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As originally published in Pipeline & Gas Journal
By: IBISWorld Analyst, Thomas Larson
Access to natural gas has never been easier. Since 2005, countries with natural gas reserves have been ramping up their extraction efforts, resulting in a supply surplus in the United States and abroad. This years-long trend has prompted more suppliers to expand their reach into the global marketplace, and has essentially motivated suppliers to create new customers and markets outside of their respective countries and regions.
IBISWorld expects this trend toward a highly globalized market will persist as natural gas continues to be a cheaper and preferred energy source in the global transition to a low-carbon economy.
Natural gas is available as compressed natural gas (CNG) or it can undergo additional processing to become liquefied natural gas (LNG). CNG is most often sold directly to buyers that tap into a pipeline, but it can also be stored underground, where a supplier or user can access it at a later time. While convenient, buyers are often responsible for bearing the costs of constructing pipelines that go directly to their facilities, which has made many businesses averse to using natural gas in the past.
Conversely, LNG is more easily stored and transported via dedicated tank, but high transportation costs have typically offset any cost-benefits of using natural gas. As a result, the high risk of the natural gas market, regardless of whether it is CNG or LNG, has prompted many businesses to turn to coal, petroleum, nuclear power and other sources. The market has been going through a transformation, however.
Within the United States, higher levels of extraction and production activity have created a domestic oversupply. Coupled with new natural gas reserve discoveries around the globe – including Tanzania, Australia and Qatar – suppliers have been seeking new customer outlets for their natural gas rather than cutting production. This has led to an influx in infrastructure investments on a global scale, including pipeline construction and import and export terminal projects.
Supplier rationale is that by making investments now, they’ll be rewarded with new buyers in new markets, allowing them to keep production at high levels. These changes to the worldwide market have signaled the end of the fragmented, geo-restricted natural gas market.
IBISWorld expects rising globalization will boost competition among suppliers in the next three years. Suppliers are increasingly in direct competition with one another because their reach in the market is expanding and supply contracts have become shorter. Furthermore, the increased distribution scope is anticipated to benefit buyers with international operations, because a single supplier can meet all of their needs.
Additionally, globalization will mitigate supply chain risk. As more countries with vast natural gas reserves lease out space to companies for extraction activity, IBISWorld anticipates more suppliers will compete on a global scale. Thus, buyers will have more workarounds when it comes to dealing with problems, such as weather, that impede access to natural gas from a particular supplier.
Less Energy Dependent
Imports have also been necessary to meet domestic energy demand. Nevertheless, energy independence has been a promise from political leaders for decades. And while the United States still relies on imported petroleum products and natural gas, the country has become less energy dependent on foreign countries.
The U.S. has emerged as the global leader in total natural gas production, vastly surpassing second-place Russia by roughly 162.3 Bcm of product, which has reduced the need for imports. Despite producing the most natural gas of any country, the U.S. exports only 5.5% of its LNG supply. Instead, the U.S. has elected to retain most of its supply as a means of electricity generation, resulting in natural gas beating out coal to become the energy source of choice in 2016.
The U.S. has increased pipeline construction activity to move natural gas to domestic regions that do not have underground reserves. For example, the Federal Energy Regulatory Commission (FERC) on June 9 authorized the partial operation of the Sabal Trail pipeline into Florida; the pipeline became fully operational at the end of June. The pipeline stems from compressor stations in Alabama on the Transco line, which connects to pipelines that originate in the Gulf, and will eventually extend into the Northeast to a hub in central Florida by the end of 2018.
The Transco line is expected to go through two more phases of construction, from 2017 to 2021, to increase the capacity of natural gas that can reach the Sabal Trail. The completion of the most recent phase of the Transco line comes on the back of a recently finished pipeline project from Sempra Energy. The two new pipelines were recently put into service to send U.S. natural gas from Texas to Mexico, which is the leading importer of U.S. natural gas. Both pipelines will continue growing, with additional projects intended to extend into Mexico set for completion in late 2017 and 2018.
Bucking the national trend of the switch to natural gas, the Midwest still relies predominantly on coal power. Coal production is deeply ingrained in many Midwest states’ economies, and the region’s access to natural gas is limited, compared to others. As a result, coal has been critical to cities and towns from Ohio to Illinois for decades. However, the gap between coal and natural gas use across the region has been narrowing on a yearly basis according to data from the Energy Information Association.
