From the Editor: Right now the only problem with LNG is there isn’t enough [Gas in Transition]
In its 2022 World LNG Report, the International Gas Union (IGU) reported a 4.5% growth in LNG trade in 2021, as well as 6.9mn mt/yr of new liquefaction capacity, 49.8mn mt/yr of new regasification capacity and an almost 10% growth in the global LNG carrier fleet. An additional 12.5mn mt/yr of liquefaction and 4.3mn mt/yr of regasification capacity, respectively, came online in the first four months of 2022.
In its latest Gas Market Report, the International Energy Agency (IEA) says that global gas demand will grow by only 140bn m3 (103mn mt) between 2021-25, compared with growth in 2021 alone of 170bn m3. The primary cause of the lack of demand growth is price, the result of insufficient investment in new supply and Europe’s thirst for LNG as a means of displacing Russian gas imports.
In an exceptionally tight market, a lack of natural gas and, in particular LNG, means a recourse to the power generation and heating technologies which exist, not those that have yet to be built. This, unfortunately, means coal.
As Martin Daniel points out in his analysis of Chinese LNG demand in this issue of Gas in Transition, Chinese coal production rose 10.4% in the period January to May year/year.
China is, of course, not just any other country, it is the world’s largest producer and consumer of coal, mining a gargantuan 3.9bn mt of the high-carbon fuel in 2021. It consumes even more, accounting for 54.3% of the world’s total coal requirements.
Higher coal burn is not so much a choice as a necessity. Beijing has pursued aggressive coal-to-gas switching programmes across its northern provinces to reduce both local air pollution and the country’s greenhouse gas (GHG) emissions, taking the risk of dependence on imported gas over domestic coal in pursuit of its environmental goals. It is a world leader in the deployment of both solar and onshore wind power. In 2021, it became the world’s largest market for offshore wind, overtaking the UK, and it leads the world in the production and deployment of electric vehicles.
If China had affordable gas, it would use it.
India is in much the same boat as the world’s second largest consumer of coal. Faced with high gas import prices in the latter part of calendar 2021 and the first half of 2022, Indian coal production rose 8.6% in fiscal 2021/22 to 777.31mn mt. Production growth in second-quarter 2022 is expected to be over 30%, according to the latest data from the ministry of coal.
In contrast, LNG imports into both India and China this year have slumped.
In the US, while coal-fired generation is expected to fall, coal production itself will rise by 3%, according to the US Energy Information Administration, followed by a forecast 1.1% increase in 2023. The rise would be larger, the EIA says, if the sector was not experiencing labour shortages, rail congestion and supply chain problems affecting the acquisition of critical equipment.
Faced with an impending gas crisis this winter, as Russia limits its summer gas exports to Europe, European countries from Germany to Portugal are reassessing coal plant closure timetables and even the re-opening of shuttered plants as emergency measures. Coal use for power generation, already on the rise in the latter half of 2021, has moved higher still in 2022.
There is little question that if more LNG was available, gas prices would be lower and countries around the world would not be falling back on coal to this extent.
Renewable energy needs to grow faster
In an ideal world, the fall back would be renewable energy, which grew at a record rate in 2021. More records are certain in the years ahead but, just as for LNG, the problem with renewables is there isn’t enough. Even at current record deployment rates, renewables are not expanding fast enough to compensate simultaneously for demand growth and fossil fuel displacement at the rate required by a net zero carbon trajectory.
As a result, the world faces price-driven gas-to-coal switching and the extension of coal-fired generation assets’ lifetimes. This is an environmental disaster, which, even if not long-term, means that the energy transition efforts which will be needed later on, towards 2050, will be even greater than the intimidating mountain we already have to climb.
In the interim, more gas is needed and in particular LNG, which can flow to where it is needed, rather than be limited by pipeline infrastructure.
SPAs form the basis of new supply
The long-term deals announced in early July by US LNG developer NextDecade are thus good news, moving one of the US’ many major LNG projects closer to a final investment decision (FID) and the start of construction.
NextDecade landed 20-year sales and purchase agreements with two Chinese companies, Guangdong Energy Group and China Gas Hongda Energy Trading, both for 1mn mt/yr of LNG from its 27mn mt/yr Rio Grande project. The plant could be onstream as early as 2026.
Guangdong Energy has also booked an option to purchase a further 500,000 mt/yr of LNG from Rio Grande. In April, NextDecade signed up ENN LNG (Singapore), a wholly-owned subsidiary of China’s ENN Natural Gas, for 1.5mn mt/yr over 20 years from the project.
While welcome, Rio Grande is only one of many viable LNG projects that need to move off the drawing board and into the real world.
The IGU’s report shows that, as of April, there was 1,034.5mn mt/yr of proposed aspirational liquefaction capacity at the pre-FID stage. The majority of this is in Canada, the United States and in Russia, where sanctions now make further LNG development highly uncertain. Even in the unrealistic scenario that all this capacity was built, and that global liquefaction capacity trebles, the additional energy supplied (38.7 exajoules) would equal less than half of China’s current coal use (82.3 EJ) and potentially displace just over 25% of global coal consumption (151.4 EJ).
Renewables, excluding hydropower, provided 31.7 EJ in 2021, growing by 9.7% year on year.
Only a proportion of the proposed liquefaction capacity is likely to be built, for a variety of reasons. But the expansion of renewables needs every support it can get and LNG displacement of coal should be an important element of the overall GHG emissions game plan.
Environmental organisations point out the dangers of more investment in LNG, fearing that it will lock fossil fuel use in the long-term. However, the International Energy Agency has better defined the world’s twin dilemma: insufficient investment in the energy transition and insufficient investment in traditional fuels – a seemingly contradictory position.
Yet it is the latter which has brought the current energy crisis upon us, even before Russia’s invasion of Ukraine. Demonising gas investment ignores both its relative positive attributes vis-à-vis coal and oil and the current inability to transfer energy capacity easily between key sectors of energy use – power generation, heating, transport and industry.
Hydrogen and its applicability across energy consumption sectors, holds out great hope as a source of sustainable heating, high-temperature heat provision in industry and a form of long-term storage for power generation. It will need substantial gas infrastructure to become a viable energy vector, and it will, above all, need to become cheaper. And, unlike LNG, it is not yet here at scale.
The reality is that to unlock coal’s grip, natural gas use, and LNG in particular, needs to expand, even without taking Europe’s current security of energy supply crisis into account. The scale of the problem and the complex supply and demand dynamics of transitioning from fossil fuel markets and supply chains to renewables and greater electrification need to be appreciated.
All remedies, partial or long-term, are needed in the next two to three decades. Fossil fuel or not, LNG is part of the solution.