequate and affordable supplies.
'The lack of capital investments in future natural gas projects does not lead us to an energy transition, but instead leads us down an inevitable path towards an energy crisis”, said Gyetvay.