The rising environmental concerns and subsequent actions towards climate protection is playing a crucial role in the switch from coal-to-gas. It has been the primary factor that has boosted the global natural gas demand significantly in the last few years. Growing industrial activities, gas-fired power generation and network expansion have resulted in a consistent surge in natural gas consumption. The upswing in its production process for meeting its growing market also added to the rising demands.
Natural Gas is going to be a prominent source of energy in the transforming energy landscape. In this article, we have tried to capture the steady evolution of the natural gas industry, and its pricing mechanism. Historically, linked with oil price indices and long term contracts, gas pricing has now progressed to become more competitive, region-based, and are moving away from being indexed to oil prices.
Key highlights of the growth and trends in Natural Gas segment, as reported by IEA shows that:
- Natural Gas consumption went up by an estimated 70 bcm in 2019. That is 1.8% yoy, in line with the average growth rate experienced over the period 2010-17.
- According to a general forecast, the average annual growth rate for Natural Gas would be 2% from 2012 to 2040, owing to the clean fuel drive.
- However, the year 2020 brought some challenges for the gas markets. Especially for the European sector that was initially hit by mild temperatures, and then pandemic lockdowns followed.
- Whilst, prediction shows an upward movement Q4 onwards, as industrial activities pick up the pace.
The major Natural Gas consuming regions worldwide are North America, Europe and Asia. While, two main driving markets for natural gas demands in the last couple of years have been The United States and China. In addition to this, the Asia Pacific region attributed notably to this growth, mainly due to the LNG deliveries.
Evolution of Natural Gas hubs
Globally, supply and demand of Natural Gas are not distributed uniformly between regions. As a result, the gas hubs form an integral part of the gas infrastructure networks. These include pipelines and liquefied natural gas (LNG) terminals.
Predominantly, these hubs operate as a central pricing point that is separate to oil prices. The three prominent factors that called for of these hubs were:
- Competitive pricing – Competition among gas suppliers on hubs and spot markets to determine the price of the commodity. Promote open access for all market participants.
- Structure and transparency in pricing – A gas hub tends to bring a between balance the demand and supply patterns. Especially, as there is a rapidly growing demand, yet uneven distribution of resources among regions.
- Efficient operations – The hubs induce a structure in the market that ensures higher efficiency and coherent operations.
Natural Gas Pricing and its non-price characteristic
According to reports, the demand for natural gas in not responsive to pricing. For instance, during 1987-2000, there was a rapid rise in demand in OECD countries. During the period, the prices remained low and did not fluctuate. However, when the price began to move upwards, it did not have an impact on the demand. The demand either stayed stable or continued its growth in some regions.
The trend brought into light the fact that pricing doesn’t impact the demand for natural gas and the reasons were;
- Customer loyalty and the entire move towards relatively cleaner sources of fuel
- Convenience in delivery and is it use
- One-time infrastructure setting up. Once the infrastructure is in place, residential and industrial users are less troubled by the price
Natural gas prices and its price-setting mechanisms have gone through stages of transformation and have evolved gradually. The demand for it fluctuates primarily due to weather conditions, and not specifically by price variations. For instance, as the temperatures plunge in the United States, it has a consecutive effect on demand marked by an upswing.
A journey to developing Gas Hubs – learnings from the developed markets
Access to resources, consistency in supply, and pricing are the influencing factors in deciding the Energy mix of a country. Every market that has a developed Natural Gas Hub has gone through an evolution, at a varied pace depending on its policy and regulatory environment. Despite the European gas benchmark TTF catching up in terms of key volumes and regional importance, the world’s biggest natural gas hub, the Henry Hub in the U.S. benefits from vast domestic production and consumption. It also has the most freely accessible pipeline network, the biggest in the world, stretching into Canada and Mexico.
- A vast and a robust consumer base, with varying buying interests, is seen as a crucial component in developing a diverse market place. These consumers range from household, power generation and industrial consumers.
- Besides, political will and regulations allowing domestic and foreign participants to trade, and access to pipelines and storage facilities is another essential factor in establishing a gas hub. It needs Regulatory support for the development of new pipelines. Further, contract standardisation aids in buying and selling without getting involved in complicated legal aspects. It ensures more price transparency and benchmarks for international trades.
- Finally, diverse sources of gas supply, from the domestic output, pipeline imports and overseas LNG shipments, are seen as favourable factors that avoid domination by a few producers.
- A digital platform brings producers, suppliers, marketers, traders, infrastructure providers and customers together and integrates the market in a real-time, open and transparent.
In a nutshell, the pathway to liberalised gas markets and structured trading hubs do have challenges. However, every liberalised market today has gone through similar stages of evolution. Therefore, to expedite the journey towards developing a robust and matured gas market, a country needs to leverage learnings from other parts of the world that are already operating successfully.
The balancing act of renewables and natural gas
In the transition to a more balanced energy mix, both renewables and natural gas are going to be the driving force. Natural Gas being the cleanest-burning hydrocarbon, and an efficient and reliable partner to renewable energy sources, is increasingly becoming a choice of fuel by countries across the world.
While the shift will be more focused on the deployment of renewable sources in the coming years, it cannot have a complete dependency on renewables. In this case, the only solution is to use a mix of both fossil fuel and renewable energy to support the ever-increasing demand for electricity around the world.
As a result, Natural gas will continue to expand rapidly in decades to come. Technology advancements will continue to play a crucial role. And, seamless collaboration between key players such as energy players, government, businesses and consumers will be the key propeller to the new world of energy.