The global energy crunch has reintroduced vigour into the oil and gas markets, especially in Asia Pacific where the soaring demand for LNG as a replacement for oil and coal has led to a high-cost environment that doesn’t appear to be slowing. As the northern hemisphere’s winter demand looks to keep prices elevated, with the Christmas manufacturing demand pressure on China and their neighbours producing record spot prices for LNG shipping, it has revealed one of the first major hiccups of the energy transition – if the renewable sector be able to step-up to fulfil the demand gap.

The situation is primed for natural gas exporters to take advantage of their position and regain capital lost over the past two years of constrained trading. The advancement of coal’s pariah status has only continued to grow, however it has led to distinct coal supply scarcity causing interruptions to the power generation sectors of Asia’s major economies.

This month, the Energy Council looks at the rapidly evolving importance of the LNG sector to support the energy transition away from coal thus incentivizing a slew of new projects to rise out of the ashes of the disastrous Covid demand collapse.

The Energy Transition’s Eastward Ambitions

The eagerly awaited COP26 in Glasgow this past November failed to achieve it’s watershed moment for climate action, ironically however it did mark the moment of sustained energy crunch as the northern winter temperatures took hold. The situation has been complicated by the climate commitments of Asian states that do not align to the intentions of Western powers, but do have the greatest obstacles to overcome in maintaining energy supplies to their gargantuan populations.

There exists this trade-off for many nations across the world – do you meet the demands of international pressure and place your nation under strain, or do you maintain energy access at affordable rates?

One obvious route to lowering emissions exists in shifting away from coal and onto LNG-powered turbines, immediately limiting the carbon output by up to 50% and by up to 30% for fuel oil. The duel benefit of lowering emissions with a high-intensity fuel that can replace coal-thermal power – meant that industrial output could be effectively maintained. In turn, this led to Asian states betting on LNG as the core replacement fuel for coal over the next several decades, at least.

The trouble came from a convergence of unfortunate events that undermined market fundamentals;  a global pandemic saw a range of oil and gas projects accepting a force majeure and a cessation of new projects while capital was tied up. An unusually low wind environment for winter saw offshore wind turbines underperforming in Europe and sending gas prices northward, LNG shipping spot prices hit all-time highs, while national storage facilities were well below yearly averages. Now with the major economies of East Asia all on similar paths to supplant coal with LNG, the competition for LNG has never been greater.

Now the global natural gas producers are being encouraged to support this demand growth – so much so that 50 mmtpa of projects have been granted FIDs so far this year, in comparison to the just 3 mmtpa in 2020. Natural gas and especially LNG, are seen as the most viable route for industrial and manufacturing power to supplement our energy transition goals.

In just this year, there has been 27 Mt of demand growth for LNG. This is in stark contrast to the 2020 demand slump that sent prices tumbling. Now as the engines of economies are begninning to rumble once more, the demand spike has revealed scarcity of supply as everyone clamours to replace their coal with natural gas. 

FIDs set the machine in motion

Rising LNG prices have provided strong impetus to ramp up the FIDs of major LNG production projects the world over, most notably Woodside and BHP’s Scarborough and Pluto Train 2 developments. Undergoing construction in Western Australia, Woodside are investing $12 billion in capex to have LNG production underway to produce up to 8Mt by 2026.

This followed two major production projects; firstly, the $28.7 billion Qatargas production of the North East field off the country’s coast – with an estimated 900 trillion scf (or 10% of the global proven reserves of natural gas), it elevates Qatar to one of the world’s top 3 gas producers. It has the potential to supply up to 33 mmtpa, much of the current additional supply additions. Production will also look to begin in 2025.

Secondly, with Russia’s Balkan LNG project, that will enjoy a relatively modest 6.5 mmtpa output from the port of Ust-Luga. The state has recently agreed to underwrite the financing of the project to the tune of $12 billion in the hope of securing first production by 2025.

Elsewhere, natural gas production in the United States is set to reflect the growing demand from Asia with many producers focusing their attention towards exports in the coming years. With the right price environment to take advantage of Asia’s need for natural gas – producers are signing long-term agreements with Asian states and companies looking to minimize their exposure to an uncertain marketplace.

With Asian buyers keenly interested in US gas, the gates have opened to begin developments on new multi-billion dollar LNG projects. The demand recovery has placed LNG producers on the front foot to finish developments or ramp up production to meet the demand from Asian consumers.

Africa’s coastal states are enjoying a renaissance with gas discoveries along Senegal’s $4.8 billion project with bp is set to produce 2.5 million tonnes of LNG annually by 2023[6], Egypt has maxed out their LNG exports at 1.6 bcf/day while maintaining steady production of 6.5 – 7 bcf/day[7], while TotalEnergies $20 billion LNG project in Mozambique remains in the balance following a force majeure for security reasons.

The Price is Right

With the elevated LNG price and natural gas prices looking to maintain their status over the coming winter months, and as we look to the horizon of the energy transition, we should see that LNG will continue its rise as the alternative of choice to coal and fuel oil. Despite the concerns of substituting emissions from one to another, the shift to a greater demand for LNG appears to be cemented as a medium to long-term solution in Asia. With this in mind, it will be who can match that demand that fastest that will benefit the most. As we look to 2025 and beyond, when the FIDs become ‘first production’ only then we may see a reprieve from the high price environment.