Creating new demand for gas
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Global gas demand is expected to grow at a slower rate of 1.3%-2% CAGR from 2015 to 2040, influenced by competition from coal and renewables, alongside an oversupplied LNG market. Factors driving gas use include availability from the shale gas revolution, customer awareness of its benefits, and favorable government policies. However, challenges such as high infrastructure costs, sluggish growth in power demand, and competition from alternative fuels may limit gas demand growth.
Creating new demand for gas
- 1. Creating new demand for gas Andy Brogan EY Global Oil & Gas Transactions Leader Ernst & Young LLP, UK
- 2. Page 2 Creating New Demand for Gas Global gas demand is projected to decelerate to 1.3%–2% CAGR during 2015–2040 vs. 2.3% CAGR in the last 25 years. Competition from coal and renewables is limiting growth in power generation, the anchor segment for gas use. The global LNG market is oversupplied and is not expected to rebalance until the mid-2020s. LNG prices are at record-low levels due to oversupplied global market and depressed oil prices. Lack of policy support in many countries has rendered gas use unviable. Strong need to develop new applications of gas 1 2 5 3 4
- 3. Page 3 Creating New Demand for Gas Various factors, including availability, affordability and state policy, drive gas use 1 Availability The shale gas revolution in the US boosted gas availability across industries. 3 5 7 Awareness Customer awareness about economic and environmental benefits of gas and new applications in their industry will promote gas use. 2 Switching costs Recently, low LNG prices have stoked demand and brought new importers (e.g., Pakistan, Jordan) to the market. 4 Carbon pricing Introduction of carbon pricing in some countries (e.g., the UK’s power generation) has helped coal-to-gas switching. 6 Government policy Favorable government policies will encourage gas use even in emergent segments (e.g., LNG transportation in China). Infrastructure Availability of infrastructure to import and distribute gas could drive consumption growth in many emerging countries. Ease of operations Gas became a preferred fuel in many applications due to its versatility, efficiency, dispatchability, and quick response time.
- 4. Page 4 Creating New Demand for Gas Challenges and risks limiting gas demand growth in power generation According to the IEA, the global demand for electricity will likely grow at compared to 2.3% CAGR in the 1990–2014 period. during the 2014–2040 period 1.3% CAGR LCOE^ (US$/MWh) for projects completed in 2015 Sluggish growth in power demand Gas is uncompetitive with coal (specially in Asia) and some renewables despite low prices. Growing competition from alternative fuels ^LCOE = Levelized cost of electricity; * CCGT = Combined Cycle Gas Turbine Source: EY analysis of IEA data India Critical coal1 Hydro2 Gas CCGT*3 China Critical coal1 Geothermal2 Gas CCGT*3 EU Geothermal1 Gas CCGT*2 Critical coal3 Geothermal1 Gas CCGT*2 Critical coal3 US
- 5. Page 5 Creating New Demand for Gas Challenges and risks limiting gas demand growth in power generation ► Gas-fired power plants require more, sophisticated and capital intensive infrastructure, than coal-fired ones. ► In many countries, infrastructure to import and deliver LNG to a gas-fired power plant may cost more than the plant itself. Lack of infrastructure to deliver gas ► Regulatory support (subsidy, tax credits and project funding) is accelerating adoption. ► Total installations are expected to grow by ► The cost of Li-ion batteries will likely decline by more than 47% CAGR during the same period. during the 2016–2021 period. 44% CAGR Substantial improvements in battery storage
- 6. Page 6 Creating New Demand for Gas Strong prospects across other sectors: industrial ► Growth more likely in gas-rich regions with affordable prices. ► Transition to consumer-led growth (outside the US). ► Gas demand will be more confined to industries that require high heat that electricity cannot deliver (e.g., steel production). ► Lack of transportation and distribution infrastructure. ► Versatile roles of gas — feedstock, fuel for heating and power generation. ► Increased availability of low-cost shale gas in the US transforming gas-based chemicals production globally: ► More than 100 million metric tons of new shale gas-based chemical production to be added by 2025. ► The US projected to transition from a major net importer of methanol to a major exporter by 2018. Industrial Competing fuels/feedstock: coal, electricity, refined oil products Key drivers Challenges/Risks
- 7. Page 7 Creating New Demand for Gas Strong prospects across other sectors: transport ► Lack of refueling infrastructure ► Competition from alternatives (e.g., scrubbers and premium low-sulfur fuel oil) to limit sulfur emissions in marine transport ► Prolonged low oil prices eroding economic viability of gas as a transport fuel ► Rapid improvements in battery technology ► Emergent LNG transport markets such as medium and heavy duty road transport, and marine ► IMO regulation to limit sulfur emissions to 0.5% by 2020, down from 3.5% currently ► Stringent anti-pollution measures driving CNG and LNG use in transportation (e.g., China, India) Transport Competing fuels: Refined oil products, electricity Key drivers Challenges/Risks
- 8. Page 8 Creating New Demand for Gas Need to walk the extra mile to fully realize the demand potential of growing markets Nascent marketsEstablished markets Rapid-growth markets ► Partner with local industry for R&D and roll out of new gas applications beyond conventional ones. ► Integrate downward: set up liaising offices, collaborate with local gas players and utilities. ► Lower costs to remain competitive. ► Play a greater role in developing gas infrastructure. ► Use low-cost, mobile infrastructure (e.g. FSRUs, LNG trucks and mobile refuelling units). ► Partner beyond core sector to deliver packaged and customized solutions. ► Start with pilot projects to improve gas supply and develop market. ► Use JVs/alliances to share capital and mitigate risk. Despite low stand-alone returns, downstream operations help secure gas placement and actively push gas volumes downstream, thereby improving overall returns.
- 9. Page 9 Creating New Demand for Gas Alternative sources and creative solutions could help overcome financing challenges Federal/State government Infrastructure funds/investment trusts Regional development banks FSRU providers Consuming sectors Domestic NOC Oil majors Foreign governments, NOCs or banksSponsors of gas infrastructure New sponsors made viable through small, low-cost and integrated projects.
- 10. Page 10 Creating New Demand for Gas For more information on all of EY’s oil and gas insight visit ey.com/oilandgas
- 11. Page 11 Creating New Demand for Gas Andy Brogan Author biography EY Global Oil & Gas Transactions Leader Ernst & Young LLP, UK Andy Brogan is the Global Oil & Gas Transactions Leader for Ernst & Young LLP, the UK EY member firm. Andy has been with the member firm for 28 years and has advised oil and gas companies on a variety of public and private transactions covering both upstream and downstream operations in more than 30 countries.
- 12. EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. How EY’s Global Oil & Gas Sector can help your business The oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY’s Global Oil & Gas Sector supports a global network of more than 10,000 oil and gas professionals with extensive experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oil field subsectors. The Sector team works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively. © 2017 EYGM Limited. All Rights Reserved. EYG no. 04496-174GBL BMC Agency GA 1005401 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com