May 2018 – @alvaroriosroca – During the decade of high oil prices (2005-2014), were developed several technological alternatives of energy sources. During that decade, the US began a competitive production of shale gas, which has cannibalized polluting coal in power generation and oil derivates in industry, business and for other uses. In terms of the transportation segment, vehicles, heavy machinery, ships and others, began to turn towards small LNG.
With shale gas, the US has started a new large-scale LNG export cycle (9-10 billion cubic feet per day in 2019 is expected) and this is turning natural gas trading much more flexible globally, even with operations on the spot market, which makes it competitive. A future supplier is already offering LNG not linked to any international marker (cost plus).
During that decade, the costs of renewable energies, mainly wind and solar, went down to levels enough to get competitiveness, displacing oil derivates, coal and natural gas in the Power sector. These technologies were also stimulated by climate change agreements.
In that decade, the first Floating LNG projects were also promoted. These have now become a reality and are generating a technological breakthrough to produce and liquefy natural gas offshore. Small LNG became competitive for applications in the transportation segment, in industries and businesses due to its lower volume to store and transport. There was also a vertiginous technological advance in storage batteries, both for use in vehicles and as a backup to power systems, which are already a disruptor.
Relating to this topic, the cost of a barrel of WTI oil has exceeded US$70, which undoubtedly causes great joy among those involved in the supply chain and especially in companies and producers countries. What happened to make oil prices raise again so rapidly?
There are many factors. The sharp drop in prices since 2014 halted exploration and production projects, while production from mature fields continued to decline, leading to lower supply. The Organization of Petroleum Exporting Countries (OPEC) agreed and applied production cuts, generating less supply. The world economy picked up somewhat and has generated more demand. Finally, there has been a series of geopolitical events, mainly focused on Syria and Iran, which have also triggered speculation in the market.
This new cycle of high oil prices will lead to a new wave of development for alternative energies, which had suffered a brake by the competitiveness of oil and its derivatives (2014 to 2017), mainly in the transport segment, where there is the most important demand for these products.
In the US and many other countries around the world, they start to talk again about conversions of heavy transport fleets (buses and trucks), ships and heavy machinery that uses oil derivates to natural gas and to operate with LNG and small LNG.
In our region, Chile and its imported LNG, under competitive rules, is making an important substitution of LPG, gasoline and diesel and other heavy fuels for small LNG in industries, commerce and mining machinery. With the arrival of LNG in Central America, the same will happen. Other countries in Asia are moving along the same way with LNG, which is undoubtedly cleaner, more flexible and more competitive.
For particular vehicles, users will prefer electric ones. In addition to this, restrictions on the use of diesel or gasoline-driven vehicles, are taken in many cities and whole countries, particularly in Europe and Asia. This kind of restrictions should be imposed for natural gas too, that is cleaner than oil derivates, to use it as a transition fuel in the meantime electric cars demand grows. This can effectively help to start mitigate climate change in a shorter time.
Finally, most prices in future natural gas supply contracts, will no longer be linked to oil prices, breaking the paradigm of “oil goes up-natural gas goes up”. Natural gas is beginning to have a life of its own. For example, if we look at gas prices in the Southern Cone, everything indicates that there will be competition between different gas sources, with imported LNG as a price reference.
The higher oil prices go, the more penetration there will be of natural gas and alternative energy sources in the transportation segment, which is currently the most important demand for oil derivates.
*Managing Partner of Gas Energy Latin America