The Future of Natural Gas in a Renewable World
by Christina Nagy McKenna, Enerdynamics Facilitator
Energy's future is electric, renewable, and global. Electric vehicles, solar and wind farms, and electric growth in developing countries dominate the headlines of future projections in the energy industry. It is not unusual for discussions about the future of natural gas to skip the bold print reserved for oil, coal, nuclear, and renewables. But does a lack of attention equate to a dim future? A cursory glance around the industry reveals that the fuel that supplies 22% of the world’s energy today will continue to grow in the short and medium term, but it will likely plateau in the next 20 years.
In the meantime, global demand growth for natural gas will be dominated by China as it and other developing countries increase their use of gas in place of coal. The electric industry will use natural gas as the fuel for baseload plants and for highly flexible plants. Industrial consumers will fuel demand growth as they use natural gas in place of coal and oil. And transportation markets will grow for liquified natural gas (LNG) as maritime fuel laws change.
Market growth: China and everyone else
The biggest impact on global natural gas demand will be market growth in China. According to a recent report by McKinsey, demand growth in China is greater than the combined growth of the next 10 largest growth countries, including the United States. China will be responsible for almost one half of global market demand through 2035. The Chinese government is aggressively replacing coal as it seeks to improve air quality nationwide. This also puts China in the cat bird seat to become the largest importer of natural gas in the world. It currently sits second only to Japan, having passed Korea in 2017 as LNG imports surged by 46% in 2017. Preliminary data from 2018 supports continued double-digit growth. For China, its impact on the global natural gas market soon may be unprecedented. For the United States, which is poised to become the third largest exporter of LNG by the end of 2019, China’s roll as the potential market maker for LNG further cements their relationship as vital trade partners.
Source: GIIGNL LNG reports (2013-16), Global Trade Tracker export-import trade statistics (2017), and IHS Markit
The future of natural gas in the power sector
One of the largest consumers of natural gas is power generation, however, this is poised to change dramatically over the next two decades as solar and wind generation become more affordable and continue to have government support in select markets. Improvements in electric battery storage will put additional pressure on natural gas as the preferred short-term load-balancing tool. Worldwide electricity demand is forecasted to increase due to growth in developing parts of the world including China, India, and Africa. Renewables already offer the advantage of environmental sustainability, an important detail in areas of the world like China where urban air quality is notoriously poor.
As renewables become more affordable and reliable and as governments continue to subsidize them to increase the speed of their development, natural gas, coal, and oil will continue to be marginalized in the power sector. However, natural gas holds a couple of key advantages that will prolong its use as a power plant fuel. First, it is the most environmentally benign of the fossil fuels. Thus, as nuclear and coal plants are retired, and if natural gas prices remain low, gas-fired power plants will likely take over the roll of baseload plants. Second, gas-fired combined-cycle plants and small peaking plants can operate in a flexible manner, which make them desirable tools to balance system loads.
Consumer growth: industrial and transportation sectors
Worldwide consumer demand in the industrial and transportation sectors are forecasted to grow for the next two decades. For global industrial customers whose countries have their own natural gas supplies or import it, natural gas is a better alternative to coal and oil for environmental reasons and ease of use. When compared to oil, it holds a price advantage as well. In the U.S., industrial customers’ natural gas use is forecasted to grow, as seen in the graph below.
Source: U.S. Energy Information Administration, Annual Energy Outlook 2018 Reference case
The maritime industry is looking to LNG as a clean fuel alternative due to regulation changes. Beginning in January 2020, the International Marine Organization (IMO) will enforce new regulations that limit the sulfur content of marine fuels to 0.5% by weight, down significantly from the 3.5% that was put in place in 2012. Ship owners have a few options: install scrubbers if they wish to continue using heavy sulfur residual fuels; switch to lower sulfur residual fuels or blend fuels to reach lower sulfur levels; or switch to LNG. There are currently 143 LNG-powered vessels in operation, up from 118 vessels in 2017. And 130+ additional LNG-ready ships are on order or in operation. These ships include cruise ships, container ships, tankers, car carriers, and very large ore carriers.
The future of the natural gas industry
Predicting the future is an uncertain art, but what seems certain is that the energy industry is poised for a large transformation in the next two decades, due primarily to changes occurring in the power sector. The natural gas industry will change as well. Its use in electric generation will evolve by growing in some markets such as China and developing countries, but it will begin losing ground to renewables in other markets. Meanwhile, the industrial sector and transport sector are likely to expand their uses of natural gas. So yes, the future mostly like is electric and renewable, but it will still be partially based on natural gas for quite some time, and it will most certainly be global.
Does your workforce need a deeper understanding of gas markets? Enerdynamics seminars including Gas Market Dynamics and/or Gas Fundamentals for Power Markets can provide employees the knowledge they need.