Revolution/evolution in the natural gas markets

By András Gyürk, Member of the European Parliament (pictured)
Spring 2017

We are living in times when we are witnessing a very important step in the evolution of fossil fuels. Observing it in a historical context, the evolution of fossil fuels closely resembles the evolution of species. The changing environment induces changes in the status quo, and the more adaptive and more complex are to prevail.

The large scale utilization of fossil fuels started with the use of coal in the days of the industrial revolution. The profound transformation based on the availability of coal provided unprecedented amounts of energy. It was relatively easy to exploit and to transport, spreading industrialization all around the globe. The next step in this evolution took place before World War I, when most navies switched from coal to oil as the fuel of their ships.

Winston Churchill, as First Lord of the Admiralty was the first to press for such a change, and after the British had switched to oil, other nations followed suit. With major developments in its exploitation and refining, oil could offer enhanced manoeuvrability and smaller scale application, which provided a competitive edge in naval warfare. This marked the beginning of the age of oil, as its use became predominant in transport and heating. Eventually it has replaced coal as the primary global energy source.

What we are experiencing nowadays is very similar to that shift. Natural gas is harder both to exploit and transport than oil, but it has some features – particularly its cleanness and efficiency – which make it a superior source of energy. Substitution is not possible in every application, for example it cannot be used as a feedstock in all cases, but the technological changes foretell a shift from coal and oil to natural gas. The prediction of the International Energy Agency about the coming golden age of gas could have been premature, but it is clear that the role of natural gas will grow in the next decades.

When contemplating the evolution of fossil fuels, we cannot overlook the common fate that will come to most species eventually: extinction. Natural gas might be the cleanest, but it still creates harmful emissions. Mass scale electrification and the spread of renewable energy challenge the rule of fossil fuels, but in my opinion, the end is not yet close. Not every application can be electrified and the intermittence of renewable power sources requires a flexible backup, which is most efficiently provided by natural gas. In the coming decades, both its overall demand and its share in the global primary energy consumption are expected to grow. It seems that natural gas will not become extinct soon, on the contrary, its importance is about to increase considerably around the globe.

The supremacy of oil started when it gained a truly global market. I would call a market truly global, when one can buy a standard amount in a fairly standard quality for a somewhat uniform price all over the globe. You can buy a barrel of Brent quality crude in Singapore and in Rio de Janeiro for about the same price at a given moment. Natural gas markets cannot perform like that because of the costs of transport (both for pipeline and LNG) and the lack of liquidity. Inadequate demand, combined with high fixed costs halted the development of natural gas markets, when suppliers tended to be monopolistic and long term contracted. With increasing demand and decreasing transport costs, the competition has intensified and the markets have become more liquid. We can already see the contract time horizons shrinking, while the terms of the contract become increasingly loose. With the LNG projects under way, which are to be realized in the next 2-3 years, we will see not just a boom in LNG trade, but also a massive and unprecedented integration of the markets.

This rapid development and integration of markets is essentially due to innovation. In the last decades we could see innovation reducing costs all over the supply chain, while unlocking previously untapped reserves. From the improvements in liquefaction and regasification, to the vast new shale gas production, the natural gas market has seen many fundamental changes, both incremental and transformational ones. These changes have revived industries and altered geopolitics, and those who adapted to them usually gained momentum.

I believe that, due to the rapid developments, gas markets will change fundamentally in the coming five to ten years, and I do not see the pace of the changes slowing down. Take for example Floating LNG (FLNG). The first operating floating facility, stationed in Malaysia, received first gas in last November, and is about to launch its first cargo in early March 2017, a historical moment. With such a novel technology, there are bound to arise new challenges and unexpected difficulties, but further innovation will surely tackle them, expanding natural gas production to previously untapped reservoirs.

As we have seen, the evolution of fossil fuels has accelerated, changing the status quo on the energy market. Technological and consumption changes have paved the way for a radical shift in business models. Although oil and coal are to stay with us for many years, they will not significantly question the primacy of the new champion: natural gas.

András Gyürk

  • Born in 1972, graduated in history in Budapest
  • 1998 – 2004 member of the Hungarian Parliament
  • 2004 – member of the European Parliament (Committee on Industry, Research and Energy, EPP)
  • 2010 – head of the Hungarian EPP delegation
  • Shadow rapporteur on the Energy Union Package – A Framework Strategy
  • Rapporteur on the EU Strategy for LNG and Gas Storage