Global Forces Drive Natural Gas Supply and Demand
As much as recent natural gas industry dynamics are influenced by price, the reality is that the global market always is truly driven by supply and demand. Where gas reserves reside, where energy demand is needed, and how supply is being transported all tell a more holistic story of the market’s dynamics. The current disparity in supply and demand is giving natural gas buyers the upper hand in negotiating contracts and is affecting how organizations throughout the value chain are planning for the future.
The 2017 Strategic Directions: Natural Gas Industry Report reflects how global forces are impacting all sectors of the natural gas industry:
- Trade Relations: Saudi Arabia, the United Arab Emirates, Bahrain and Egypt recently severed diplomatic, trade and transport ties with Qatar, the world’s biggest supplier of liquefied natural gas (LNG). The sanctions highlight the potential impacts of interrupted or blocked supply routes around the Middle East and decreased volumes of LNG on the market.
- Growing Population Centers: Projections for population surges in regions such as India, Southeast Asia and Sub-Saharan Africa will increase demand in both developed and developing areas that will require new infrastructure to receive, process and transport gas supply.
- U.S. “Energy Dominance”: The presidential administration is pushing increased capital expenditures toward LNG export terminals. A policy shift signaling support for the United States to sell more energy to new markets such as China could address the current market oversupply; this and other trends point to the United States emerging as a major LNG supplier.
- Discovery of Natural Gas Reserves: The discovery of natural gas reserves in resourcerich regions such as East Africa is creating opportunities to develop projects that integrate more power domestically and boost local economies.
These factors seemingly play into how the industry views the market, with 90 percent of survey respondents naming economic/demand growth as a top issue. Low gas prices and price stability, and gas supply reliability round out the top three natural gas market challenges.
As the industry plans for differing geopolitical scenarios that could affect these top issues, forward-thinking leaders are aligning businesses to prepare for the long-term ramifications. For LNG transport, if shipping channels are blocked because of regional tensions, are there alternate methods of moving supply to buyers? Will buyers backfill supply by purchasing from the spot market? Will emerging supply leaders such as the United States and Australia capitalize by providing more flexible contracts to buyers? While these may be seen as challenges, the industry is keeping a close watch on global trends and strategically mapping out business opportunities from each scenario.
Supply Reliability Hinges on Infrastructure Investments
Oil and gas leaders must look beyond the next few years and plan for decades to come. For example, investments made now in infrastructure will be key to support future economic growth and facilitate reliable transport of natural gas to demand centers. In India, Swan LNG Private Limited is developing the country’s first floating storage and regasification unit (FSRU) import terminal, which will increase LNG import capacity by 2022.
Black & Veatch is providing engineering, procurement and construction services on the project, which will support development of the Indian gas market, projected to be one of the fastest growing in the world in the next two decades.
While financial investment decisions have slowed in some regions, plans to advance gas-to-power projects are beginning to positively impact economies, particularly in underdeveloped regions. In many African countries that historically have been net exporters of gas, a turning point is being reached, and more gas is slated to be utilized incountry. Foreign investments from trade partners in China and Japan are helping energy projects there come to fruition, which will provide much-needed baseload power to rural areas. When completed, these projects could dramatically affect LNG trade around the world.
In the United States, build-out of new pipeline capacity necessary to keep pace with increases in production volume continues to be a challenge. Pipeline capacity was listed by 72 percent of survey respondents as a critical infrastructure investment for growth in the natural gas market.
These developments and their interrelated impacts are seen throughout this year’s report:
Market Outlook: One of the most dramatic swings from previous years’ surveys is the expectation for global crude oil prices between now and 2020. Of natural gas industry respondents, nearly half expect prices to be between $40 and $50 per barrel. In our 2016 report, only 7 percent listed this price range as their expectation. This shift could be attributed directly to recent Organization of the Petroleum Exporting Countries (OPEC) quota cuts, which highlighted that OPEC’s control of the market and ability to drive oil prices up may be diminishing.
Natural Gas’s Latin American Connection: Rising demand in Mexico and Latin America presents broad opportunities across the industry. Steadily growing economies are spiking energy demand and, in turn, catalyzing soaring imports from the United States. However, conditions beyond these neighboring countries present critical challenges that must be overcome to seize natural gas’s potential as a cheap, reliable and cleaner power generation source.
Critical Considerations for Global Gas-to-Power Deployment Success: Many developing regions are working to establish stable, long-term gas markets. These markets will provide a base for energy diversification, sustained growth and local job creation. South Africa, for example, has launched its LNG-to-Power Independent Power Producer Procurement Programme for 3 GW of new gas-to-power capacity, and other regions with significant gas deposits, such as South America, Bangladesh and Indonesia, have similar gas-to-power efforts under way.
Convergence with the Electric Market: Clean burning, cost-effective and reliable, the benefits of natural gas are undeniable. Amid the decline of coal and the increased integration of solar and wind power, providers will continue to see value in gas-fired generation, especially when it comes to backstopping renewable energy supply.
Regulatory Mandates: For years, Environmental Protection Agency (EPA) regulations have shaped natural gas operations in the United States, but the presidential administration has sparked discussions on how and when new methane regulations will be enforced. Particularly for new pipeline infrastructure, federal compliance requirements could delay or accelerate project approvals and overall timelines for getting gas to markets inside and out of the United States.
Seeing the Global Picture
Whether in the United States or abroad, the industry leaders most poised for future growth in the natural gas industry will be the ones who see the broader global picture. Regardless of their role in the supply chain, organizations will be subject to impacts from geopolitical crises and increasing foreign competition. The next few years could bring about drastic changes, including who the dominant market players are and what technology is being applied to bring supply to demand centers. Analysts still predict a market rebound within the next 10 years. However, those who do not engage in proactive planning, especially in regard to long-term projects, risk being unable to capitalize on big opportunities down the road.