Global gas markets: the role of LNG in the golden age of gas and the globalization of LNG trade.

• Author: Sakmar, Susan L.
• Position: Liquefied natural gas

1. INTRODUCTION II. THE ROLE OF NATURAL GAS IN THE 21ST CENTURY A. The Divergent Views About Natural Gas B. The Global Economic Crisis and Projections for Natural Gas Leading into COP 15 C. Natural Gas Grows in Importance-IEA WEO-2010 New Policies Scenario D. World Energy Demand Grows Under Any Scenario E. Natural Gas Will Play a Central Role in Meeting the Energy Demand in 2035 III. THE GOLDEN AGE OF NATURAL GAS A. Increased Demand from China--China's 12th Five- Year Plan B. Lower Growth of Nuclear Power--Japan's Fukushima Daiichi Crisis C. Natural Gas in Transportation D. Price and Supply of Natural Gas E. Climate Change and the Role of Natural Gas in the GAS Scenario F. Are We Entering a Golden Age of Natural Gas? IV. THE ROLE OF LNG IN THE GOLDEN AGE OF GAS A. The Evolution of LNG Trade--From Regional to Global B. Traditional Pricing Structure for LNG--Oil Linked Pricing C. Recent Pricing Issues D. From Convergence to Divergence: Is the US Market Moving Away? E. The Future Evolution of LNG Markets V. CONCLUSION--THE FUTURE LOOKS BRIGHT FOR LNG I. INTRODUCTION

   As the world enters the second decade of the 21st century, policy makers around the globe continue to grapple with issues related to energy security, energy affordability, and an expected increase in demand for all energy sources. At the same time, concerns about global climate change and reducing greenhouse gas emissions remain in focus as the world struggles to define the path to a sustainable energy future. (1) As an abundant, affordable, and clean-burning fuel, many countries around the world are increasingly looking towards natural gas to play a key role in powering the future. (2) The prospects for natural gas are so promising that the International Energy Agency (IEA) has suggested that the 21st century could be the "Golden Age of Gas" with demand for natural gas projected to increase by more than fifty percent from the 2010 levels and "account for over [twenty-five percent] of world energy demand in 2035." (3)

   Along with the increased demand for natural gas comes a corresponding increase in international trade in natural gas, with most of the increased trade expected to be in the form of liquefied natural gas (LNG). (4) LNG is natural gas that has been cooled to approximately -161[degrees]C, at which point it condenses to a liquid that can then be shipped via LNG tanker anywhere in the world. (5) Since many natural gas reserves are located away from key demand markets, LNG offers an important solution for the global gas markets in terms of moving natural gas to markets where it is most needed. (6)

   Through the lens of the IEA's Golden Age of Gas Report, this Article explores the growing role of LNG as the "glue" linking global gas markets and identifies a number of developments in global gas markets giving rise to new opportunities and challenges for LNG in the coming decades. (7)

   Part II of this Article discusses the increasingly important role of natural gas in the global energy mix. This includes a discussion of the divergent views of natural gas as the world struggles to meet growing energy demand in the coming decades with cleaner burning fuels.

   Part III addresses the role of natural gas through the lens of the IEA's Special Report, The Golden Age of Gas. Will the 21st century be the Golden Age of Gas? What are the key drivers behind the expected increase in natural gas in the global energy mix?

   Part IV addresses the role of LNG in the Golden Age of Gas and highlights the important role LNG plays in global gas markets. In recent years, the significant increase in interregional LNG trade has led many to question whether the gas markets are globalizing, and whether LNG can someday trade as a global commodity. (8) The general consensus that seems to have emerged is that while LNG markets are globalizing in terms of the increase in trade and the number of countries involved, LNG is still not likely to become a global commodity anytime soon for lack of a single pricing structure. (9) Nonetheless, there is widespread recognition that LNG is the "glue" linking global gas markets and indeed, the Golden Age of Gas would not be possible without LNG. (10)

   Part IV also addresses the traditional oil-linked pricing structure for LNG and discusses recent pricing developments in global LNG markets indicating that the traditional market structure for LNG trade is likely to continue to evolve into a more dynamic and flexible model that better reflects the LNG trade of today.

