Monetizing Natural Gas in the New “New Deal” Economy

Repeated rounds of regeneration and replenishment that sustain legacy production and open new frontiers characterize the global oil and gas upstream businesses. The U.S. domestic industry, in particular, moved aggressively along the oil and gas technology pathway to the next iteration in the shale era. The pursuit of light tight oil and shale gas plays resulted in production gains that reversed patterns previously taken as the long-term paradigm—lower and even declining U.S. supply, with the United States as a large, swing importer with broad geopolitical implications. The U.S. domestic upstream is distinguished by a number of attributes including privately owned lands and minerals, a diverse industry organization and funding sources, a large oil field service support industry and an independent midstream industry that helps to accomplish field-to-market linkages. The dominance of shale plays and focus on oilier acreage for value has linked natural gas supply strongly with the price of oil. This relationship will hold as the industry works through the best oil and liquids rich locations, yielding large increments of low-cost, associated gas byproduct. U.S. companies are monetizing abundant, cheap supply through power generation, petrochemicals and LNG exports, with the latter contributing to a new paradigm of the United States as a significant supplier to world markets. Future prospects, for the U.S. and global energy interests, hinge on the ability of U.S. producers to define business models that can support sustained profitability in the face of technical challenges and large volumes that can overwhelm midstream and downstream markets and their realized prices.

After years of growth, gas-fired generation became the largest source of electricity in 2015. New gas-fired capacity has been expanding most in regions with large baseload capacity retirements, all with access to low-cost shale gas. With more baseload plants slated to retire and cost of gas expected to remain competitive, gas burn should increase. There are headwinds. Decarbonization policies are spreading across the country promoting not only renewables but also other measures that can transform the power system to a more distributed structure. An anti-gas movement is expanding, stimulated by concerns around methane leaks, flaring and hydraulic fracturing, and makes obtaining social license to operate more difficult. These trends imply a reduction in gas-fired generation. Yet, there is growing awareness about technical limitations and costs of integrating large intermittent renewable capacity. Retail costs have been increasing in states with most ambitious clean energy goals. The gas industry is reducing its environmental externalities across the supply chain. Combined with massive reductions in local pollution when gas-fired generation replaces coal-fired generation, gas could regain public acceptance. Given all of these uncertainties, I put forth a qualitative outlook of roughly +/−30 percent change in gas burn by 2035.

Natural gas supply growth, in particular from light tight oil and shale gas plays in the United States, and resulting low prices for natural gas (methane and natural gas liquids [NGLs]), spurred a significant recovery in petrochemicals, especially along the U.S. Gulf Coast. The petrochemical industry will have invested nearly $150 billion by the early 2020s across a variety of projects. Ethane, which accounts for roughly 40 percent of all NGL volumes, prompted large investments in steam crackers, both new and expansions, as well as in facilities along the ethylene value chain, and the United States has become a large exporter of liquefied petroleum gas or LPG owing to increased propane and butane production. Access to global markets for chemical products has been critical to the creation of value across the hydrocarbon value chain, and this industrial renaissance is expected to create incremental gas demand of 4 billion cubic feet per day (Bcf/d), driven mostly by the use of methane as feedstock in methanol and fertilizer plants.

The global liquefied natural gas (LNG) marketplace has been amply supplied for some time, partly a consequence of the impact on demand of oil-indexed LNG during a period of rapidly appreciating oil prices. Global supply also has been influenced by the growth in U.S. natural gas production and the surge of interest in monetizing U.S. gas resources via the global LNG value chain. The Covid-19 pandemic is having a major impact on the global LNG market, reducing demand and delaying final investment decisions (FIDs) on new liquefaction capacity. Expectations that the growing demand would create a need for new capacity to come on stream by the mid-2020s to balance the market are having to be revisited. Developers of nearly 500 Mtpa of proposed new liquefaction capacity, half of it in the U.S., which was being lined up to fill the potential gap between supply and demand, are having to revisit their plans because buyers are reluctant to enter into new long-term commitments required to underpin the investment. How will the U.S. LNG exports fare given these indications? U.S. developers and suppliers must compete in an industry mix within which upstream and LNG project costs face considerable pressure. With more options than ever for customers, U.S. and North American developers will need creative commercial tool kits.

The evolution of natural gas demand centers has underscored important differences between existing and potential gas consumers. Much of this is rooted in the level of economic development and societal wealth in countries, as well as ease of access to natural gas resources. In this context, countries lend themselves to classification into “Old World” and “New World” of gas demand. Though imprecise, such dichotomy helps understand different needs that countries have as well as different role gas can play in countries’ energy futures. In the Old World, natural gas has been an important and useful commodity over the past decades, but many countries now aim to reduce gas consumption as part of their decarbonization policies. Higher levels of economic development, societal wealth, and environmental awareness typical for the Old World make such goals less controversial than in the countries of the New World where natural gas has been underutilized and needs to compete with coal that often is the main source of energy supply. Natural gas offers new avenues for growth and better quality of life for billions of people including those living within the borders of new economic powerhouses, China and India, and beyond. But as promising as it is, monetization of natural gas in the New World faces serious obstacles related to affordability, insufficient and expensive infrastructure, lack of competitive markets, often burdensome regulatory conditions, and general energy security concerns since much of the world needs to import natural gas from often faraway sources.

What makes a natural gas market work? Based on a number of case studies and projects in various countries, we offer a natural gas market decision-tree approach that helps to identify and isolate the main roadblocks that typically prevent evolution of liquid natural gas markets. For countries that must import natural gas, the price of gas relative to substitute fuels is a distinct consideration. Too few countries allow market-based natural gas prices that reflect internal supply and demand dynamics. Interactions across spheres of influence—politics, legal, policy, regulatory, market design—can affect natural gas infrastructure investments, undermining even “license to operate” agreements that seem solid. Any number of challenges affect natural gas monetization, including policies to promote competing alternative energy sources as well as institutional capacity constraints that impact overall energy sector development. Capital intensity of natural gas value chains and creditworthiness of home governments are distinct considerations. We provide a snapshot of global natural gas market maturity across a selection of countries and regions.

Although there is some uncertainty given the hype around “energy transition”, natural gas demand should increase globally for at least another two decades. Growing economies in the New World certainly will consume more natural gas for many reasons: the global resource base is abundant; LNG trade is making gas more widely available; its cleaner burning qualities make it a fuel of choice over coal and liquids; and its reliability and scalability give it an advantage over intermittent wind and solar. Overall, natural gas fits energy-secure portfolios of growing economies that prioritize economic and human development with benefits visible to the public in the short-term. In contrast, decarbonization policies are long-term and uncertain with geographically dispersed benefits. Even in the Old World, societies can only balance retirement of coal plants at sufficient scale and quickly enough with combined-cycle gas plants. The shift in demand growth from the more market-friendly Old World to the New World, where governments and state-owned entities dominate energy sectors, raises questions about natural gas monetization. Can resources be developed and supplies delivered to meet both commercial criteria and affordability, especially to substitute for coal in growing markets? Public funding has sustained gas infrastructure development in many countries, and subsidies have made gas competitive for many consumers. Can governments continue promoting gas, given other spending priorities in a world that is de-globalizing, with even the Chinese economy facing budget constraints?