The natural bridge between coal and carbon-neutral
The strong underlying demand growth in liquefied natural gas (LNG) sets the global gas market apart from the oil market, where a managed decline in long-term production seems to be the most plausible future scenario.
In sharp contrast to oil products we deem natural gas very much a part of the solution in a global effort for decarbonisation, as the commodity serves as a 'bridge fuel' between carbon intensive coal and renewables-based electricity generation.
The sheer fact 38% of global electricity generation still relies on coal exemplifies the enormous scope for natural gas and the ecological benefits that could be realised by making use of the substantially lower CO2 footprint of gas-based electricity generation.
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LNG shipped via independent transporters plays a crucial role in this equation because of its fungibility and independence of pipe networks, two characteristics that have enabled producers to capture large shares in consumption growth.
Historically, the large fixed-cost nature of LNG projects meant dedicated LNG projects were financed via long-term offtake contracts, or production sharing agreements between concession holders and global energy supermajors.
The rapid underlying growth and the abundance of natural gas produced from associated gas in US shale has led to increased competition between the most prominent gas production hubs.
In turn, this has helped create an increasingly liquid spot market in shipped gas.
The European gas market will be one of the main battlegrounds in the fight for market share. This competitive environment, combined with the politically hypersensitive dominance of piped gas from Russian Gazprom to central Europe, may mean the European market defines the trajectory of global gas prices going forward.
If Russia was to defend its European market share, the resulting price pressure could lead to rapid adoption of spot based pricing systems and spur on gas for coal substitution in electricity generation.
Matthias Siller is co-manager of the Baring Emerging Europe investment trust
Bull Points
• Gas represents the growing part of global hydrocarbon production with demand secured from coal substitution
• Volumes set to grow and supported by the brownfield nature of many new gas projects and the substantially lower capital outlays associated with it
Bear Points
• Abundant supply of gas
• More transparent pricing mechanisms could lead to lower-for-longer gas prices
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