Natural gas is a relatively clean fossil fuel and is poised to play a valuable role for years to come. However, it is still uncertain whether it will be a profitable one.
In recent years, exuberant investment in new gas reserves and liquefaction facilities has helped globalize the market. Growing Asian demand has boosted prices dramatically recently, raising hopes of better times. However, any sustained recovery in prices and profits will need fossil-fuel producers to curb the temptation to overinvest in their preferred green-transition fuel.
Furthermore, future gas demand will balance two major trends — growing prosperity in Asia driving an increase in competition; and declining sales in North America and Europe. Future profitability depends on how well demand and supply match up.
Some of the world’s biggest economies have committed to radical change. The European Union, South Korea, Japan, and the U.K. have all promised to cut their net emissions to zero by 2050. In the meantime, China is aiming for 2060, and the U.S. under the Biden administration may join them.
Natural gas will likely play two key roles in that green transition: replacing coal-fired power plants until adequate renewables production are built, and fueling backup peaker plants to bridge the gaps in intermittent solar and wind generation.
Experts expect gas demand to peak sometime in the next decade and then taper off slowly. Plus, advances in carbon capture and storage could also extend the resource’s role. On the other hand, gas demand could be reduced by a swift fall in costs for renewables and storage or accelerated development of green hydrogen. The uncertainty facet makes it difficult to estimate the future supply. The ambiguity raises the risk of overproduction, which can lead to languish in prices.
Liquefied natural gas (LNG) is expected to keep a lid on prices by offering marginal supply. Russia, Qatar, and the U.S. are the chief global producers most likely to be attracted to add noteworthy LNG capacity.
Long-term expectations for fossil-fuel price and demand were trimmed in 2020, prompting producers to write down billions of dollars in oil and gas reserves. Moreover, there is a risk that some gas reserves may become uneconomic to produce, particularly in the U.S., the Middle East, and Russia.
Ultimately, it might seem inconceivable that fossil-fuel producers could get enough capital to overinvest again. However, it is precisely gas’s role as a transition fuel that makes that overinvestment possible.