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US$283 billion of potential LNG projects in jeopardy

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Hydrocarbon Engineering,

A new global gas study published by Carbon Tracker Initiative has identified US$283 billion of possible LNG projects to 2025 that are likely to be surplus to requirements in a low demand scenario. A transition to a low carbon economy indicates there is some room for gas demand growth to 2040; however, if the world is to stay within a carbon budget that limits global warming to the 2°C U.N. target, energy companies will need to be selective over which gas projects they develop.

The Carbon Tracker study also revealed that over the next ten years, US$82 billion of potential capex in LNG plants will not be needed in Canada, US$71 billion in the US and US$68 billion in Australia in the lower demand scenario. The value of unneeded LNG projects rises to US$379 billion by 2035. Furthermore, new projects that rely on an LNG price of more than US$10/million Btu may not be needed over the next decade.

Major players

Shell’s agreed US$70 billion takeover of BG will combine two companies with significant LNG projects over the next decade, making it by far the biggest player in the market. Shell has disclosed that it assumed oil prices will recover to US$90/bbl in making the offer, which translates to an oil linked LNG price of US$14 - 15/million Btu based on typical contract pricing formulae. The analysis suggests that US$85 billion of Shell’s and BG’s potential future LNG project options may not be needed under a low demand scenario to 2035.

Moreover, 16 of the world’s 20 biggest LNG companies are considering future major projects that are unlikely to be needed to meet demand to 2025. Only three, Eni, Cheniere and Noble, have additional projects that are needed to meet demand to 2025. The remaining company, Total, is not modelled as developing any new LNG projects over the course of the next decade beyond those already operational or under construction.

Natural gas and climate change

“The size of the gas industry in North America could fall short of industry projections, especially those expecting new LNG industries in the US and Canada. Avoiding the combination of US shale gas being exported as LNG will be important if we are to use the carbon budget most efficiently,” said Andrew Grant, Lead Analyst at Carbon Tracker and co author of the report.

Gas has been perceived as the cleanest fossil fuel and huge investment has poured into developing new gas supplies. But there is a limit to the amount of gas that will be needed in a world committed to a 2°C limit, especially as there is currently a glut of LNG, and the cheapest sources are likely to be used first. The study analyses projects that companies are considering but have not yet made final investment decisions on.

“Natural gas is complex when seen in the context of a climate constrained world. It can deliver better outcomes than coal, but gas must continue to work on reducing its fugitive emissions and there is a possibility that if it reaches too large a share of the energy mix then in the longer run this could still be incompatible with a 2°C outcome,” said Mark Fulton, Advisor to Carbon Tracker and a co author of the report.

A perfect storm

The study indicates that there is a perfect storm of factors in play to cause a rapid transition to a low carbon energy system. Cheaper renewables, stronger energy efficiency measures, new storage technologies, higher carbon prices and fluctuating energy prices will all influence global gas demand. As renewables costs come down, some regions are likely to leapfrog over gas straight to renewables.

Recent calls from the European oil and gas industry for a global carbon price show the industry is under pressure to demonstrate its role in a low carbon future. Natural gas production results in the leak of methane, a highly potent greenhouse gas. These fugitive emissions must be kept below 3% for gas to maintain its climate benefit over coal, so minimising them should be a high priority for the industry.

The report shows that the highest greenhouse gas emissions are caused by unconventional gas supplied via LNG infrastructure. Fortunately, however, it finds that only around 17% of LNG fed by North American Shale gas or Australian coal bed methane is needed in a low demand scenario.

Over half of the unneeded LNG capex analysed relates to unconventional gas projects, like shale, tight gas and coal bed methane, in the US and Canada. Foregoing this supply will limit future greenhouse gas emissions, according to the study.

Carbon Tracker’s analysis breaks down demand growth into three main markets: North America, Europe and global LNG, which combined represent half of the global gas market; the remainder is largely produced and consumed domestically and therefore does not interact with the globally traded gas markets referenced. There is little evidence from the project economics that Europe could repeat the US shale boom.

For more information, or to download the ‘Carbon Supply Cost Curves: Evaluating Financial Risk to Gas Capital Expenditures’ report, please click here.

Adapted from press release by Rosalie Starling

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