   While the pace and scale of the global economic recovery remains uncertain as this Article goes to print, with energy policies in a state of flux in most regions around the world, (11) this Article takes the long-term view that over time, demand for natural gas will continue to increase as more countries look to meet the rising demand for energy with lower emission fuels. (12) Accordingly, the Article concludes that the future looks bright for LNG to play an increasingly important role in the world's energy future.

2. THE ROLE OF NATURAL GAS IN THE 21ST CENTURY

   As the world entered the 21st century, there were a number of challenges confronting policy makers around the globe in terms of energy security, energy poverty, climate change, and an increased focus on reducing greenhouse gas emissions. As a clean-burning fuel, many business and policy leaders began to look to natural gas and LNG to meet growing energy demand. (13) During the first decade of the 21st century, natural gas demand increased significantly, as did LNG's share in worldwide natural gas trade. (14)

   However, in the global market place, natural gas received mixed reviews, especially as concerns about global climate change grew in the mid-2000s. (15) Some environmental groups viewed natural gas as yet another fossil fuel with its own set of environmental and emissions considerations. (16) Other groups and policy makers took the view that natural gas could be a "bridge fuel" to a renewable energy future. (17) Not surprisingly, the energy industry has embraced natural gas not as a "bridge" or transition fuel, but as a foundation or primary fuel for the 21st century. (18)

   During the first decade of the 21st century, these divergent views tended to influence whether natural gas and LNG were perceived as fuels for the future. (19) As new technologies are developed and new opportunities for natural gas and LNG are sought by governments and the industry, these debates are likely to continue throughout the 21st century. Despite the often divergent views about natural gas and LNG, as the world enters the second decade of the 21st century, natural gas and LNG seem poised to assume a far greater role in the energy supply mix for many reasons that will be discussed throughout this Article. (20)

   1. The Divergent Views About Natural Gas

      As the world entered the 21st century, the role of natural gas in the energy supply mix was anything but clear. As concerns about climate change grew in the early to mid-2000s, there were a number of competing views regarding the role of natural gas coming from the industry, environmentalists, and a large group in the middle.

      1. The Industry View--The Many Benefits of Natural Gas

         Not surprisingly, the worldwide energy industry has embraced natural gas as a foundation fuel for the 21st century. (21) In support of their view, the natural gas industry has focused on the many benefits of natural gas and has set forth a coordinated view that highlights natural gas as a clean, affordable, reliable, efficient, and abundant source of energy. (22)

         Natural Gas is Clean: Natural gas produces fewer emissions than any other fossil fuel and the most advanced combined cycle gas turbine (CCGT) power plants emit almost fifty percent less C[O.sub.2] than coal-fired power plants. (23)

         Natural Gas is Affordable: Natural gas power plants have half the capital cost of coal plants, one-third the cost of nuclear plants, and one-fifth the cost of onshore wind. (24) Additionally, natural gas does not require subsidies, unlike most renewable technologies. (25)

         Natural Gas is Reliable: In contrast to renewable technologies that in some cases may take decades of research, natural gas is readily available now from a variety of sources. (26) Natural gas is also a reliable back-up power source for intermittent energy sources such as wind and solar, which could facilitate the phase-in of renewables. (27)

         Natural Gas is Efficient: Modern gas-fired power plants are forty percent more efficient than coal-fired power plants and require less construction time than coal or nuclear power plants. (28)

         Natural Gas is Abundant: Global production of natural gas is expected to increase in the coming decade with growing supplies coming from both conventional and unconventional resources. (29) As will be discussed in Part IV, the significant increase in reserves and production of shale gas in recent years has led many to call shale gas an "energy game changer." (30)

      2. From Big Oil to Big Gas?

         In addition to more focused efforts to highlight the benefits of natural gas to the public, many of the world's largest international oil companies (IOCs) are increasingly focusing their core businesses on natural gas. (31)

         For example, with its $40 billion acquisition of XTO Energy, Inc., ExxonMobil became the world's largest natural gas company in terms of reserves. (32) While Exxon has defended its move into natural gas, some industry experts have opined that the rush to natural gas is driven largely by declining oil reserves and a shrinking access to oil fields around the world due to geopolitical reasons. (33)

         Royal Dutch Shell PLC (Shell) is also betting big on natural gas with plans to make gas roughly half of its total production by 2012. (34) Shell also believes that "natural gas, and LNG especially, will play critical roles in meeting global energy demand to 2050 during which time the world must reduce greenhouse-gas emissions by half."...