Never has natural gas been so widely accessible. No, it’s not because Amazon recently added it to its two-day shipping list. Rather, a natural gas excess has prompted more suppliers to expand their reach into the global marketplace, essentially creating new buyers and markets outside of the United States. IBISWorld expects this globalization to persist as natural gas continues to be a cheaper and more environmentally friendly energy source in the transition to a low-carbon economy.
A global natural gas market is a stark contrast to the loosely connected network of regional markets that formerly molded the natural gas procurement process. Natural gas can either be purchased as compressed natural gas (CNG), or undergo additional processing to become liquefied natural gas (LNG). CNG is commonly sold to buyers directly through pipelines, with the surplus supply stored underground for later use. LNG, on the other hand, is cooled and sold to buyers in insulated tanks & cylinders. Historically, LNG has had a very limited downstream market because transporting it is expensive and formerly required long-term contracts to be economical. Consequently, many buyers opted to tie in directly to a pipeline, for which they usually had to bear the cost. The market’s overall difficulty and risk prompted many businesses to forgo natural gas entirely and turn to other energy sources.
However, much has changed in recent years. Throughout the United States, increased production through fracking has created an oversupply of natural gas. Higher domestic production, in combination with new natural gas reserve discoveries in Tanzania, Australia and Qatar, has presented suppliers with a unique problem: to avoid cutting production, they need to find ways to get their supply to new buyers. In response, suppliers have begun investing billions of dollars in capital projects to increase the cost-effectiveness of procuring natural gas. Suppliers’ rationale is that by making investments now, they’ll be rewarded with new buyers in new markets, allowing them to keep production at high levels.
In the past year alone, 20 tanker ships have been added to the overall global fleet, meaning 170 LNG tankers are now cruising the globe. Meanwhile, along the Gulf Coast in Texas, major player Cheniere Energy has converted multiple import terminals into export terminals to begin shipping product out of the United States. In fact, if current trends from the US Energy Information Administration continue, the United States will be a net exporter of natural gas within the next few years. The company has also spent considerable financial resources to create plants that can cool CNG to turn it into LNG, which can then be shipped by tanker. Similarly, Total and Royal Dutch Shell have been targeting newly discovered reserves in East Africa by providing capital assistance to fund other infrastructure projects meant to open the market to buyers in economic centers elsewhere on the continent. Floating terminals have also appeared, which are mobile plants positioned in offshore locations that can be easily relocated if needed. These and other investments have so far paid off, with the number of countries importing natural gas increasing within the past year.
Global Market Has a Wide-Reaching Impact on US Buyers
Buyers are likely to benefit from the global natural gas market. Typically, when demand increases, so do prices. However, because supply has also increased, IBISWorld does not expect these market changes to have an impact on the benchmark price of natural gas in the United States, which has been falling at an estimated annualized rate of 10.1% in the three years to 2017. Increased competition among suppliers, though, will have an impact. Suppliers are now in more direct competition with one another because their reach in the market is expanding and supply contracts have become shorter. These factors increase price-based competition. IBISWorld also anticipates that a buyer’s location will become less of a pricing factor due to the presence of more tankers that can ship globally. As such, IBISWorld expects the price range for natural gas to narrow because suppliers will not have as much of a hold on specific geographic areas. Furthermore, the increased distribution scope will benefit buyers with international operations, because a single supplier can meet all of their needs. Additionally, globalization will mitigate supply chain risk. With more suppliers competing globally, buyers will have more workarounds when it comes to dealing with inclement weather or geopolitical issues.
Putting Pressure on Other Markets
The changes in the natural gas market will put pressure on other related markets. Natural gas is a cleaner-burning, cheap alternative energy source compared to other energy sources. Thus, these changes will have the most effect on petroleum gas markets. For example, IBISWorld expects demand for propane, which is derived from crude oil, to decrease. The full impact will be slow, however, because buyers will need to alter their facilities to accommodate the use of natural gas. Still, as prices for natural gas remain low, more buyers will convert their facilities to burn natural gas.