U.S. LNG Projects Face Steep Challenges in Replacing Coal Abroad

Tuesday, 03/26/2024 Published by: Richard Pratt rbnenergy.com

Excerpt.  Link to full article:  https://rbnenergy.com/are-you-gonna-go-my-way-us-lng-projects-face-...

Many have argued that U.S.-sourced LNG can be instrumental in combating climate change by helping countries around the world replace coal-fired generation with natural gas-fired power. While this argument carries a lot of force in the eyes of many politicians and LNG marketers, the questions of exactly how — and to what extent — LNG can replace coal need to be asked. In today’s RBN blog, we’ll look at the challenges that the expanded use of LNG faces in countries with high coal utilization and the possible means of overcoming them. 

The challenges inherent in the world’s ongoing shift to a lower-carbon economy are social, political and economic — not to mention practical — which in the aggregate make the path toward decarbonization via expanded LNG use a tortuous one. As we said recently in Hello Darkness, My Old Friend, there is a potential disconnect in the amount of LNG supply coming online by the end of the decade and demand. The ongoing use of coal can be seen as both a headwind and a tailwind for LNG. On one hand, LNG has long been viewed as a more environmentally friendly alternative to coal that could be prioritized by governments looking to decarbonize. On the other hand, coal-fired power is cheap and the fleets of several growing countries have expanded recently. The focus of today’s blog is on countries such as China, India, South Africa and Indonesia (see Figure 1 below), each of which are major economies where coal is used extensively for power generation — and where its replacement would require massive volumes of LNG imports.

There are several economic reasons why a switch from coal to LNG would be challenging, but the political aspects are worth mentioning at the start. In the four countries noted above, there are strong and deeply embedded coal lobbies that view gas-fired power generation and LNG imports as threats to a status quo that has benefited coal companies for decades. Take China as an example. As noted in Figure 1, the country produced 4.56 billion metric tons (MT) of coal in 2022 and employs 1.5 million people in the coal mining industry, more than half the global total of 2.7 million. Moreover, China in 2022 alone proposed construction of another 122 GW of coal-fired power, with the prospect of having 200 GW of new capacity online by 2030. But whether it’s China, India or any other coal-friendly country, a large-scale move away from coal-fired power generation needs to address how to create a future for large numbers of mining workers and their communities and address established business structures that benefit from the way things are. 

In making their case for a larger role in the global energy market, LNG’s proponents point to declines in coal and the success of gas in the U.S. Coal accounted for 45% of U.S. power generation in 2010, a share that shrank to just 16% in 2023. In contrast, gas has gone from 24% of U.S. power generation in 2010 to 43% in 2023. After peaking at nearly 2.6 billion MT in 2001, U.S. power-sector emissions (measured in carbon dioxide equivalent, or CO₂e) fell to 1.6 billion MT in 2022 — largely attributable to the move away from coal. (It’s interesting to note that India, which is #2 behind China in coal production and planned additions to coal-fired power generation, generally uses natural gas as a way to improve air quality, which was the big driver behind LNG’s introduction to Japan in the 1970s.) The ability to replace coal in the U.S. is enhanced by the low cost of domestically produced gas as a result of the Shale Revolution, a trend that has continued into this year. (See Fear and Loathing for our latest blog on the subject.)

So, to what extent could these achievements be replicated in overseas energy markets? From a financial perspective, coal is generally more economic than imported LNG under existing market pricing principles. Let’s look at an example to show what we mean. If we take the average Henry Hub price of $2.57/MMBtu for 2023 and apply pipeline transportation costs, liquefaction fees and shipping costs to Asia, we get a landed LNG price of close to $8/MMBtu before downstream terminal and onward pipeline costs. This price level cannot compete with domestically produced — or even imported — coal at the burner.