The case for North American gas over coal in emerging economies

Fuel switching from coal to natural gas in emerging economies globally can be a cost-effective and feasible short-term path to reduce emissions, according to research.

North American LNG exporters could be well placed to benefit from any such fuel-switching in Asia, particularly those situated on the West Coast with shorter shipping routes across the Pacific. US exporters shipped over 3 bcf/d of LNG to Asia in 2023. China and India increased LNG imports from the US by a combined 0.6 Bcf/d compared with 2022.

The snag for any further growth in exports as a result of fuel switching – and it’s a hugely significant one – is that it requires a sustained low-price environment for natural gas. For evidence of the consequences otherwise, note the increased coal burn in India, China, and other locations when gas prices spiked due to Russia’s invasion of Ukraine in 2022. That year coal demand reached a record global high of 8.42 billion tons, says the International Energy Agency (IEA).

The IEA believes coal demand has now peaked and will fall through 2026. Meantime, LNG prices for delivery to Northeast Asia have fallen sharply from around US$70/mmbtu in 2022 to US$11-12/mmbtu.

A recent research paper from investment bank JP Morgan concluded that an oversupplied global natural gas market will lead to a continued downward price trajectory in global LNG markets. “Continued downward pressure on global natural gas prices is conducive to enabling the needed coal-to-gas switch globally and affordable economic growth for developing nations,” it said.

Coal demand in the top ten coal consuming countries is responsible for one third of total global emissions, said the authors. Without coal-to-gas switching, emissions reductions targets for developing economies will be much harder to achieve.

“If India maintains its current energy mix (55% coal) while closing the energy consumption gap with China, its annual emissions in 2050 will increase by five times and will be 20% higher than those of China in 2022.”

The IEA medium-term gas market report from last year agrees that loosening global gas market fundamentals as a wave of new LNG supply comes online after 2026 could spur growth in LNG imports by emerging economies.

The degree and speed with which coal-to-gas fuel switching takes place in such economies depends on several factors — the relative prices of the two fuels, the gas storage and transport infrastructure of the country in question, and regional macroeconomic conditions.

China

Delivered prices below $13/mmbtu make LNG imports attractive to industrial users and power generators in China. Imports are expected to grow by 8.1% year on year to 77.11 million tons in 2024 because of current prices, according to data released by state owned oil and gas firm CNPC’s Economics & Technology Research Institute.

Shell’s LNG Outlook for 2024 said that China’s steel production sector — currently reliant on coal — will increasingly begin to substitute that fuel for gas this decade to cut emissions and lower production costs. “China is likely to dominate LNG demand growth this decade as its industry seeks to cut carbon emissions by switching from coal to gas,” said Shell Energy vice president Steve Hill.

But fuel switching for steelmaking is not straightforward and requires Chinese industrial units to use a different type of technology. Traditionally, China uses blast furnace-basic oxygen furnaces (BF-BOF), which can only burn coal. Currently around 71% of Chinese steelmaking capacity is based on BF-BOF technology, according to non-profit Global Energy Monitor’s Global Steel Plant Tracker.

Using gas for steelmaking requires a different technology known as direct reduced iron (DRI). Only a small fraction of steelmaking capacity under development in China is currently based on DRI technology, largely due to the relative higher costs of the technology when compared to BF-BOF.

But the implementation of the European Union’s Carbon Border Adjustment Mechanism (CBAM) — which requires steel imported into the EU to be subject to a carbon price parallel with that levied in the EU emissions trading scheme (ETS) — could help trigger the development of more DRI capacity.

The Shell outlook also noted that countries in South Asia and Southeast Asia would need significant investments in gas import infrastructure if they were to successfully replace coal demand with gas in their economies.

India

India tends to import more cargoes when delivered prices are under $15/mmbtu — the level at which fuel switching with oil products becomes competitive. This is demonstrated by the uptick in LNG imports in the fiscal year from April 2023 to the end of March 2024, which were up 17% on the previous fiscal year at 23.3 million tons, according to figures from India’s Ministry of Petroleum and Natural Gas.

Should delivered prices fall below $10/mmbtu, further imports are likely to flow to India as the country begins to undertake some domestic gas-to-LNG switching and even some coal-to-gas fuel switching for power burn.

Other countries such as South Korea, Bangladesh and Vietnam could also begin to increasingly substitute coal for gas in power generation if prices remain under pressure into the second half of the decade.