Gas could be a bridge to nowhere on the energy road map
Conventional wisdom says liquefied natural gas is the future of energy; It bridges the gap between the world abandoning fossil fuels and the introduction of renewable resources. But this optimistic perspective faces a reckoning. LNG is threatened by a pincer movement that, ironically, involves two old and new resources that it must bridge: coal and solar.
The cracks in the bridge could not have appeared at a worse time. The LNG market is about to witness its third major wave of supply growth in 20 years. If demand growth is weaker than expected, the only way the market can rebalance is with much lower prices.
The beauty of LNG is that when supercooled to minus 160 degrees, it turns into a liquid that can be loaded onto tankers and shipped anywhere in the world, just like oil. Thus, LNG can reach every customer, bypassing the historical limitation of gas pipelines.
Its main advantage, the unlimited nature of gas supply, becomes one of the most important factors contributing to its collapse.Credit: Bloomberg
Since the turn of the millennium, the global LNG market has absorbed each wave of supply fairly quickly, over a period of two to three years. China absorbed much of the 2009-11 wave, when supply increased by nearly 40 percent following the completion of various projects in Qatar. Europe embraced the 2016-19 wave, which came after a massive increase in US export capacity increased global output by 45 percent.
Now a third wave is coming, which is likely to extend from 2026 to 2030. This is by far the largest and could contribute a further 60 percent to world supply. Therefore, demand is important.
Enter bridge theory. It makes perfect sense on paper. Since LNG is cleaner than coal, a world concerned about the climate crisis will turn to LNG. Moreover, LNG offers flexibility as gas-fired power generators can power on and off to offset solar and wind outages. But what looks good in theory doesn’t always work in the real world; especially in Asia, which is now the locomotive of energy consumption. Here, economic development takes precedence over the fight against climate change.
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Perhaps lower LNG prices could encourage a switch from coal to gas; I am skeptical. Developing countries in Asia burn coal for electricity not just because the commodity is so cheap, but because it is mined locally, or at least regionally.
Coal versus imported LNG strengthens domestic energy security, provides millions of local jobs in often deprived regions, and maintains the balance of payments. Look at electricity generation in places like the Philippines and Vietnam, where coal is on the rise. And above all, look at China, where coal-fired electricity generation hit an all-time high in August.
