Natural gas and the move toward energy self-sufficiency

PERSPECTIVE | April 02, 2024

Authored by RSM US LLP

The major move toward energy self-sufficiency in the United States and in Europe in recent years has been the development of the U.S. natural gas industry and the export of liquefied natural gas (LNG) to our allies.

Natural gas accounts for roughly 30% of the energy used domestically, and the U.S. is now the largest global exporter of LNG.

Similar growth has taken place in crude oil, where the U.S. has become the world’s leading producer and exporter. Ten years ago, exports of crude oil were banned.

But it is the shift to natural gas, a cleaner-burning fossil fuel, that has had the biggest impact as nations transition from carbon-intensive fuels like coal to renewable sources.

When wind and solar power are factored in, the result has been an economy, both in the U.S. and in Western Europe, less dependent on traditional fossil fuels. This change can be seen in the loosening of the direct relationship between economic growth and carbon emissions among the developed economies.

While gross domestic product in the United States has doubled since 1990, carbon dioxide emissions have returned to 1990 levels. And while the European Union economy is 66% larger now, its carbon emissions are 30% lower than in 1990.

There is still a long way to go before we can expect anything close to zero emissions. But for the next few years, the energy outlook in the U.S. is bullish with respect to both natural gas supplies and the economy.

In addition, as the diversification of supply and demand increases, risks to economic growth—linked to a volatile external sector—should diminish on the margin.

For our allies in Europe, exports of LNG have been a lifeline as Russian energy supplies have been cut off. For the U.S., natural gas has become the cleanest available fuel, providing an alternative fuel until cheap supplies of renewable energy are fully attainable.

The ideal transition fuel

Natural gas is the ideal energy source that aids energy self-sufficiency. First, it is “cleaner,” generating lower carbon emissions than oil and coal, although it is not as low-carbon as renewables. The switch from coal and oil to natural gas use will help curb carbon emissions while allowing time for renewables capacity to grow.

Second, while natural gas markets are localized, LNG can be transported all over the world, helping to smooth out the wrinkles in global supply and demand.

Wind, solar and hydro energy all have distribution challenges that require generation centers to be relatively close to where the energy is consumed. Natural gas, while not as easily transported as oil and coal, is the hybrid fuel that helps fulfill energy demand where shortages arise.

In addition, natural gas generation is reliable where there is supply. In an era in which energy security is a top priority, moving to natural gas as a transition fuel is a natural step. It also means that for many European countries that depend on imports of gas and oil, energy security still depends on relationships with top producers like the U.S., Canada and Russia.

Expanding supplies

Production of natural gas in the U.S. has been increasing since 2006, with the rate of increase accelerating since 2017. We would surmise this has to do with meeting the demand of U.S. public utilities as coal and oil generation is phased out, and with the rapid increase in demand by foreign buyers.

The increase in natural gas production is one of three main pillars driving electricity generation today:

1. The decline of fossil fuels: Combustible sources (coal, oil and natural gas) now provide 59% of total electricity generation, down from 70% in 2010.
2. The rise of renewables: Hydro, wind, solar and geothermal now provide 22% of total electricity generation, doubling the share of a decade ago.
3. Natural gas, the bridge fuel: Natural gas is now providing 41% of total generation and 70% of combustible generation. Use of natural gas for generation has nearly doubled since 2010, growing at an average rate of 4.9% per year.

Changes in the U.S. wholesale market for electricity were recognized as early as 2019, according to a pre-pandemic analysis by Lawrence Berkeley National Laboratory. The paper found that in the 10 years ending 2017:

• Renewables have contributed to the price decline in wholesale electricity, with regional variation.
• Natural gas was the greatest driver of the decline in average wholesale prices across all markets.

LNG exports

The U.S. shipped its first export of natural gas in 2016. By 2023, a total of 91 million metric tons of LNG had been exported. According to Bloomberg Intelligence, LNG exports are poised to expand by 4% this year. Based on projects in development, an additional 79 million tons per year in projected supply are likely to come to market by the end of the decade.

Despite the recent moratorium on export license approvals implemented by the Biden administration, that decision will not affect production and export of LNG in the near to medium term.

The top five export destinations have accounted for more than half of total U.S. LNG exports, according to the Energy Department:

1. France (15.3%)
2. United Kingdom (12.3%)
3. Netherlands (9.4%)
4. Turkey (8.1%)
5. South Korea (6.8%)

Stumbling blocks

While natural gas is the obvious transition fuel, stumbling blocks are inevitable. Increased oversight of production and transportation, and the reduction of harmful emissions, can help address concerns.

The shocks of the pandemic have prompted nations to build greater flexibility around supply chains, especially in energy.

But substantial challenges around such strategic objectives remain.

Price volatility

The price of natural gas has been highly volatile in recent years as the pandemic and then geopolitical conflicts have roiled energy markets.

After stabilizing last year, the recent conflicts in the Middle East have led to renewed volatility.

Local market

While crude oil is fungible, with prices set on a global market, natural gas remains a localized commodity. The product is piped from producers to public utilities and then to consumers. Shipping natural gas requires the added cost of liquefying and then further processing it before it can be piped to consumers.

For now, most of its production is limited to areas outside of Western Europe, where supplies were most needed after the Russian invasion of Ukraine. Price levels in Europe reflect this need, reaching as high as six times as much as the United States.

The price discrepancy has left U.S. producers scrambling to ship more and more LNG from Louisiana to Europe.

Concerns about climate change, though, have put up a roadblock to expanding this capacity.

Methane mitigation

Should public policy support the use of natural gas, domestically or in Europe? In our opinion, the answer is a qualified yes, with policy directed at reducing the negative aspects of producing and burning fossil fuel.

Natural gas is a nice word to describe a fuel that is 97% methane. Its chemical composition is CH4, a one-carbon compound in which carbon is attached by single bonds to four hydrogen atoms. It is called natural gas to describe its presence in the earth, as opposed to coal gas, which is artificially created by burning coal.

Methane is a potent greenhouse gas and the second-biggest human contribution to greenhouse gases after carbon dioxide. And because of its short atmospheric life, the reduction of methane emissions would slow the rapid rate of global warming.

Methane mitigation is voluntary and costly for small producers, however. We’ve all seen pictures of the burn-off of natural gas at the top of oil wells.

To those ends, the Department of Energy and the Environmental Protection Agency are providing technical assistance and up to $1.3 billion to improve methane monitoring and reduce these emissions.

These investments are expected to improve the economic competitiveness of small and medium-sized producers while reducing air pollution and creating jobs in energy communities.

The takeaway

Developed economies are moving away from burning coal and oil toward renewable sources of energy.

But getting from Point A to Point B implies a transition. Market forces and current technologies have settled on natural gas as the transition fuel of choice.

There are national security issues to consider, particularly for Europe as it fully weans itself from Russian energy sources.

As such, we expect that industrywide innovation and government policy design will most likely move in alignment to mitigate the emissions of methane into the atmosphere at all stages of production, transportation and use of natural gas.