Natural Gas Is Wishing for a Warm Winter

High natural gas prices are one of the factors that are leading to higher utility bills for residential users this year, part of the reasons some utilities in the UK have actually gone bankrupt, as well as resulting in canceled orders from manufacturing facilities in China. What was once a regional commodity is now a truly global part of the energy mix.

And one thing we will discuss today in the podcast is that at least when it comes to natural gas, we'd better hope that the northern hemisphere has a bit of a warm winter this year. Today I interview my colleague Fausia Marzuki, Global head of natural Gas for b a F. She recently wrote a research note titled four Ways to Think about the future of natural gas, and subscribers can read it on benof go on the Bloomberg terminal,

or at benof dot com. A quick reminder, we do not provide investment or strategy advice and have a complete disclaimer at the end of the show. And now let's speak with Fausia about what's happening with natural gas. Fousia, thank you for joining today, Thanks Dana for having me,

and we are going to talk about natural gas. Liquefied natural gas will be a big part of it, but natural gas in all of its forms, and really it's a very important topic at the moment for many industries in ways that I think maybe they hadn't considered before. So let's get into natural gas to begin with, is it clean or not? This may be the most basic

of questions. Some people are saying it burns clean, it's a clean fuel, and others are saying that, actually, no, we're going to have to remove this from the energy system and as soon as a deck aid because it's not the cleanest fuel. So where do you stand on it? Well, so in most of these things, both answers are correct to us, that's an extent. So natural gas is the cleanest burning fossil fuel or cleanest burning hydrocarbon. Now that's because natural gas is primarily methane. Now that is a

c H four compound. So the amount of carbon dioxide that is actually emitted when a fuel is burned is directly related to how much carbon there is in the molecule. So natural gas only has one carbon molecule, as opposed to, for example, oil that has eight carbon molecules. I don't know if you want to take a step at how many carbon molecules there are in coal hundred and thirty two to about two hundred and forty. That's embarrassing. How did I not know that? So hence why natural gas

when it burns, it is a clean nerve emissions fuel. However, the problem with natural gas is that it is not a net zero fuel. It is a lower carbon fuel, it is not a net zero one. And this is why we're getting this increased pressure on the natural gas industry questioning its role in the future energy transition. Before we can talk about the future, let's talk about the past.

Where has it historically sat within the power sector, for example, or just in the general wider energy max So at the very very very beginning, natural gas was largely just found with oil, which is what was called associated gas production, and a lot of times we just flared, so it

was just sort of released into the atmosphere. Eventually, the use cases and commercialization if it started and it started being adopted in the power sector, in industry to heat your homes for cooking, sooner or later it started in the trans sports sector, and all of these are the use cases. So now natural gas actually has a very wide breath in terms of its use cases across various sectors.

Where oil is predominantly used in the transport set to and coal is used predominantly in power generation, gas is a lot more variable. It's everywhere, and hence why it has also been growing in its share of the overall energy mix. Well, so then let's dig into that. Within the energy mix, where is it being used? And now I know I have a gas boiler in my house, and I know that there are some European countries looking to phase that out, but as of today, that is

where my heating and hot water comes from. Is residential demand a big part of the pie? If not? Where else is it? Residential demand is a big thing because you needive to heat your home, right, So it's a big thing in the cold countries or where you have cold, harsh winters, So that's a big thing. But it is increasingly growing in the power sector, and one of the reasons why it's been growing recently is that it actually complements. So the idea is that it does actually complement what

we call intermittency and renewable energy. So when sun doesn't shine, wind doesn't blow, gas can come in to help give power when you come come home from work and you turn on your kettle and turn on your telly. That's kind of where gas plays a big role. It is also being used very much to phase out dirty your coal bio generation, so Ansastick. We'll talk about coal to

gas fuel switching in a minute. But when we're thinking about the increased use of gas and the fact that it is really playing a bigger role in the energy mix and also in primary energy, what void is it filling? Is it really stealing let's say, market share from other commodities like coal and other sources of energy, or is it filling in the demand associated with growth, Because invariably we are seeing energy demand growth as well. Something is

going to have to meet that. This is a really good question because a couple of years ago I would have given one on sower, but now I'm going to give a slightly different answer. So hold to gas. Switching has just been a thing that's growing, and this is one of the main driving forces for natural gas consumption rising. Many countries are enacting policies or funding new projects to deliberately phase out coal power plants in favor of gas.

