Is there a future for Natural Gas?

Is there a future for Natural Gas?

Natural gas was supposed to be the future. Or at least it was supposed to be the bridge, through which we’d transition to a better tomorrow. However as this report from Bloomberg notes, companies and investment firms are now increasingly moving away from fossil fuels altogether as demand for natural gas continues to plummet.  So in today’s Finshots we look at the factors shaping the future of this relatively clean source of energy and how things might shape for incumbents who’ve bet big on this dream.


Business

The Story

The Bloomberg article makes a simple claim. Many developed countries have invested massively in gas plants only to see a dip in demand thanks to cheaper renewables making ground each year. So the story goes that there is a sudden rush to exit the business in a bid to mitigate losses. Both oil companies and investment firms backing them are seemingly looking to offload these assets as quickly as possible.

However, this is only part of the story.

People use natural gas for multiple reasons. In some parts of the world, they’re used as a replacement for coal. In other parts of the world, they’re used because they’re cheap. So it’s imperative to understand the motivations here before making broad generalizations.

In the US, natural gas adoption primarily took off in a massive way because of fracking — a complicated technique mostly deployed by oil producers to drill deep down into the earth’s surface and release all that trapped gas. This unconventional approach gave US oil producers an edge. They began pumping out natural gas in abundant volumes and prices began to crater. Sure, natural gas is still a cleaner alternative. But it’s the discount that really enticed people. As this report from McKinsey notes 

From 2000 to 2018, LNG was priced at a small discount relative to oil — values varied between contracts, but savings of 10 to 20 percent were typical. That discount has roughly doubled for contracts signed during the past two to three years, and short-term LNG supplies available in the spot markets in 2020 have offered as much as 50 to 70 percent savings relative to the prevailing oil price. As the price discount relative to oil increases, consumers are incentivized to make the switch from oil and oil products to gas where practical.

But here’s the thing. Prices of renewable energy have also been on a similar trajectory. For instance, Hydroelectric power is now available at an average of $0.05 per kilowatt-hour (kWh). Solar energy is available at about $0.10/kWh. Meanwhile, electricity from traditional sources of energy can typically range from $0.05/kWh to over $0.15/kWh. The premiums have vanished and renewable sources of energy are cost-effective in a wide range of applications.

So as green energy becomes more affordable, the incumbents will have to make a switch, no doubt. And as more people start adopting renewables in a wide variety of applications, it’s even possible that natural gas might be phased off much faster than coal in the US.

In places like India and China, however, coal is still seen as a major source of power. And while gas continues to be a cleaner alternative (albeit slightly expensive), adoption has been slow. But that’s not to say the status quo will persist. As prices of LNG continue to dip, maybe the price difference between coal and LNG will vanish. And since, it’s also unlikely we will make the shift to renewables right off the bat, natural gas will probably have a massive role to play in these developing countries.

In Europe, meanwhile, the commitment to decarbonization is pushing natural gas out of favor quite quickly. As this article from S&P Global notes —

“Gas projects are increasingly vulnerable, as financiers and company management face pressure from their boards and investors not to invest in fossil fuels.”

Also, the production of natural gas often entails harmful byproducts. For instance, consider flaring. While you try and recover natural gas, you might be forced to release bits and pieces (of gas) into the atmosphere. This isn’t necessarily a very prudent thing to do. So oil producers simply burn this extra gas before releasing them. This isn’t exactly a no emission program and gas plants in Europe are now trying to figure out ways to reduce their carbon output. If they don’t, they might have to risk obsolescence.

So yeah, natural gas may or may not have a future, depending on who you ask. And hopefully, you now know why that might be the case.

Until then…

Don't forget to share this article on WhatsApp, Twitter and LinkedIn