LNG surplus on markets to reduce coal's share in energy generation

The surplus of liquefied natural gas (LNG) on global markets will affect its prices in the coming years. It will soon become another factor in decisions on the construction of new coal-fired plants. According to Reuters, global LNG production will increase by 35 million tonnes in 2016.

Energy markets will face increasing LNG supply over the next several years, with the potential to reduce coal demand by tens of millions of tonnes. This trend is further supported by government incentives to move away from coal-fired energy generation, which is among the most polluting energy sources.

„Purely from an economic perspective, it must be noted that coal is significantly cheaper. But with this volume on the market, (LNG) will begin to be used for electricity and heat generation in some parts of the world. This will come at the expense of coal-fired generation.“
a commodity trader told Reuters

There is currently a surplus of both coal and LNG on the markets, as a result of high prices in the previous decade that encouraged investment in new projects and production expansion.

The gap between LNG and coal prices has narrowed considerably, primarily due to political pressure and economic disadvantages imposed on coal to reduce its competitiveness.

„The construction of new coal-fired plants is becoming less and less likely at a time when such volumes of new LNG are coming onto the markets.“

Changes depend heavily on China.China is one of the most significant factors influencing the future position of coal and LNG. Concerns over climate change and air quality in China led to a year-on-year decline of almost one-third in coal imports in the first nine months.

„Natural gas will be very cheap in China and there will be a surplus of it for several more years. This will be an opportunity to create a regulatory environment that enables a shift from coal to gas. But that will take several years.“
Torbjörn Törnqvist, chief executive of Gunvor

Changes may also affect Europe

Besides China, Europe is another region that may be affected by the current market situation. According to Trevor Sikorski, an analyst at consultancy Energy Aspects, up to 130 million tonnes of coal per year could be replaced by electricity generation from natural gas.

Considering the number of projects due to come online over the next two years, gas prices are likely to fall significantly. In 2017, gas-fired generation could therefore replace part of coal-fired electricity generation.

Energy Aspects expects gas supplies to rise by 16 % year on year, meaning an additional 35 million tonnes of LNG in 2016.