Is Natural Gas A Bridge Between Fossil Fuels & Renewables?

High carbon generating fossil fuels no longer attract investors as its demand has started to decline. People are looking for cleaner energy sources now. Usage of natural gas along with solar, wind and water power has increased manifold in the last 10 years and so have investments in them.

Why the Surge in Demand?

Carbon dioxide emissions from gas are much less than coal. Also, emission of nitrogen oxide and other health-harming particles is lower by more than 75%. Thus, it has become an important resource in the fight against air pollution and climate change.

Though nuclear energy is also a source of clean power, it has its limitations. The danger of exposure to the harmful radiation deters many. Also, the transition from oil to renewable sources will take a long time. This is where natural gas can act as a bridge. It is expected to become the most vital energy source by mid-2030. Many large cap companies who can afford the transition are already investing in gas and associated research and development projects. Liquid Natural Gas (LNG) supply is expected to increase by 50% in the 2014-2021 time period.

What Supports the Surge?

Natural gas supply has increased rapidly in the last few years across the world. It is cheaper than most of the other sources when it comes to power generation and easily available. The United States is the largest producer in the world at present. Huge supply from the country pushed LNG prices down globally.

To transform the supplied LNG into gas economically, floating storage and regasification units ("FSRU") have been built along the coastlines around the world, which are cheaper than building permanent onshore terminals. In the last decade, LNG importing countries nearly doubled to 35 due to FSRUs making gas imports affordable. While making a terminal would cost a country $500 million and also take four years, FSRUs can be put in place within 18 months. For example, France's integrated energy company Total S.A. (NYSE:TOT) is now building a FSRU and associated gas pipelines in Ivory Coast.

As far as gas consumption is concerned, it has grown rapidly across the world. Global gas consumption grew 63 billion cubic meters (bcm) in 2016. Gas consumption in the European Union, the Middle East and China has risen by 30 bcm, 19 bcm and 16 bcm, respectively, while Russia and Brazil witnessed a slight decline in consumption.

LNG Trade Scenario

Last year, a record volume of 258 metric tons (MT) of LNG were globally-traded, up 13.1 MT from 2015. The International Gas Union believes this record will be broken repeatedly in the next few years as more plants are scheduled to come online around the world.

Companies in Focus

European oil major, Royal Dutch Shell (LON:RDSa) plc RDS.A has started moving forward with its Prelude floating liquefied natural gas (FLNG) facility in north-west Australia. It has a production capacity of around 5.3 million tons per annum (mtpa) of liquids, with LNG accounting for 3.6 mtpa or 68% of the total capacity. Production in projects worth $14 billion is likely to start in early 2018.

Smaller rival oil giant BP plc (NYSE:BP) has 16 new projects lined up for the period 2017-2021. Among these, 12 projects are more focused on gas than oil. The company presently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The world's largest publicly traded oil company, ExxonMobil Corporation (NYSE:XOM) is operating in Papua New Guinea's $19 billion PNG LNG joint venture, where LNG production started in 2014. China Petroleum & Chemical Corporation or Sinopec (NYSE:SNP) is one of the major customers of this project that produces approximately 7.9 million tons of LNG per year.

Another big player in the LNG industry is Chevron Corporation (NYSE:CVX) . The company has invested millions of dollars in the Australian coasts in multiple projects. Chevron is the major shareholder in the Gorgon Project in Australia, which is said to contain around 35.3 trillion cubic feet of natural gas, with a 60-year life span.

Conclusion

Although natural gas is considered the best alternative to high carbon emitting fuels, investment in gas is currently witnessing lower returns due to a supply glut. Production from the American shale plays and Australian coasts have significantly increased over the last few years. The oversupplied LNG market has positioned buyers in the driver’s seat. They are now demanding more flexible contracts from the producers. However, the role of natural gas in bridging the energy gap and making the transition smooth is too significant to overlook.

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