Most recently, especially in Emerging Asia and emerging markets, it's l en G specifically to power. It has also actually been used to phase up oil, like very old oil fired generation. So that's what's been happening here. However, what you're talking about the mix and is it filling a void. So there is an element that it is taking the market share from coal, which is great because we don't like the emissions from coal, right, so we rather have

lower emissions with gas. And however, with the growth in renewable energy, as many of us know at BNF, renewables are catching up and they're actually taking a lot of that increased fundamental demand upside. So gas has been growing very much, eating into coal, but there is now very fierce competition from other energy sources much cleaner net series energy sources, and gas provides the source of flexible supply, which I think plays an integral role in the clean

energy sector as this kind of bridge. Right, it lives, as we discussed at the beginning, is it clean, is it not clean? It sort of lives between the two worlds. Let's come back to that, because we already brought it up, the cold of gas switching that is transpiring. You said it was in a lot of developing economies, and is it not also happening very evidently in China and India. Are those the biggest places in the world where you're seeing this switch or is it something that we're also

experiencing in Europe and North America? For example, switched has happened a lot in Europe. So right now, the world, or at least the gas industry is very much looking to the Asian economies. So China and India are going through their own coal to gas switching right now, and a lot of it has to do with just cleaning the air, cleaning air pollution. So there was a huge initiative in China to just clean the air. They literally

called it the blue Sky. An issue and they phased out all of these coal boilers that were affiliated with industry production and power and even heating. That now there's been this huge surge in natural gas consumption coming out of Asia, and you would have seen the headlines about, you know, some of the energy crisis going on right now. A part of that actually also has to do with

a lot of China's up and coming gas consumption. Is it fair to say that the gas market used to be more regional and that now it is an extremely global marketplace? Absolutely, when I first got into this industry, I only needed to know about full markets in Asia. So I sit here in Singapore and most of my experience in the gas market has been the Asian market. I now need to know about Brazil, I need to know about Turkey, and I need to know about US

shale drilling. So it absolutely is a global market. Now it is a global gas market, but there are still very much localized fundamentals and dynamics for each of the market. But all of that danta. So what we once regional gas markets are now being interlinked with the rise of global llengy trade. You mentioned that in the beginning llengy. This is what's fueling the growth of natural gas, which

then brings me to another question regarding physical pipelines. So I'm sitting here in London, which is in Europe, and week in our natural gas by pipelines that are extending largely from eastern Europe. What has that meant for pipelines with this rise of llen G llengs beating pipelines now, so, the global international trade of natural gas was dominated by very big, long pipelines from places where there was a lot more gas sending it to markets that needed the gas.

Now llen G for last year it finally overtook pipeline gas. There's more international liquefied natural gas being traded today and we can attribute that to a whole bunch more supply coming out of the US on the back of the big West Shield gas boom. Do we see that continuing

this rise of lergy into the future. Does that leave the pipelines essentially not in use and in theory available for hydrogen because there has also been a lot of talk in the hydrogen space about repurposing existing natural gas infrastructure. Are we able to have both at least in the their term. So with regards to the growth in lergy supply. A little bit more to unpack here. So, like many commodities, the lergy market is cyclical with regards to its build out.

