International natural gas markets are, thanks to technological progress and the emergence of new major global players, undergoing a major shift from regional to global markets. Part of these tectonic shifts are due to the dramatic US shale gas revolution which started about a decade ago, but it is also due to the strong development of LNG (liquified natural gas) markets. Indeed, after the very strong increase in Qatar’s LNG export capacity some ten years ago, catapulting it by far into first place, most recent developments have seen Australia overtaking Qatar and in the future we may see three countries (Qatar, Australia and the US) each exporting LNG volumes well above 100 bcm. Russia, which has always been a large pipeline gas exporter to Europe, is also emerging as a major LNG exporter, as potentially are some African countries. As far as gas demand is concerned, it is increasingly shifting to Asia, in particular Japan, China, South Korea, India and other Southeast Asian countries, even though Europe has also recently increased its LNG imports.
Moreover, the contractual set-up of gas markets is also changing with an increasing decoupling of the oil and gas price linkage, elimination of destination clauses, reduction of the take-or-pay contracts, the increasing role of spot pricing and the emergence of specific financial markets (future contracts) making gas markets increasingly look like oil markets. Indeed, while gas markets had traditionally been regional with relatively little interaction among the different continents, they are increasingly becoming global.
All of this has important geopolitical implications. We should mention the repeated gas crises between Russia and Ukraine which had their origin in the break-up of the Soviet Union twenty years ago. We must obviously also mention the political crises between Russia and the EU following the annexation of Crimea and subsequent Western sanctions on Russia, all of which have considerably worsened gas relations between Russia and Europe, making energy supply security again a top priority for European policymaking together with its climate policies which are aimed at decarbonizing the EU by mid-century and therefore questioning the long-term role of natural gas in its energy mix. But we must also mention the recent commercial tensions between the US and China which, depending on how they evolve, may have a considerable impact on future US LNG exports to China.
In Europe, we may see a battleground for Russian pipeline gas and US LNG exports. In the Middle East we must mention the recent political conflict between Saudi Arabia, the UAE and Egypt on the one side and Qatar on the other, as well as the bellicose attitude of the US and Saudi Arabia on the one side, and Iran on the other. All of this has implications on gas markets. Let us just remember that Iran has the second largest gas reserves in the world and with the absence of sanctions could also become a major LNG exporter. It is clear that economic and competitiveness considerations alone are insufficient to explain future international gas market and trade evolutions as there is again an increasingly major geopolitical component involved.
Of all fossil fuels, natural gas is the one experiencing the largest growth worldwide: since 1990 the global natural gas demand has doubled reaching 3,849 bcm in 2018 (annual average growth rate of 2.5%, to be compared to an annual average growth rate of 1.9% for coal and 1.3% for oil over the same period). While the share of oil in total primary energy demand declined from 40% in 1990 to 33.6% in 2018, the share of coal still represents some 27% (due to China it increased to 30% in 2010, but is now declining rapidly), the share of natural gas has increased from 20% in 1990 to almost 24% today. Most forecasts expect natural gas’ share to overtake coal’s share before 2025 and the oil share around 2040-45.
Even more impressive has been dramatic LNG growth ,with average annual increases of 6.6% over the last two decades. This dramatic growth rate can also be appreciated by the following figures: while back in 1990, LNG represented 16% of the global gas trade, presently it already represents 46%. The International Energy Agency expects LNG trade to double by 2040 reaching some 730 bcm (350 bcm in 2018), representing by then about two thirds of global gas trade.
During the present and next decade, we expect three countries to dominate LNG exports: Qatar, Australia and the US, though Russia has the ambition to progressively also become part of this group of major LNG exporting nations. So far, Russia has mainly been a major (the largest) pipeline gas exporter, with most of its pipelines going to Europe, thus having a major security of demand issue.
