January 31, 2024 [IGU]- The announced halt to the review of key US LNG export projects sends an unsettling signal to global energy markets.
The US is the world’s largest LNG exporter, and has revolutionised the global gas market, supercharging its liberalisation by introducing great commercial flexibility in trade and contracts. The functioning of a flexible global gas market made it possible to keep the world’s energy system above water during the worst energy crisis in memory. Having open, flexible, transparent, competitive, and reliable gas markets is imperative to ensuring the success of the global energy transition and safeguarding international energy security, while markets provide the best counterbalance to the politicisation of energy supply.
“The current dynamic we are seeing unfold is highly worrying. It is eroding these fundamental market principles and will harm global energy security and emission reduction” said Menelaos (Mel) Ydreos, Secretary General of the International Gas Union.
Globally, gas supply remains tight, and the market is vulnerable to more volatility and price escalation.Despite a cooling of prices in Europe and Asia, they remain nearly double the pre-crisis levels. But the world is not yet through the crisis. Until new volumes of LNG come onstream, the global market will hang on a fragile balance of demand reductions and stability in the current supply level, especially when it comes to the flexible LNG, which allows bringing gas to remote markets that need it. The mild winter in the northern hemisphere, together with demand-reducing factors including affordability issues, have contributed to the subdued demand in Europe thus far. At the same time, demand in Asia is growing again, adding pressure to this fragile balance.
LNG is playing a key role in the reliability of the global energy system and in keeping emissions in check. Gas produces about half of the greenhouse gas emissions of coal on a lifecycle basis. In the form of LNG, it has unmatched scalability and flexibility, making it a critical resiliency resource in the energy transition, as seen through its rapid deployment to offset the Russian pipeline gas shortages in Europe. The surge of renewable energy will intensify the need for responsive dispatchable tools to balance the grid. Natural gas, low carbon and renewable gases will therefore need to play a key role during intermittency and peak periods (while batteries may fulfil the balancing needs for shorter duration periods and provide key rapid reliability and stabilisation services).
Restoring global LNG supply balance and energy security requires the current and forecasted shortfall to be addressed. Despite recent optimism about new gas project investment growth, this comes after a prolonged under-investment period. Between 2014 and 2020 investments in gas supply dropped by 58%. These began to recover marginally in 2021, however current levels of investment and off-take agreements are still falling short of the growing global demand.
Limiting the supply of gas into the global market will not reduce emissions; it will do the opposite.Over the last two years we have seen high gas prices lead to gas-to-coal switching and to all-time high emissions from coal in line with record consumption. Despite record additions of renewables and the resurgence of nuclear in 2023, the decade-long trend of coal having a 40% share of global power sector emissions continued.
Gas is the lowest emission, highly efficient, abundant, and non-air polluting hydrocarbon. It is critical for providing power system flexibility and balancing the grid in longer periods of renewables intermittency, particularly those that fall outside of the technical capabilities of the storage technologies that are commercially available today across the world. Beyond electricity, which still represents about a fifth of the total energy consumed by the world’s economies, gas is critical for heating buildings, fuelling industry, and providing feedstock to critical sectors like food fertiliser production. Recent gas supply shortages and extreme price volatility have resulted in skyrocketing fertiliser costs, with obvious knock-on effects on food prices. Fertiliser prices more than tripled between 2020 and 2022. According to the IMF, a 1 percent increase in fertilizer prices spikes food commodity prices by 0.45 percent.
While natural gas will continue to play a pivotal role in the energy transition, facilitating the decarbonisation of the global economy, the gas sector itself will also continue to undergo a process of decarbonisation. This is imperative, and we call on the policymakers and industry to find urgent solutions for accelerating the deployment of carbon capture, low-carbon, and renewable gases. We also stress that doubling down on eliminating methane emissions is required to make this transition possible.
Investments emissions-eliminating technology for gas and LNG infrastructure will ensure project longevity, guaranteeing long-term asset use in parallel with the growing adoption of low-carbon and renewable gases. For instance, renewable biomethane and e-methane can be liquified, and can leverage existing natural gas infrastructure. The potential of utilising existing LNG infrastructure for liquid hydrogen carriers, like ammonia or liquid hydrogen, is also gaining traction, with rising investments and R&D efforts. Finally, the right policy frameworks, such as putting a price on emissions and putting a value on their reduction, will help encourage all these investments.
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