Douglas Westwood: A Bridge From Black to Green?

In recent years, liquefied natural gas (LNG) has become integral to meeting global energy demand. However, as the oil and gas industry continues to navigate the prolonged downturn, capital intensive export LNG projects have been in the spot light due to questionable economic viability. A key driver is oversupply in the global LNG market – spot prices are expected to remain low in the near-term (Henry Hub averaged $1.92MMBtu in May 2016 a 58 percent decline from May 2014). This gloomy scenario presents limited economic incentives for companies to commit to capital intensive projects in a period plagued with budget austerity.

 

With the world’s LNG export capacity currently above 310.8 mmtpa, an additional 30.8 mmtpa is expected to be added by the end of 2016 – annual additions are expected to increase by 37 percent in 2017. However, demand is expected to plateau over the next two years. Reduced demand from Japan will likely be made up by growth from China and India. Both of these factors increase the risk of a short-term demand – supply imbalance. Massive investment prior to the industry downturn on large Australian and U.S. LNG projects has driven this growth. Other projects expected over the same period include the PFLNG-Satu (Malaysia), Prelude FLNG (Australia), Yamal LNG Train 1 (Russia) and Bintulu LNG train 9 (Malaysia).

 

Despite near term concerns of oversupply, natural gas is expected to play a vital role as a bridge fuel between environmentally damaging coal and oil to renewables. This will be vital to ensuring that the COP21 commitment to limiting global temperature increase to 1.5 degrees by the middle of the century is achievable. There is plentiful gas supply, as well as massive yet to be developed gas reserves in the Mediterranean Sea, East African Basin, and various unconventional reserves. This is the window of opportunity to implement constructive legislative strategies to help switch industries with heavy carbon footprints, such as the maritime industry to gas. Such a shift in legislative strategy and improvement in technology will increase both the appeal and use of a fuel that could help lower the global carbon footprint.