Qatar’s main objective is to remain the world’s number one LNG exporter, and for this it has some major competitive advantages: huge reserves, very low production costs, favourable geography allowing Qatar to arbitrate between the Atlantic and the Pacific gas markets. Due to competition from Australia, Qatar recently eliminated its self-imposed moratorium of 77 Mt and announced it will increase its export potential to 126 Mt/y (some 165 bcm/y) by 2027, i.e. 6 additional LNG liquefaction trains of 7.8 Mt each.
Australia has tremendously increased its LNG production capacity during recent years, overtaking Qatar last year, but these LNG export projects have been sanctioned at a time when oil (and thus gas) prices were still very high, thus pre-2015. Australian LNG exports, which are high cost, are principally destined for Asian markets and at the current lower energy prices it will be difficult to sanction added greenfield LNG export projects.
With depleting conventional gas fields, the US expected in the 1990s to progressively run out of natural gas and therefore planned to import massive quantities of LNG. But then during the 2000s, thanks to the spectacular development of shale gas (520 bcm in 2018), the US has become the world’s largest gas producer (ahead of Russia) and is expected to become a major LNG exporter during the 2020 decade, potentially at a level similar to Qatar and Australia. The importance of US LNG for the global gas markets is, however, not only related to the huge size of potential export volumes, but also to its original and very flexible contractual arrangements, which may revolutionize the whole LNG industry.
Presently, the EU is the world’s largest gas importer, ahead of China, but going forward we expect China to dramatically increase its gas imports due both to the huge size of its economy, which will continue to grow, and to an increasingly larger share of gas in its energy mix at the expense of coal. China imports gas mainly from Kazakhstan, Myanmar, and recently also Russia (thanks to the recently built Power of Siberia pipeline). In addition, China is developing a huge LNG regasification capacity on its coast allowing it to import increasingly important LNG volumes. There would in principle be a strong complementarity with the US to import high volumes of US LNG. In fact, this would make it possible to somewhat balance out the highly unequal trade relations between the two countries, but the increasingly bellicose sanction politics of the present US administration may discourage China from relying on large-scale US LNG imports.
Natural gas has an important role in the EU’s energy mix representing a share of some 23%. Some 321 bcm of natural gas were imported in 2018, meaning an import dependency ratio of some 60%. As EU domestic production will continue to fall, short- to medium-term imports are expected to increase, also taking into account that the EU wants to decarbonize and therefore first reduce its coal consumption. The question concerns longer-term natural gas demand, because as the EU decarbonizes further, it will eventually also need to massively reduce its use of natural gas. Traditionally, the EU’s gas supply was assured by an oligopoly consisting principally of Russia, Norway and Algeria, with in recent years Qatari LNG and other LNG adding to the equation. Going forward, we expect a major battleground between Russian pipeline gas and US LNG in Europe (none of the other suppliers can add significant quantities of gas on EU markets). This competition will for sure be profitable for European consumers as it will provide a downward pressure on prices.
Russian gas has always been controversial (staring in the late 1970s when Europe started to import Soviet Union gas) and continues to be controversial (in particular after the two Ukrainian gas crises of January 2006 and January 2009): some stakeholders/observers accuse Russia of using the gas as a political weapon, others argue that Russia is just a commercial player. The truth is probably somewhere in between. In any case, since Europe has a regasification capacity of about 213 bcm, which in recent years has been used between 20% and 30%, some 150-170 bcm of unused capacity is available, which is about the figure for EU gas imports from Russia during recent years. Last year, the EU’s LNG imports strongly increased, but even with a 50% utilization rate there is still more than 100 bcm of idle capacity. This is to say that, should Russian supply routes be interrupted for whatever technical or political reason, there is enough alternative LNG import capacity available to provide sufficient supply security to European consumers. Indeed, since the last Ukrainian crisis of some ten years ago, huge efforts have been made to strongly improve the internal gas market thus allowing gas to be moved from one part of the continent to another. No market player, not even Russia, can any longer play a dominant role and impose its market power on parts of Europe. Thus the US and other LNG supplies, which are much more flexible than pipeline gas, will act as a guarantee for future supply security, but this does not imply that Europe should necessarily need to diversify away from Russia if other gas is more expensive than Russian gas.