A lot of people will start approving a lot of supply projects and then suddenly the market will see that there's an oversupply and they'll stop building for a little bit and they get a little lull and then you realize, oh, we're short of supply, and then we'll stop building again. So there is that cyclicality. So we just had a huge round of what we call final investment decision approvals

for big llergy projects. So there's a lot of llergy supply coming on the horizon DANTA and that's going to start as early as we are going to see huge mega developments coming out of Canada, British Columbia, Canada, out of Mozambique. We're going to see more llergy coming out of Cutster and many other places. So lleng supply is still coming, a lot of lergy supplies coming, and it's going to meet a projected increase in natural gas demand.

There's natural gas demand is coming from many different places. A lot of it's still coming from Asia. It's it's China. It's also other markets here in Asia that used to have their own gas production that's now coming down, so they need to supplement it with important energy. So supply is coming, definitely coming. The big question right now that investors in the markets are looking for is when is

that next gap going to be? Because we have so because market sees that's gonna be a whole bunch of supply coming in in about twenty when's that next gap Because it takes about five years to build an energy plant. Rights usually five years to build an energy plant, so you've got to plan that for whenever you see that next gap in the market. You're talking about the pipelines. Lergy, in my opinion very much is going to keep overtaking the natural gas pipeline trade only because it's so inflexible.

Once you lay down a pipeline, you can't do anything else with it. It takes gas from point A to point B and you can't move it, can't do anything with it. But as you mentioned, you could consider repurposing it for hydrogen. This is still a new thing, and that's what I want to stress. The industry is still studying it hydrogen. At the end of the day is still a gas, but it is not the same as

natural gas. So at this stage in the market, you can blend so mix hydrogen with natural gas in order to reduce its carbon intensity, but we can't just swamp an actual gas pipeline today for a hydrogen one. There are a number of pipeline integrity issues that come with that, like that the compound is fundamentally different. You'll have grossion, you have all sorts of potential issues that come out

of this. So it's still being studied, but it's definitely something that the natural gas industry is really really looking at in order to make sure that we can still use and repurpose and really salvage all of this investment that has been coming in into the natural gas industry. Now for a very short break, stay with us. So I love that you actually mentioned a couple of years in the future where we are going to see increase

in supply. Now at the moment, I think it's not surprising to anybody who's probably listening that natural gas prices have been quite high, and this has had different impacts in different countries, but we're all experiencing some degree of high gas prices, either having an impact on manufacturing of goods, whether they're and being manufactured in China, know where natural gases are currently being rationed and given only to certain industries based on some pretty tight controls there, or just

the prices that we're experiencing is in consumers and what that's actually doing the utilities. You're seeing a real shrinkage of the overall utility market in the United Kingdom in many respects in regard to these high prices. So this increase in supply that we see in the future, is that going to level things out and will these prices come into line with something that is a little more consistent like we've seen in the past. Nobody likes the prices right now, even the gas people. We don't like

these prices right now. It's not good for us. It really isn't good for us for our market. Granted, there are some in the industry who are probably making an absolute killing on margins right now selling at these gas prices, but it doesn't do the industry, the gas industry, any good to see such high prices because as a gas supplier, if your customer is upset that you know they're paying that much for gas prices you're upset because your customer

is upset. So not good for anybody, quite frankly, However, regrettably, what happens in the natural gas market is every year we always have a balancing issue because the gas, a lot of it is being used for heating. Most big markets need more gas during the winter. We don't need it during the summer. So in all the major gas consuming markets, so North America, Europe, and North Asia, they go through this season of storage in the summer, they

stop power all their gas for the winter. The problem that we see today and what has caused this crazy gas prices is this imbalance. And what I tell people, it's just that the gas market is used to this dynamic. It's when this very delicate dynamic gets thrown off, market goes crazy. So what's happened with us here in the market data is that you know, we're supposed to stop pile like all these big markets, was supposed to stop pile all of this nice gas in time for winter,

and it just wasn't enough to go around. Because what happened is that we had a post COVID gas demon recovery being met with post COVID supply maintenance there was so much maintenance that was supposed to go on in but we couldn't for health and safety reasons for people, we couldn't do many of these things. Oh, that's really interesting.

