Major international oil companies like Shell and BP may have made an historic error in staking their future on natural gas, particularly liquefied natural gas (LNG), according to a post earlier this month on The Energy Collective.
The companies’ decision looked like a sound one in 2010. As recently as 2011, the International Energy Agency was proclaiming a “golden age of gas.” And “to some extent, this change of strategy was made out of necessity rather than out of choice,” writes geophysicist Jilles van den Beukel.
“Replacing oil reserves had become increasingly difficult. Gas reserves are more accessible and have a wider global distribution. Cleaner gas was expected to take away market share from coal due to environmental concerns. As a transition fuel, it should allow the majors to continue to grow without having to dramatically change their business model.”
But not all is going according to plan: Demand forecasts for natural gas have been falling, and the resulting oversupply has led to lower prices since 2014, just as several new LNG projects came on the market in spite of serious cost overruns. “For the coming years, the supply demand balance for gas and LNG looks worse than it does for oil,” van den Beukel writes.
The post points to several factors that make natural gas a bad bet for fossil companies, including the structure of the global gas market, the higher cost of transporting the less energy-dense fuel, the stronger competition gas faces due to its prominence in power generation markets, and the degree of oversupply in the LNG market.
“In the long run, gas seems to be systematically less profitable than oil,” van den Beukel concludes. “In the short term, the current low LNG prices are expected to last a lot longer than the current low oil prices. In hindsight, the majors would have been better off accepting a shrinking business, with a more limited focus on gas and a much more limited focus on high-cost LNG.”