IBISWorld anticipates as the price of gas continues dropping – having already fallen at an annualized rate of 10.1% in the past three years – it will become a more cost-effective energy solution. In turn, coal plants across the country as a whole will struggle to compete, eventually leading to natural gas reigning supreme in the Midwest.
As a result, IBISWorld also expects an uptick in infrastructure projects, including pipelines and exploration projects, which will connect natural gas pipelines to areas that were formerly dominated by the coal industry, such as southern Illinois and parts of Indiana and Ohio.
In a sign of the shift in the energy landscape, the Trump administration officially dubbed the last week of June as “Energy Week.” Energy Week comes on the back of President Trump’s Energy Dominance policy, which seeks to increase the reach of all U.S.-produced energy products around the world.
In April, the president signed an executive order that reversed an action from President Obama. The “America-First Offshore Energy Strategy” order made areas in the Arctic, Atlantic and Pacific open to leasing for the purpose of exploration and drilling. Over time, these areas will increase the nation’s ability to ship natural gas to overseas buyers, particularly those in the Eastern Europe and Asian markets.
Energy Week was capped by a landmark deal with South Korea. South Korean energy companies announced four partnerships with U.S. companies to assess future business opportunities. In particular, South Korean companies are interested in LNG investments in Alaska, Texas and Louisiana. South Korea was already a primary importer of U.S. natural gas before the deal, but the construction of more export terminals along the U.S. coasts will simplify and increase transportation to other Asian countries and Eastern Europe as well.
Currently, natural gas imports constitute only 0.4% of the U.S. natural gas market, but it is generally expected that the United States will become a net exporter of natural gas within the next five years – a feat that had not been accomplished for several decades.
Geopolitics at Play
The Energy Dominance plan is not going to be accomplished without challenges from other major LNG producers. IBISWorld expects the high level of globalization to put more LNG-producing countries in direct competition with one another, with the highest level of competition happening between the United States, Russia and Qatar. The latter two countries are the largest LNG exporters, but the U.S. is expected to challenge their positions in the market, due to the previously mentioned production increases.
Despite recent diplomatic instability in the Middle East – Saudi Arabia, the UAE, Bahrain and Egypt cut ties – Qatar recently announced it will ramp up production of natural gas. In July, Qatar said it will double the size of the already-planned infrastructure in its share of the North Field, a large-scale natural gas reserve located in the Persian Gulf. Qatar is already the largest natural gas exporter in the world, and its higher production levels will add even more natural gas to a global supply that is already expected to skyrocket.
Iran is also expected to increase development of its share of the North Field, with the country signing a contract with Total SA, a French multinational oil and gas company. This is Iran’s first natural gas deal since sanctions that banned doing business with the country were lifted. Total’s exploration and development of the area will likely be followed up with interest from other natural gas companies. As a result, it is expected Iran will become a prominent player in the global natural gas market.
Additionally, Russia plans to increase production and exploration in the Arctic Circle as a means to better compete with the United States and Qatar. However, Russia’s military activity in Eastern Europe threatens its global position because downstream buyers are nervous about supply disruptions that occur as a side effect to conflict.
There has already been an increase in pipeline construction in Eastern Europe, meant to curtail the region’s dependence on Russian natural gas. For example, Hungary, Romania and Croatia are constructing pipelines to become more connected with each other; formerly, many countries relied on natural gas from the Brotherhood pipeline, which routed Russian gas through the Ukraine, Slovakia and Czech Republic.
IBISWorld expects globalization to keep rising in the short term but eventually stabilize amid ample supply levels. There will be high levels of investment in pipelines and terminals around the world to create a more interconnected, global market, but eventually construction will subside because natural gas prices will stay low. However, the most infrastructure construction to transport natural gas to markets will occur in the European Union and Asia, areas that historically have had minimal access to supplies, but a high demand for alternatives to coal and other energy sources.
Exploration and production activity will also increase in the Arctic Circle, Atlantic and North Field, supporting extremely high supply levels. Nevertheless, with Russia, Qatar and the United States all stating they will become the world’s largest natural gas exporters, at least two of the countries must be wrong.