Is LNG The Next Big Thing For Oil And Gas Companies?

We live in a world which is growing at a fast pace, while the resources that are needed to sustain a reasonable life are limited. According to UN DESA report – “World Population Prospects: The 2015 Revision” – the global population is estimated to grow from 7.3 billion at present to 9.7 billion by 2050. Since roughly 75% of this population is expected to reside in urban cities, their demand for energy products is likely to go up exponentially. According to industry experts, the global demand for energy, particularly oil and gas, is expected to double between 2000 and 2050. This will, in turn, cause a sharp rise in the carbon emissions globally, forcing people to use environmental friendly products to sustain a healthy life.

Source: Capital Market Day 2016, Royal Dutch Shell, June 2016

One such hazardous fuel is the residual fuel oil, which is used in marine transportation, power generation, in commercial furnaces and boilers, and in various industrial processes. However, it is believed to have severe health and environmental concerns because of its high sulfur content. This has led to new policies and regulations that have significantly lowered expectations for its use in the future. Foreseeing this trend, oil and gas companies across the globe are now looking at products that result in a low carbon footprint and will be environmentally sustainable over the long term. In this regard, many experts consider natural gas to be a much cleaner and safer hydrocarbon compared to residual fuel oil. However, it is relatively expensive to store or ship natural gas across regions in its gaseous form. Consequently, over the years, oil and gas players have been shifting their focus to Liquefied Natural Gas, or popularly known as LNG.

LNG is a clear, colorless, and non-toxic liquid, which is formed by cooling natural gas to very low temperatures. This process shrinks natural gas to 1/600th of its original volume, thereby making it easier and safer to store or transport. When LNG reaches its destination, it is turned back into a gas at regasification plants, from where it is supplied to residential houses, and/or industries for generating electricity or heating purposes. Due to the ease of transportation and safety involved, LNG is now emerging as a cost-competitive and cleaner fuel, especially for shipping heavy-duty road transport.

The global LNG market has grown significantly over the years, as more and more countries are realizing its economic and environmental benefits. At present, over 30 countries import and around 20 countries export LNG. This number is expected to increase to 50 and 25 respectively in the early years of the next decade. Thus, the world natural gas trade, both by pipeline and by shipment in the form of LNG, is poised to increase in the future. According to International Energy Outlook 2016, the world LNG trade is expected to more than double, from 12 trillion cubic feet (tcf) in 2012, to 29 tcf in 2040.

On the demand side, the demand for LNG has risen by roughly 6% per annum since the beginning of this decade. At this rate, we expect the global LNG demand to almost double by the end of 2030, reaching almost 500 million tons per annum (mtpa) of LNG.

On the supply side, we estimate a sharp growth of more than 100 million tons per annum (mtpa) over the next five years, i.e. by 2020, based on the existing projects and proposed investments, primarily in Australia and North America. The LNG market is likely to be supply driven until the end of this decade, with a majority of the volume being contracted to either end-customers or portfolio players. However, a supply gap is expected to set in in the early years of the next decade, unless there is a continuous flow investment to expand the LNG supply. North America and East Africa are the potential drivers of supply between 2020 and 2030, while Asia will continue to be the key source of growth on the demand side.

Given the tremendous potential that the LNG market is likely to offer, it makes economic sense for large integrated energy companies such as Exxon Mobil, Royal Dutch Shell, Chevron, and BP Plc. to enter or expand their operations in this market.

Have more questions about Chevron (NYSE:CVX)? See the links below:

• Chevron Posts Poor 2Q’16 Earnings Despite Better Price Realizations In The Quarter
• Chevron’s 2Q’16 Earnings To Be Severely Hit Due To Persistently Low Commodity Prices
• What’s Chevron’s Revenue & Earnings Breakdown In Terms of Different Products?
• What’s Chevron’s Fundamental Value Based On Expected 2016 Results?
• What Has Led To More Than 30% Decline In Chevron’s Revenues & EBITDA In The Last Five Years?
• How Has Chevron’s Revenue Composition Changed In The Last Five Years?
• By What Percentage Can Chevron’s Revenues Grow Over the Next Five Years?
• Why Crude Oil & NGLs Operations are 3x As Valuable As Refined Products Operations For Chevron?

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