The next revolution in low-cost energy is well under way and it's coming in the form of liquefied natural gas. Why global natural gas prices could fall by 40% over the next decade.
- Cheap natural gas has transformed the North American energy landscape, but until recently its impact has been isolated.
- A wave of investment in liquefied natural gas (LNG), which can be easily transported, is creating a new global commodity market.
- Global natural gas prices could fall by 40% over the next decade, translating to a $600 billion reduction in world energy costs.
Fracking has given rise to a North American energy boom that in little more than a decade has shifted the U.S. from an energy importer to the world's largest energy producer. Until recently, however, that impact was geographically constrained because of the challenges of moving and storing the highly flammable and explosive gas.
When cooled to -260⁰F, natural gas transforms into a liquid, which takes up vastly less space and can be transported by truck or ship. In other words, natural gas becomes a global commodity.
Now, the next revolution in low-cost energy is underway in the form of liquefied natural gas, or LNG. In its liquid state, natural gas is a game-changing, low-cost export that is poised to drive down energy prices in Europe and Asia, and disrupt energy and utility markets around the world.
“We expect natural gas prices over the next decade to average nearly half the level of the last decade, transforming the landscape within energy and utilities, and beyond," says Devin McDermott, an equity analyst and commodities strategist covering oil and natural gas for Morgan Stanley Research.
In a recent Morgan Stanley Research BluePaper Natural Gas: Fueling Global Disruption, McDermott and a collection of colleagues across multiple sectors outline how extensive investments in LNG technology and infrastructure could soon bear fruit: New LNG capacity is on track to increase by 100 to 155 million tons per year over the next two to three years, driving 50% growth for the global natural gas market by 2025.
Global LNG demand growth expected to remain strong through 2025
The impact on global energy markets—and companies tied to them—cannot be understated. “Natural gas will become increasingly liquid, potentially creating a lower-cost energy resource and a new global commodity market," McDermott adds.
Cheaper, Cleaner and Now Global
At the turn of the century, oil scarcity seemed all but certain until the rise of fracking—which uses a high-pressure mixture of water, sand and chemicals to release the oil or natural gas in shale rock—reshaped the energy landscape.
Since 2006, natural gas prices have dropped a stunning 80%, as production of natural gas extracted from U.S. and Canadian shale dramatically increased. Meanwhile, the natural gas boom cut U.S. coal consumption in half and reduced power sector carbon emissions by about 25%.
Shale has transformed the North American Energy industry, helping drive an 80% decline in natural gas prices over the past decade
Natural gas, however, has been difficult and expensive to move, with most of it traveling through pipelines. The cost and limitations of such existing infrastructure has constrained the impact of new gas supplies.
This changes with LNG. When cooled to -260⁰F, natural gas transforms into a liquid, which takes up vastly less space and can be transported by truck or ship. In other words, natural gas becomes a global commodity.
“In 2019, the spreads between gas prices in Europe, Asia, and the U.S. have collapsed, with the three historically independent markets now linked based on transport costs." says Igor Kuzmin, EEMEA Oil & Gas Equity Analyst covering Eastern Europe, Middle East, and Africa
Although short-term factors, including a surge in new LNG capacity and a mild winter, contributed to this dynamic, Morgan Stanley still believes a long-term structural shift has begun for global commodity markets—not just a short-term cyclical disconnect.
As this shift takes place, the drivers of natural gas prices could structurally change, permanently delinking from oil and collapsing regional price differences. As a result, global natural gas prices over the next decade could fall by 40%, compared with the past 10 years, which could reduce global energy costs approximately $600 billion.
Historically, natural gas prices have moved in concert with oil, with Henry Hub gas following Brent oil futures. Since the beginning of the year, however, European and Asian gas prices have both declined nearly 50%. This decline in global gas prices comes despite Brent moving in the opposite direction and approximately 25% higher.
Within the last few months, reginal gas prices across the globe
have converged, fully decoupling from oil prices
Liquid Gas Sector Implications
As the U.S. transitions from a net importer of LNG to one of the largest global exporters by the end of 2020, low-cost shale gas could permanently alter global gas markets—and the prospects for companies that have long been entrenched in them.
The winners will be led by four main categories: engineering, procurement and construction (EPC) contractors, industrials, shipping, and European chemicals.
- EPC contractors are well-positioned to benefit from the LNG investment cycle, as project sanctions translate into multibillion-dollar contracts.
- Industrials are the key beneficiaries of increased project sanctioning, leading to additional spend on process automation, licensing, and gas handling. The direct impact represents a potential 50% increase in the growth rate over the next five years, relative to the past eight.
- Shipping companies could ride the tide of increased capacity demands. Under Morgan Stanley's base-case capacity growth assumptions, the market will need an estimated 75 to 175 additional LNG carriers by 2025 (above and beyond the current fleet of 550 vessels).
- European Chemicals stand to benefit from lower input costs for products where natural gas is a key feedstock.
The shift to LNG could pressure some sectors, including coal-related companies and U.S. chemicals. Dry bulk coal shippers could see a 5% decrease in business in 2020, as more customers switch from coal to gas. Additionally, U.S. chemical producers could see their cost advantages narrow, as prices for urea—the globally traded nitrogen product—fall.
Finally, consider the potential sustainability impact. “LNG offers a lower-emissions alternative than most other fossil fuels, emitting 50-60% less CO2 emissions than coal and at prices that are now competitive with other fuel sources in many regions,” says Mark Savino, equity analyst on the Global Sustainability Research team.
However, the net environmental benefits from switching to LNG can vary significantly by region. Supply chain efficiency is also key, with various factors throughout the natural gas ecosystem, including methane leakage, having the potential to mitigate some of the environmental benefits.
“LNG could mean an improvement in local air quality across many parts of Asia, and if managed efficiently should drive further reductions in EU CO2 emissions, meaning it could become a key piece of the global transition to cleaner energy in the coming years," says Savino.
For more Morgan Stanley Research on the implications of LNG, ask your Morgan Stanley representative or Financial Advisor for the full report, “Natural Gas: Fueling Global Disruption" (July 22, 2019). Plus, more Ideas.