The four base trends fostering the natural gas challenge are: 1) the accelerating growth rate of natural gas availability globally, with newly booked gas reserve bookings now consistently about double new oil reserves; 2) the breaking of the traditional link between wellhead oil and gas prices – especially in North America – and the overwhelming economic incentives to develop mechanisms to change the link breakage into a cost advantage in the transportation fuel market; 3) the ability of governments, especially in emerging markets with abundant gas resources, to cap natural gas prices at levels that allow compressed natural gas (CNG) and perhaps liquefied natural gas (LNG) vehicles to be more attractive to vehicle owners; and 4) the popular and growing concerns about environmental damage associated with petroleum product use, leading to tightening specifications of petroleum products that open the door for natural gas (via CNG or LNG) to play a growing role in the marine transportation, heavy duty truck and rail transport markets.
These trends are building momentum and mutually reinforcing one another at the same time that new engine and battery technologies are emerging that rely on non-hydrocarbon propellants, including electricity, both as supplements to gasoline and diesel and as fuel sources that can supplant them. And, coinciding with all of these factors is a different monkey wrench – massive improvements in automobile and truck fuel efficiencies, which while reducing the pace of petroleum product demand growth, can also limit the attraction and pace of development of natural gas use in the transport fuel market.
Equally significant is the impact on the oil market. After decades of robust growth in oil demand, the broad consensus in the oil industry and the analytic community is that oil demand will continue its inexorable rise through to 2030.
This consensus in turn underpins the belief that oil prices will have to stay high versus historical norms to bring forth enough supply to meet this ever-rising demand . The only matters seemingly up for debate are how fast oil demand will grow and how high prices will need to be to sustain supply growth. Several developments in fact give reason to question the consensus and raise the possibility that the tipping point for oil demand may come much sooner than the markets are expecting.
Looking across the various sectors for which there are clear opportunities for natural gas to substitute for oil – specifically bunker fuel for ships, natural gas vehicles (NGVs) replacing primarily gasoline-powered light duty vehicles (LDVs), heavy duty trucks both in and ex-US, power generation, petrochemicals and various industrial processes – we model the progressive substitution using fairly conservative assumptions and the resulting impact on oil demand growth, which comes in at a formidable 3.5-mb/d by 2020. Taken together, the improvement in global fleet efficiency and the substitution of natural gas for oil could be enough to put in a plateau for global oil demand by the end of this decade.