When lockdowns first started happening, I remember I spoke with our chief analysts that covers the nuclear industry and I mentioned, is there anything that's going to happen on that side, and he said, absolutely not. You have to maintain nuclear facilities. They will show up to work regardless. So this is an industry where, even though it is a critical part of the infrastructure that we all interact with, there was some cutback in terms of what people were able to do.

And we're still making up for that time now very much so. So you still had manning to the air minimum just to get things going. But usually what the gas industry does slightly bigger maintenance to improve efficiency, improve production, etcetera, etcetera. So basically what happened during the COVID time, at least twenty time, is that a lot of this maintenance was reduced to a bare minimum, absolute minimum that they couldn't do for health and safety reasons. So many places actually

did it this year, did it this summer. This was in Norway, this was in many big lergy production facilities. Things that were delayed all came back this year. Now, granted, there was a whole bunch of other stuff as well that impacted this imbalance. It was very hot in Brazil. It didn't rain there, so Brazil took a whole lot more energy than it usually does, which took it away from Europe. China was really hot too, so it took

away a lot more energy. So a whole host of things that I could spend another hour talking about data. But the idea is that there's always a funda mental imbalance in the market, in the gas market, but we try to correct that with storage and with prices to make things flow. Gas supply and lergy cargoes to flow wherever it needs to go, wherever storage needs to be filled, they'll price that and they'll try to get that supply. But where it's really been rotten, luck really really been

one luck that we've not been able to do that. Now, depending on who you speak to in the industry, some people will say it is an actual structural shortage of gas. Some might just say it's a really bad imbalance. So it really depends on who you speak to. I think it's a really bad imbalance, and we've potentially underestimated how much gas demand there truly is coming out of all this culti gas switching initiatives that we've been talking about

in these big markets. One thing to know is that what happens in the European power sector is that there's an economic dynamics between coal and gass. You know, using a cobbon price generates us you know which one they rather they rather use, you know, whether they rather turn on the gas, they turn on coal, depending on prices in some other markets. So you take China for example, when they switched all their coal to gas, they don't

have the switch back button. They changed boilers to gas, they don't have that ability to switch back because the gas consumption the gas market in China is less about power and more about heating and actually for industrial heat processes, so part of production lines, you know, gloss manufacturing, we talk about sort of factories, all these all require gas for their production lines for power and heating. So didn't have another option. You had all the gas demon and

then we've almost caught the market off guard. Really, so that's really interesting because you're saying that we have seen some in other parts of the world, we have seen some gas to coal switching because of the high prices. But the point that you're may ing is that's only in a very limited number of use cases. So would you say that that's greater than of the use cases or is it really quite on the margins and you're only seeing it in some countries like the UK or

Germany that are you know, quite isolated. So the only places where you can have like an actual commercial switch in economic switch, so this is called just for what we call just fuel switching. You need a carbon price. This is the only way you can get those kind of dynamics to work in the power sector. In other places where you don't have this, it's just a fundamental switch, like you're literally changing stuff. There's no flexibility, not switching back.

Because a lot of this coll to guests switching was policy induced. People literally physically changed boilers, you know, in homes, et cetera. So it was a very different kind of move, if you like. But you've already mentioned that we're going to see an increase in supply, not this year, not next year, but potentially the year after that or the or the year after that, So it's coming down the

pipe and that will create a very different dynamic. And I think that's why in our research, actually when we look at our long term forecast up we actually don't see the short term imbalances in the gas market is fundamentally changing our long term for example, new energy outlook. But if we are now looking a couple of years into the future, there is this question around gas. We recognize that it plays a very critical role in creating

flexibility in the near term in the energy transition. However, if you are financing this project, and you're looking at this project that may not even have really economically viable supply until and then the long term projections show a potential phase out of natural gas because of the fact that, as you addressed at the beginning, it's not a completely

clean fuel. Do you think that these new gas fired power stations are really going to get built if there's some concern around not being able to have the full life expectancy required to get a return on your investment, so us next couple of years. One thing I would say about gas prices, because I'm sure perhaps some people listening get really scared when I say the supply isn't coming until what does that mean for my you know from from my gas prices, I'm paid for my home.

