Natural Gas – The Game Changer or Just a Facilitator in a New Game?

Natural Gas (NG) is a topic which has been at the center stage at the global level. It has been there at every debate and discussion, be it environment, politics/geopolitics, wars, power, technology innovation, etc. All nations and economies (developed/developing) have been discussing NG as the next big change but in my view, it has been facilitating the change and easy transformation towards renewable sources of energy.

Before diving into the real matter, we shall have a look at value chain and the reason why we chose to write about it. The Value Chain of Natural Gas somewhat looks like this:-

 

And we chose to write this article because we have an opinion that prices of natural gas may rise in coming future.

The rising demand is due to the various initiatives taken up by the sovereign nations after Paris Climate Treat. The target for India is to reduce pollution by 30-35% by 2030.  Due to which huge investments are being made by both PSUs and Private players, like GAIL, IGL, MGL, Adani, and Reliance. The primary aim is to connect more than 200 cities with the gas pipeline network, therefore the demand is set to rise. But we have to analyze the supply side as well to come to conclusion.

The concept of NG came into existence with the motive to gain power and have an upper hand in politics amongst the Gulf nations. But then pollution became the hot topic and every developed nation wanted to reduce their carbon footprint. The best alternative was renewable sources of energy but direct adoption of renewable energy is impossible due to huge investments and gestation period in setting up its infrastructure. In order to facilitate the change, Natural Gas (NG) has been playing a greater role.

Since NG extraction and application techniques are somewhat similar to oil, it was easier to setup NG ecosystem and in last 2 decades, all the developed economies especially the US, UK, and Japan have invested Billions of dollars in it. Other nations are investing heavily in it as most of the nations have agreed to reduce their carbon emission by participating in Paris Climate Treaty. China and UK built an ecosystem for LNG/CNG based bus ecosystem. US power generation has shifted from Coal-based power generation to Gas based power generation, which made its power sector 2nd in the list of highest contributors to pollution in the US from 1st position. Now the transportation sector is at the top.

Another interesting fact to notice is the incremental investment of developing economies, which will give us a sense of their focus towards this sector. In the last few years, investment in NG has been reduced by the US in order to invest more in renewable sources, which indicates that NG was used as a transitional instrument, which not only reduced carbon emission to a certain extent but also gave time to develop technologies and infra for sustainable development of renewable energy.

In developing nations like India, which are currently focussing on shifting to NG, there is a scope for growth and penetration.

So, the in current situations there are some parts of the world where growth has getting flattened and in some parts, there will be growth going forward. At the same time, the continuously increasing supply of NG is expected to put downward pressure on prices.

 

When we talk about technological innovations, the NG is a front runner in it, especially with the introduction of Shale gas, after which the supply side has suddenly become huge. The per-unit cost of extraction fell sharply with this new technology.

The new buzzword is “Salt-Storage”, which can absorb most of the demand shocks. There are 2 other type of storages – Depleted Reservoirs and Aquifers which are costly to form and require 50% and 80% of natural gas to maintain cushion gas. While in the Salt Caverns it needs only 30%. Salt caverns are highly permeable and have high daily injection and withdrawal capability, which allows a fast response to fluctuating demand. Some salt caverns can turn their working gas 8-10x times a year, while the other 2 have the same capability of 1x in a year. This means gas can begin flowing with as little as one hour’s notice and can be replenished quickly. This type of response to demand shock keeps the prices controlled. The prices are expected to stay calm in these scenarios as well.

Another buzzing issue is of “Creative and Flexible-Contracts”. By flexible it means – Buyers expect flexibility in terms of destination, term length, and volume; they demand it and with creativity, many suppliers are trying to offer new contract structures that are tailored to address buyer-specific risks.

The response of prices is unexpected because both suppliers and buyers are trying to find the appropriate type of contracts.

The debate of electric vehicles V/s NG based vehicles; presently tilts in favor of the NG based transportation. In the pie of consumption, the commercial vehicles would take most of the share. Electric vehicles are coming in for passenger vehicles, which would take at least a decade to replace a good amount of existing vehicles. In most of the economies, except some of the developed economies, NG has got a huge opportunity in the transportation sector. Petronet LNG is also working on creating an eco-system of LNG based public transport in India. This may give a much needed northern direction to gas prices.

Overall there are 2 factors on the demand side which may cause prices to rise but this has to be evaluated with the supply constraints. With the given scenarios, where, there is a huge surge in the supply with new discoveries of reserves and innovation in technology with Shale. Due to the salt storage, the response time to demand shock has been reduced. There is a low likelihood of the increase in the prices of gas in the medium term.

 

Having a look at this chart, we can notice two big U shapes (marked in red solid circle) and various small U’s during every year due to demand fluctuation. The prices fell after 2008 till 2009 July. After that, it stayed inthe range of $2 to $6. Currently, another U shape is getting formed due to rise in demand. Now as per expectations, natural gas prices are expected to rise in this cycle.

Another reason why we feel the prices may rise is that of the trend in the prices of Crude oil Vs. NG prices. The prices of NG have closely followed crude prices, except between the years 2009 and 2014. But then at end of 2014, we have experienced a sharp correction in NG prices to follow the path of crude again. Recently, with the pickup in economic activities in developed nations and China slowly coming back on track, the demand of Crude has increased and thus prices have seen a jump. This trend is expected to follow in the near to medium term, which indicates that the prices of NG may also rise.

Conclusion:

Taking all the factors which impact Natural Gas into consideration it is clear that with the usage of natural gas and ecosystem around natural gas is going to expand in the future. Along with that reversal in the global economic cycle will further increase the demand for the natural gas. This will lead to change in the long-term cycle natural gas prices. On the contrary, if we consider factors like the technological constraint, supply glut etc. Prices are destined to be in the sideways range for the near term.

– Report by Mr. Akshay Manocha (MDI Gurgaon)  

Under the guidance of Mr. Rahul Ingle (The Money Roller Team)



  • Kajal Poddar

    Good report 🙂