Natural gas prices and demand are likely to stay resilient even if human-induced global warming is contained to 2 degrees celsius or less, according to new analysis by Wood Mackenzie.
The 2-degree goal was established under the 2015 United Nations global climate agreement, aka the Paris Agreement.
Replacement of coal with gas-fired power generation in Asia’s developing markets contributes to 8% of global emission reductions under Wood Mackenzie’s accelerated energy transition (AET-2) scenario, said the firm’s Massimo Di-Odoardo, vice president for global gas and liquefied natural gas (LNG).
Large-scale development of carbon capture and storage (CCS) and carbon capture, utilization and storage (CCUS) in the industrial and power sectors also support gas, “while the development of blue hydrogen is a gas growth segment,” Di-Odoardo said.
The resilience of gas demand will require continued investment in gas and LNG under AET-2, he added, supporting prices.
He also noted that gas will eventually trade at a premium to oil under this scenario as demand for crude decreases, accelerating the shift of capital investments toward gas.
The price outlook for gas, meanwhile, “remains firm” in a 2-degrees-or-less scenario, according to Wood Mackenzie.
“In North America, low oil prices lead to reduced tight oil production, cutting into the availability of cheap associated gas,” researchers said, adding, “Greater volumes of expensive dry gas are needed to meet gas demand.
“Our analysis shows Henry Hub prices trading at $3 to $4/MMcf, similar to our base-case view.”
Wood Mackenzie’s base-case scenario assumes a roughly 3-degree rise in global average temperatures to 2050.
In the global LNG market, meanwhile, “resilient Asian gas demand leads to reliance on 290 million metric tons/year of pre-final investment decision LNG supply, including higher-cost U.S. LNG,” under the low-carbon scenario, researchers said.
As a result, LNG prices spike to $8 to $9/MMBtu by 2040, before softening as global gas demand begins to ease.
Wood Mackenzie estimates that a 2-degree world would require $330 billion to support LNG growth globally and $700 billion to support dry gas development in North America.
However, he said, business models would need to evolve “to maintain margins and the ability to raise capital in a low-carbon world.”
He added, “Gas and LNG sellers will need to focus on low-cost, low-carbon supply and scope 1 and 2 carbon-dioxide emission reductions as carbon prices increase.
“The management of scope 3 carbon emissions through CCS will need to become a part of integrated gas and LNG sales strategies.”
The Wood Mackenzie team also sees gas pricing paradigms evolving in a low-carbon world.
“LNG is increasingly commoditized as oil indexation becomes irrelevant, requiring a dramatic overhaul of existing oil-indexed contracts,” researchers said. “Carbon prices will define netback values for producers as natural gas competes with hydrogen and gas-plus-CCS in the industrial and power sectors.
“Trading of carbon emissions, offsets and credits are key to ensuring value creation across the gas and LNG value chain.”
The outlook for oil demand and prices is much more bearish under the AET-2 scenario, however.
Wood Mackenzie expects oil demand would begin to drop in 2023, soon accelerating to year/year declines of 2 million b/d, reducing demand to about 35 million b/d by 2050.
As a result, Brent crude oil prices would fall to an average of around $40/bbl by 2030, down from $60 to $70/bbl currently. By 2050, Brent could potentially slide further to $10 to $18/bbl, researchers said.
Wood Mackenzie’s Ann-Louise Hittle, vice president, macro oils, highlighted that AET-2 “is a scenario, not our base-case forecast. It is one interpretation of how the Paris Agreement could be achieved, based on our fundamental analysis across the natural resource sectors.”
She warned, “Even so, the oil and gas industry cannot afford to be complacent.
“The risks associated with robust climate change policy and rapidly changing technology are too great.”
© 2021 Natural Gas Intelligence. All rights reserved.
ISSN © 1532-1231 | ISSN © 2577-9877 | ISSN © 1532-1266 |