But no, so when I'd say for the immediate term, in terms of how the market is going to potentially recalibrate itself. As a gas analyst, we try to not make two May forecast data because everything is dependent on the weather. Because if we end up having a relatively warm winter i e. Not so cold, everything's fine by the summer, I really by by our biennia projections. If it's particularly warm, we're good. We're absolutely good. If it's cold, yeah, no,

that's not going to be fantastic. So it's really going to depend on how the weather plays out in various different markets, and that will determine the extent to which the market is able to recalibrate head of next winter. It could be that we've got to go through a couple more painful winters before some of the energy supply comes back in, But only whether will tell for that now with regards to future of gas investments. So this

is the critical point right now. As I mentioned, it takes about five years for a major gas development to actually become operational. So investors today, if they're looking at financing any kind of gas supply project, they're looking at and whether you need that gas supply right now, depending on whose projection you see, that's still in question. The bigger, bigger question mark really is that twenty thirty time frame. That time frame is the point at which the natural

gas industry may truly be at its turning point. So b anys new Energy Outlook report fantastic report for those of you who haven't seen it. That report has actually laid out a number of net zero scenarios, and all those net zero scenarios taken to account what happens to natural gas demon to get to net zero very in

different technologies. But one thing that was common with all those scenarios is that the turning point is because by the time you get if the world really wants to make its net zero targets, new clean gas technologies need to be deployed at scale in big, big, big quantities in order for us to get to a net zero goal. So when investors and the industry is looking at future gas power plants and stuff, it's really what their view is going to be like in that twenty thirty time frame.

So if we talk about the demands side, so gas power plants, you know, I like to introduce this concept of being transition ready. Okay, so there's still a big question mark about the role of gas and its role in the transition, but nevertheless, you can have natural gas assets be potentially transition ready. This could be something like, if I'm build a gas power plant today, if I fit it with only gas turbines GA gas of fuel turbines, maybe if natural gas isn't a thing in twenty more years,

I can't use that power plants anymore. However, if I fit it today with turbines, let run on gas today, but could actually run on hydrogen in ten years time. Wow, Suddenly that gas power plant can actually now live for a lot longer because of this transition. So hence why I bring up this notion of gas assets being transition ready, making that deliberate effort today to try to get your gas system ready for the transition. And this comes right back to the gas network upgrades and pivoting that we

were talking about earlier. Data about studying the possibility of converting gas networks or anything gas related to be able to help bring up about this hydrogen economy transition that people are actually you know, banking lots on. So this is the most basic of commodities and trade flow questions. But if we're thinking in the very near term, you're talking about the timelines it takes to build new gas fired power station in order to utilize what is a

very logical increase in supply and global trade flows. There's another solution in here in terms of meeting some parts of demand. And obviously it depends on which part of

the industry we're looking at. But if we're looking at you know, some power demand, residential electricity, things like that, do you think that the renewables industry, so solar and wind specifically, and to maybe another extent, biofuels are also saying these volatile prices right now, we are a big part of the solution, and in a couple of years time, we're going to have many, many projects that are potentially

taking off all around the same time. I would like to make the answer that with this idea of the transition to cleaner technologies and cleaner fuels, I think one thing about the energy transition is not about the transition of one particular fuel to another. I see the energy transition as a move that is going to incorporate many, many different types of technologies. Gas can potentially have a role in all of this. Though it's not a net

