Natural gas, also known as methane, has been viewed as an afterthought to crude oil for decades. Originally an unwanted byproduct of oil production, gas has finally become an integral part of the global power mix. However, a number of factors are emerging that could make natural gas the fastest growing fossil fuel over the next 20 years,1 including low cost, abundant supply, and relatively low carbon emissions.

Where is the growth in demand for natural gas coming from?

Much of the increase in natural gas trading growth is taking place in the liquefied natural gas market (LNG), where gas is super-cooled into a condensed, liquefied state and loaded onto specialized tankers for oceanic trade. The growth in LNG demand has been largely driven by regional demand from Asia, in particular China and India. These regions are expected to account for more than 40% of incremental global natural gas demand over the next 20 years1 as energy consumption per capita rises, and local governments look for ways to economically increase power supply and industrial production without damaging air quality. Ironically, the Middle East, a major producer of hydrocarbons, is expected to be another large consumer of LNG, mainly because of the desire to replace oil with natural gas for power generation, as well as increased energy demand from a growing middle class. Apart from these regions, North Africa, Latin America, and Southeast Asia are also seeing demand growth driven by low LNG prices.

Meeting the natural gas demand

How will this burgeoning demand be met? Conventional gas producers such as Russia, Middle Eastern countries, and Australia are expected to continue growing their production, but global shale gas production is expected to meet the lion’s share of supply growth and account for as much as 25% of total gas production by 2035.1 As indicated in the chart, the United States is expected to be the primary supplier, with output more than doubling over the same period. The efficiency gains and technological improvements in unconventional shale wells have materially added to the North American resource base, with some estimates2 pointing to 800 trillion cubic feet of recoverable natural gas at less than $3 per million cubic foot (roughly today’s price), an amount that could supply over 30 years of domestic consumption.

The Opportunity in Natural Gas Investing

Beyond the effort required to produce natural gas at a competitive price, one of the biggest challenges in bringing supply to market is logistics. Raw natural gas often must be processed, sent through pipelines to an export facility, cooled down to extremely low temperatures into a liquid state, loaded onto an LNG tanker, shipped to the destination country, re-gasified and finally piped to a consumption center, typically a power generator or industrial plant. This process is infrastructure-intensive and will require substantial investment as new regions of supply emerge to meet new pockets of demand.

It won’t be an easy task, but thanks to the power of declining costs and technological innovation, natural gas has the potential to play a material role in the global energy supply for decades to come.

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1Source: BP 2017 Energy Outlook.

2Source: IHS Energy, 10/25/16.