The conventional wisdom says liquefied natural gas is the future of energy — bridging the gap between the world abandoning fossil fuels and renewable supplies coming online. But that rosy outlook faces a reckoning. LNG is threatened by a pincer movement involving, ironically, the two old and new sources it’s supposed to bridge: coal and solar.
The cracks in the bridge could not have appeared at a worse time. The LNG market is about to witness its third big wave of increased supply in 20 years. If demand growth is weaker than expected, the only way the market would rebalance is via much lower prices.
The beauty of LNG is that once it’s been super-cooled to about minus 160 degrees, it transforms into a liquid that can be loaded into tankers and shipped around the world, very much like oil. Thus, LNG can reach any customer, breaking the historical limitation of gas pipelines.
The boundless nature of gas supply that has been its main advantage is becoming a key contributor to its downfall.Credit: Bloomberg
Since the turn of the millennium, the global LNG market has absorbed every supply wave fairly quickly, taking two to three years. China swallowed a good chunk of the 2009-11 wave, when supply jumped by about 40 per cent after the completion of several projects in Qatar. Europe absorbed the 2016-19 wave, which came after a huge build-up in US export capacity increased global production by 45 per cent.
Now, a third wave, which is likely to extend from 2026 to 2030, is coming. It’s by far the largest, and it could add a further 60 per cent to the world’s supply. Thus, demand is key.
Enter the bridge theory. On paper, it makes a lot of sense. LNG is cleaner than coal, so a world worried about the climate crisis would gravitate towards it. On top, LNG offers flexibility, as gas-fired electricity generators can power up and down to offset the intermittency of solar and wind. But what looks good in theory doesn’t always work in the real world — particularly in Asia, now the engine of energy consumption. There, economic development takes priority over the fight against climate change.
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Perhaps lower LNG prices would entice some coal-to-gas switching; I’m sceptical. Developing countries in Asia aren’t burning coal for electricity just because the commodity is dead cheap, but, rather, because it is mined locally, or at least regionally.
Against imported LNG, coal beefs up domestic energy security, provides millions of local jobs in often deprived regions and protects the balance of payments. Look at electricity generation in places such as the Philippines and Vietnam, where coal is on the rise. And above all, look at China, where coal-fired electricity generation hit an all-time high in August.