zero fuel, it could still have that role. Be it to complement renewables, be it to actually just help to phase out some of the really really difficult cold markets or so or actually just in some of it's inherent use cases. You know, there are certain things where electrification can only do so much. Right, So something like in a industry high temperature heat processing, you need to burn something. You need to burn a physical mole like you to get those kind of you need to get that kind

of heat temperature. So gas may still potentially be a role for that. This is a likely smaller use case for for gas, but some in the transport sector. There are some particularly hard to abate parts of the transport sector, like shipping or even long haul trucking that until we can get batteries to work for really really long journeys, a fuel that you can burn must still needs to be happened, and energy can be that role. So it's

all about different technologies all working together. One thing that's actually interesting that's that's cropped up in the sector data and I would like to share it is that, um, you know, I think people this energy crisis has actually shown people just how much gas is a part of their lives and that they didn't know of because you know, I think we talk about solo, we talk about when so much of that actually comes out of China's actually

getting produced out of China, the turbines, panels, et cetera. And China just had to do power rashtion in to some of these industries because it didn't have enough gas. There's almost a link between these things that people perhaps didn't originally appreciate, but now slowly they might once it does settled with this energy crisis and everybody does their

case studies about it. In the new year, we will see that for all of the issues that come with gas, while we figure things out, it still has a role to play, you know, because one of the things that we paid to see is that if we push away gas too soon, we retreat back to coal. You know. And this is another thing sort of like when when

people start talking about ccs. CCS is something that ever since I joined the organ gas industry many years ago we've been talking about CCS that actually that was going to be the final question. No, let's talk about that so CCS, carbon capture and storage. How important is it that we make advancements technical advancements that we don't yet really fully have in terms of bringing the economics of

this down. How important is carbon capture and storage to a gas place in the market beyond beyond you need it? If not, gas doesn't have a role to play in in at zero worlds. In in that zero world you need carbon capture and storage. One thing to mention though, is that a lot of people associate CCS, the current use of CCS with the oil and gas industry, But for natural gas, only about a third of the emissions come from the what we call the upstream side of

the value chain. Most of the emissions actually come from the actual combustion and end use of the gas. So cc US is actually much more important on the downstream side, so actually at the consuming market side rather than the producing side. However, where it's taken off and the industry that has actually been able to develop CCS technology has largely today been the oil and gas sector, and that's what started really with it being used and what we

call enhanced world recovery. So the oil and gas industry has been developing the technology, but it's meant to be used for the actual use of natural gas later. This brings me to something that I might want to actually just end on Dana, is that the oil and gas industry, for all of its issues and it's a questionable role in the energy transition, it does have a role to play. The rebranded energy companies that used to be oil and gas companies, they have over the years become the best

energy project managers. They know how to execute billions and billions and dollars worth of major infrastructure energy projects. There is legion and battalion of scientists, engineers, technicians who's sort of have built the energy system over the years. One thing I always like to stress to people, it's just like, yes, we talk about transitioning assets and resources, business models companies, but there's also an element of people. People will from

the oil and gas industry can support this transition. And I think that's one of the things that the gas industry in particular sort of this year's but very much been a year of reckoning where all of the gas industry executives and professionals and leaders have really thoughts about how they are actually going to help make this transition work. Because we all agree that we want to make this

transition work. What comes out of the current industry is how do we make sure that is done in a rational and most cost effective way that is least disruptive to people like yourself data so you don't have to pay high gas prices where you where you're heating this winter ends up being cold. All right, Well, that was really interesting and I think you did a great job at kind of explaining where we are now in the near term and where we might be in the future

with natural gas. I will continue to watch the weather reports and seeing how cold it is in various places in the northern hemisphere around the world this winter and see what that might do to where we end up next year in this discussion. Thank you for joining today. Thank you, Dana. Today's episode of Switched On was edited by Rex Warner with Great Stoke Media. Bloomberguin e F is a service provided by Bloomberg Finance LP and its affiliates.

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