tsafos, gas the next 10 years, february 2020

Natural Gas The Next 10 Years

Nikos Tsafos Senior Fellow, Energy Security and Climate Change Program

Naval Postgraduate School Monterey, CA — February 18, 2020

Natural Gas: The Next 10 Years

Why natural gas?

The global energy system increasingly relies on natural gas to meet its needs—and by 2040, even in a scenario where

the worlds meets its climate goals, gas could be the #1

energy source in the world.

2

Gas is a deeply political fuel that interacts with several cross currents from foreign policy to geoeconomics, to

sanctions and climate change. It is also a complex fuel that analysts so often get wrong.


This presentation

The global market for natural gas is being transformed, but change is often evolutionary

and multi-layered—broad generalizations can mislead

rather than illuminate.

3

The next 10 years will be shaped by the rise of four

mega-players and by a steady tension between gas as a

solution and gas as a problem in the energy transition.


Profound transformation for gas markets

4


Gas has gained market share from oil and coal

5

Source: BP, Statistical Review of World Energy (June 2019).

+9.2-8.3

-10.3


Market share remains regionally uneven

6



0

50

100

150

200

250

300

350

400

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

E

Asia Pacific Middle East Africa Americas Europe & CIS World

There is an unprecedented boom in LNG supply

7

million tons of liquefied natural gas

+67%

+2%

+43%

Source: BP, Statistical Review of World Energy (June 2019); 2019 estimate from IHS Press release.


Record-level investment in new supply

8

0

10

20

30

40

50

60

70

80

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Qatar Australia USA Russia Other

million tons of liquefied natural gas (annual capacity)

Qatar: 44% Australia: 71%

USA: 58%

Source: Company reports and industry press.


U.S. gas exports will rewire global gas system

9



Panama Bangladesh

More and more countries joining the LNG club

10

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Argentina U.A.E.

Brazil Canada

Chile Kuwait

Netherlands Thailand

Israel Malaysia

Singapore

Lithuania

Egypt Jordan

Pakistan Poland

Colombia Jamaica

Malta

Peru Papua New Guinea

New LNG exporters

Russia Yemen Angola Argentina

New LNG importers

Cameroon

Source: BP, Statistical Review of World Energy (June 2019); IGU, World LNG Report 2019; company reports.


3,849

2,613

805

2951360

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Total demand in 2018 Consumed locally Traded via pipeline Long-term LNG Short-term LNG

But most gas (still) never crosses a border

11

billion cubic meters

68% (vs. 28.5% for oil)

LNG: 11%

Source: BP, Statistical Review of World Energy (June 2019); spot estimate from IGU, World LNG Report 2019.


0

20

40

60

80

100

120

140

2000 2004 2008 2012 2016 2020Brent WTI Dubai JCC OPEC

Gas prices vary widely (unlike oil)

12

Brent +31% vs WTI

Oil pricesdollars per barrel

0

4

8

12

16

20

24

2000 2004 2008 2012 2016 2020Henry Hub Japan JKM TTF BAFA

Gas pricesdollars per MMBtu

Japan border ~5x vs United States

3x in 2019

Source: EIA, World Bank, Petroleum Association of Japan, OPEC, Japan Customs, Platts, ICE UK, BAFA.


Most regions have a hybrid pricing system

13

Source: IGU (2019), Global Gas Price Report.

22%

17%

17%

27%

75%

100%

47%

3%

64%

67%

27%

24%

19%

79%

79%

12%

15%

41%

65%

29%

15%

6%

14%

6%

4%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Mid East

Africa

Asia Pacific

Asia

L. America

FSU

Europe

N. America

Total

GAS PRICE FORMATION BY REGION (2018)Gas-on-Gas Oil indexed Regulated Other

https://www.igu.org/publications-page


0%

10%

20%

30%

40%

50%

60%

70%

20052007200920102012201320142015201620170%

10%

20%

30%

40%

50%

60%

70%

20052007200920102012201320142015201620172018

Slow and steady shift to gas-on-gas pricing

14

Consumed gas Traded gas

Gas-on-gasGas-on-gas

Oil linked

Oil linked

Regulated

OtherOther

Source: IGU (2019), Global Gas Price Report.

https://www.igu.org/publications-page


A multi-layered transformation

Market share Gas’ global market share is rising, but penetration (and growth) is regionally uneven.

New supply We are in the midst of an unprecedented supply boom, coupled with record-level investment in new supply.

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Trade flows North America will rewire trade flows in a market that is more complex and integrated.

Prices Steady move to gas-on-gas pricing, but price disparities still exist, and most regions have a hybrid pricing system.


The mega-players, the energy transition

16


Four players will define the next decade

17

Source: Tsafos, The Era of the Gas Mega-Players, September 10, 2019.

https://www.csis.org/analysis/era-gas-mega-players


Gas market more integrated and competitive

More integrated

Gas trade has mostly taken place within regions or within defined corridors. But Russia, the United States, Qatar, and China are all global players.

18

More competitive

U.S. market driven by private sector; large players in Russia and China are competing; only Qatar has consolidated position under QP.




But greater temptation to exert market power

Market structure

Move to gas-on-gas pricing and growing linkages between regions mean the market is more susceptible to efforts to exercise market power.

19

Spare capacity

All the major players will have some form of “spare capacity,” three at the hands of governments and one in the hands of the private sector.




A gas market with lots of geopolitical wrinkles

Russia Can it leverage partnerships into geopolitical gain?

Qatar How will it pick partners? Market access, overseas assets, geopolitics?

20

China How to boost energy security in a market dominated by the United States)?

United States How much to politicize LNG to boost exports and support energy security of allies; or through linkage to trade and sanctions?




Gas serves different needs in different markets

21

Source: Tsafos, How Will Natural Gas Fare in the Energy Transition?, January 14, 2020.

https://www.csis.org/analysis/how-will-natural-gas-fare-energy-transition


A simple schematic for gas in the energy transition

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Where will gas grow and where not

Power Gas will grow versus coal where gas is cheap or helped by policy; but will be squeezed by renewables.

Industry Strong role in petrochemicals; energy industry own use set by use of fossil fuels overall; few options for high-temperature process heat.

23

Buildings Gas use driven by a few places; electrification, district heating, hydrogen, will challenge gas but displacement will be slow.

Transport Likely missed window for passenger vehicles (and heavy duty transport too); marine transport most promising market.




Conclusion

The global market for natural gas is being transformed, but change is often evolutionary

and multi-layered—broad generalizations can mislead

rather than illuminate.

24

The next 10 years will be shaped by the rise of four

mega-players and by a steady tension between gas as a

solution and gas as a problem in the energy transition.

tsafos, gas the next 10 years, february 2020

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