Why Equipment and Service Providers will Benefit from The Ongoing Natural Gas Revolution


In our May 2010 report entitled “Investing in the Natural Gas Revolution” we concluded that there would be strong, long term global demand for natural gas, and that it would be a boon for this sector’s equipment and service providers in particular. The three main reasons for this secular bull market are cited below.

  1. Natural gas is less polluting and more fuel efficient than either coal or oil. This is especially the case when compared with coal, its main competitor in the electricity sector. 
  2. The development of liquefied natural gas has connected states with previously stranded natural gas reserves to major natural gas consuming countries 
  3. New innovations allowing for the extraction of natural gas from previously inaccessible unconventional reserves have significantly increased the world’s supply of natural gas. 

This additional supply of natural gas, which has led to a drop in prices, will over the mid-to-longterm stimulate demand even further. Recent developments in the areas of demand and infrastructure further strengthen our original report’s main findings.

World Demand 
One of the main conclusions of the International Energy Agency’s (IEA) annual World Energy Outlook report, released last November, was that natural gas would be the world’s fastest growing fossil fuel over the next 25 years. This is a significant change from its long held position that the leading fossil fuel for the foreseeable future would be coal. The IEA, in it latest report, has gone as far as to say that natural gas could be entering into a “golden age.” The IEA predicts that global demand for natural gas will increase by 44% between 2008 and 2035, versus 36% for energy demand in general. The two charts below illustrate how significantly the IEA changed its outlook in the span of only one year.

United States 
The United States is in the midst of making a significant transition towards natural gas in the
electricity sector. Deutsche Bank predicts in a recent report that natural gas will account for 35%
of America’s electric power generation by 2030, significantly up from its current 23%. At the
same time, it forecasts that coal’s market share will fall from 47% to 22%.2.

The driving forces behind America’s switch to natural gas include:

  • Ageing coal power plants: There are an estimated 60 gigawatts (GW) of coal plants over 60 years old that will need to be retired by 2020 at the latest. In addition to this, there are a further 92 GW of coal plants over 45 years old. Taken together, this represents 45% of America’s total current coal generating capacity.3 The older the coal plant, the less efficient it is and the more likely it does not have any pollution control equipment installed; thus making it more economical to close rather than to refurbish. 
  • Regulatory pressures to reduce pollution. Even absent national carbon legislation, there are plenty of other regulatory developments at the state and federal levels that are undermining coal’s market position. They include stricter pollution laws in states, such as Colorado and Michigan, and the federal Environmental Protection Agency’s imposition of new limits on sulfur dioxide and nitrogen oxide emissions in 31 eastern states starting in 2014. Credit Suisse estimates that over 30% of America’s coal generating fleet has no emission controls at all; while another third lack either a scrubber for removal of sulfur dioxide or other controls for nitrogen oxides.4 The charts below show how much less polluting natural gas is than coal. 
  • Building Costs. Building a new natural gas combined cycle plant costs about $1,230 per kilowatt of capacity, versus $2,890 per kilowatt for pulverized coal plants and $6,100 for nuclear plants. This includes the cost of building the required pollution-control equipment. Constructing a coal plant capable of eventually capturing and storing carbon dioxide underground would even further worsen coal’s competitive position.
  • Lower natural gas prices. Another important factor is that U.S. natural gas prices have plunged over the last several years due to the discovery of massive new reserves. This has made natural gas competitive with coal, even without taking into account the extra costs coal incurs due to increasingly tighter environmental regulations. 
  • Bipartisanship. While a Republican controlled House will significantly reduce the chances of a federal carbon dioxide bill coming into law, expanding the use of natural gas has strong bipartisan support among Republicans and Democrats. 
All this means increased U.S. demand for natural gas infrastructure 
In order for the U.S. to meet its growing demand for natural gas it will have to spend approximately $129 billion to expand its natural gas pipeline networks by 37,700 miles, or 10%-12% of its current capacity.6

While the switch to natural gas is occurring considerably more slowly than in the U.S., there are growing signs that natural gas is also poised to gain significant market share in China.

  • The EIA projects that 20% of the increase in global demand for natural gas over the 2008-2035 period will originate from China.
  •  In October 2010, the Chinese government announced plans to increase the production and use of natural gas. The goal is for natural gas to meet 8% of China’s energy needs by 2015, up from its current 4%.8 Even at this higher level, China’s consumption of natural gas lags behind that of many countries. Natural gas accounts for about 27% of America’s energy mix, and 23% of the world’s.
  • China is also making plans to increase its domestic production of natural gas from unconventional gas reserves. While China only has 2.46 trillion cubic meters of conventional natural gas reserves, it may have up 10 times that amount in unconventional gas deposits.10 The problem is that China currently does not have the technological means to tap these unconventional sources on a large scale. It is attempting to acquire this capacity by partnering with, or investing in, companies with the requisite technology. The most recent example is China National Offshore Oil Corporation’s $2.16 billion deal with Chesapeake Energy, one of the pioneers of shale gas drilling, for a one-third stake in a south Texas shale gas and oil field.
  • The charts below show that China has consumed more natural gas than it has produced for three years counting and, as a result, is now a net importer of natural gas. In the past, when China has become a major net importer of certain commodities, such as oil or iron ore, price increases have followed. 

An official from China State Shipbuilding, China’s only LNG shipbuilder, projects that China may more than quadruple its imports of liquefied natural gas over the next six years. China’s LNG imports have already surged 66% in 2009 from a year earlier.

In order to facilitate its growing use of natural gas, China plans to triple the total length of its natural gas pipelines to 100,000 km by the end of 2015, up from 36,000 km by the end of 2010.13

Several Indian energy companies have recently announced plans to expand their natural gas pipeline networks. Gail India plans to build 5,500 km of natural gas pipelines over the next 2-3 years;

Reliance Gas and Transportation Infrastructure plans to build 3,020 km of pipeline by the end of 2012; Gujarat State Petronet intends to expand its capacity by 7,601 km; and Gujarat State Petroleum is looking to build about 2,600 km of pipelines.

Investment Recap 
As mentioned, due to the growing global demand for natural gas, we are bullish on equipment and services providers active in the natural gas sector. Companies in this market include:

  • BG Group, Fluor and Foster Wheeler, which develop LNG projects.
  • GE and Caterpillar, which manufacture natural gas-fired turbines. 
  • Air Products & Chemicals, which produces liquefied natural gas processing technology 
  • Vallourec of France and Indian-based Welspun Gujarat Stahl Rohren, which build natural gas pipeline infrastructure 
  • ENN Energy, China Gas Holdings (both of China) and Gujarat State Petronet, which are in the natural gas delivery business.