Still gas in the future

It is an indisputable fact that natural gas, combined with a growing use of renewable energy, will play a key role in the path towards building a low emission impact economy model. There are a number of reasons behind this statement:

• its quality as a fossil fuel with a lower carbon content
• its flexibility of use for electric power generation
• vast worldwide reserves; the competitiveness of prices
• growing opportunities for its use - even in liquid form - in transport.

The centrality of natural gas in the new energy paradigm to be constructed is evident even in the forecast scenarios developed by major international organizations operating in the sector. Today, natural gas accounts for approximately 21% of the world’s primary energy consumption and, according to estimates by the International Energy Agency of Paris (IEA), by 2040 its quota will increase to 24%, with a growth in absolute terms from 3,500 to 5,200 billion cubic metres (bcm). It will be the only fossil fuel to grow significantly with an annual average increase of 1.5%, whereas coal is expected to increase by just 0.2% and oil by 0.4%. On a geographic level, growth in natural gas consumption will be driven by Asia which will have a significant impact on the growth in demand of 43%: the role of China will be dominant, with it alone accounting for 24%. The increase in usage in the Middle East will also be important, accounting for 21% of increased consumption, and in Africa which, by doubling its demand, will contribute to growth by 10.5%. On the other hand, consumption in Europe will all in all remain stable or drop slightly. On a sector level, industry and electricity generation will be the drivers of growth: the industrial sector will contribute 40% to additional consumption while 35% will be determined by its use in power plants where gas, alongside the growth in renewables will be competing above all with coal. At a global level, the extent of its use in transport remains uncertain, with a contribution to overall growth presumably amounting to less than 10%.

Wide availability and new producers

Natural gas is considered to be a relatively abundant source of energy: proven reserves and technically recoverable resources suggest that long-term global demand will be easily covered by productive availability. The proven reserves amount to about 220,000 bcm and recoverable resources to 800,000 bcm; the latter would be able to cover a level of consumption equal to current day volumes for over 200 years. With the exception of Europe, all major regional areas are expected to increase their gas production:

• The United States and Australiawill contribute to two-thirds of the increase in production from here until 2020, but from then on the increase in supply will be the result of the growth in other countries and a wider number of producers
• In the long term, the Middle Eastwill account for 24% of world production growth and China (13% of growth) will become a central player in the world gas market
• But it will be the emergence of new gas producing countries that will contribute to characterising the world market scenario, with East Africa becoming a new and important extraction area.

Mozambique and Tanzania, in particular, using their offshore resources, will be added to the historic African producers - such as Nigeria, Algeria, Angola and Egypt - with the latter country set to increase production thanks to development of the large Zohr field discovered by Eni. The gas extracted in Africa will be used both to cover growing domestic demand and to be exported, mostly in the form of liquefied natural gas (LNG). This mode of transport will drive the growth of global gas trade over the coming years.

Changes in the markets and the role of LNG

In global terms, the gas traded between the various macro-regions of production and consumption has increased over the last 25 years by 70% and it is expected to grow by another 70% by 2040, accelerating the process of gas market globalization. Most of the growth will be through LNG trading, the share of which in global long-distance gas deals will increase from the current 40% to approximately 53% (source: IEA), with new producers and importers who will grow in importance. The increase in LNG trade will be accompanied by important changes, already underway, in trade agreements and pricing. From a system of trade built on stable, but also contractually "rigid" relationships, between supplier countries and well-defined groups of buyers, we are moving towards a market model built on more flexible trade agreements - in terms of the destination of gas, delivery volumes, duration - and predominantly based on market prices (in the past they were almost entirely linked to oil prices) in a context of greater liquidity with an increase in the number of traders and transactions.

In Europe, already for a number of years, procurement strategies of the major importers, including Eni, have been focusing on progressively relaxing the take-or-pay obligations - i.e. obligations to purchase a minimum predefined annual volume even if the purchasing party does not take delivery of it all - included in long-term contracts and on increasing the portfolio quota no longer linked to oil prices but to market prices. The latter are calculated in the physical or virtual gas trading points (called hubs) based on the supply and demand ratio. By way of example, today 90% of Eni's purchasing portfolio is based on prices aligned with the market. Also on an international level, over the medium- to long-term, contractual structures are expected to prevail which can guarantee, as in the oil market, increasingly more flexible and "ready" supplies. These changes will be catalysed by the growth in LNG trading, which, by the nature of its supply chain, is particularly adaptable to commercial formulas of this kind. LNG will increase its global availability: increased flows will come from the USA and new export areas such as East Africa, as well as from historic producers such as Australia and Qatar. In addition, FRSU (Floating Storage Regasification Unit) technology with offshore floating terminals will help unlock new market outlets or increase those which are currently of minor importance. Therefore, the LNG industrial chain will be both the object and driving force of changes. The contractual structures for trade are becoming more flexible. Three major trends are emerging:

• volumes traded per single contract are smallerand this reflects a gradually more open market, with a higher number of buyers and a growing share of small importers in emerging markets
• the predominance of contracts with oil-linked prices has declined
• the share of contracts with flexible destination has increased, where the term flexible refers to open volume contracts for multiple destinations and quantities sold depending on the area in which the demand is created, or reloaded in the port of first destination to be sent to another place of use.

In a well-supplied market and with significant amounts tied to long-term contracts due to expire (Japan), the share of flexible and short-term LNG volumes should increase over the coming years. And the arrival on the international scenario of new LNG volumes will significantly increase the flexibility of the entire gas market.

Excerpt from the article by Rie in collaboration with Agi