As the world transitions towards renewable energy, Liquefied Natural Gas (LNG) has emerged as a crucial “bridge fuel”, balancing immediate energy demands with environmental concerns. LNG is natural gas cooled to -161°C, transforming it into a liquid state. This process reduces its volume by a factor of 600, resulting in a commodity that is much easier to store and transport – with a density approximately half that of water. Natural gas is a non-renewable fossil fuel typically found buried in the Earth’s crust, often in conjunction with oil deposits. Currently, natural gas comprises 23% of global energy consumption, with LNG constituting 12% of gas demand. As a less carbon-intensive alternative to coal and oil, LNG is commonly regarded as a “bridge fuel” in the energy transition, with its share of the global gas market projected to grow by 50% by 2040. Beyond its environmental credentials, LNG plays a pivotal role in global economics and geopolitics, where energy security and global diplomacy are becoming increasingly intertwined.
Natural gas is primarily composed of methane (85-95%), with trace amounts of other short-chain alkanes such as ethane, propane, and butane, along with nitrogen. While the exact composition can vary depending on the source, common impurities include CO2, water, and hydrogen sulfide. Vertical drilling is the most prevalent extraction method, typically accessing deposits up to 800 metres below the Earth’s surface. For deeper reserves, hydraulic fracturing (fracking) may be employed, though the process is banned in many countries due to its high water usage and associated pollution. Once extracted, raw natural gas is purified at LNG plants, removing impurities before being cooled to -161°C using cryogenic heat exchangers, transforming it into LNG.
LNG is often referred to as a “bridge fuel” because its combustion produces 40% less CO2 than coal and 30% less than oil. Additionally, the purification process significantly reduces harmful emissions, resulting in 90% fewer pollutants than coal. While renewable energy sources like wind and solar are intermittent, LNG can provide a reliable backup, ensuring a stable energy supply during peak demand or when renewable generation is low. Although LNG is still a fossil fuel, its lower emission intensity make it a more favourable energy source for industries which are difficult to electrify. Heavy industries such as iron, steel, and cement production, as well as heavy-duty transport like shipping, require highly calorific fuels and are difficult to electrify. Instead, LNG can be employed as an effective “halfway house”, delivering an 80% reduction in NO2 emissions and a 99% reduction in particle pollution compared to traditional heavy fuel oil. While natural gas is not a new energy source, its liquefied form makes these new applications feasible due to its reduced volume and weight.
LNG production is divided into three stages: upstream, midstream, and downstream. Upstream costs encompass exploration, purification, and liquefaction, accounting for 45-65% of total production costs. Technological advancements have significantly reduced purification and liquefaction costs by 35-50% in recent years. Midstream costs cover storage and transportation, requiring specialist tankers equipped with cryogenically adapted shipping containers and cooling systems necessary to maintain the liquid phase. Downstream costs involve regasification and delivery to consumers. While natural gas relies on fixed pipelines, which are costly and inflexible, LNG’s ability to be transported via ships and roads allows it to be bought and sold globally, although it requires high upfront investment in LNG tankers and infrastructure.
LNG production costs vary significantly between regions. In the Middle East, LNG plant construction costs range from $500-800/ton, while in countries like Norway and Australia, costs are much higher, between $1,500-2,400/ton. These disparities are repeated with differing upstream and liquefaction costs, with the Middle East producing LNG far more cost-effectively than many developed nations.
Globally, LNG prices - whether spot prices, futures, or long-term contracts – are typically based on a Free-On-Board (FOB) cost. FOB prices include production, transport, and loading onto LNG tankers but exclude shipping and regasification. Delivered Ex-Ship (DES) prices add shipping costs to the FOB price, while post-regasification prices incorporate the final costs at the receiving terminal. LNG prices are highly sensitive to geopolitical events, as natural gas reserves are concentrated in politically unstable regions, and trade relies on secure shipping routes and infrastructure, which are vulnerable to disruptions from sanctions or conflicts.
Russia, Iran, and Qatar possess the world’s largest proven natural gas reserves, with the US, Qatar, and Australia leading global LNG exports in 2023. Since 2020, the number of nations importing LNG has quadrupled, yet East Asia remains the dominant importer, accounting for 71.4% of global imports, led by Japan, China, and South Korea. Despite efforts to diversify energy sources, European nations have struggled to decouple themselves from Russian LNG following the invasion of Ukraine. So far in 2024, the US has supplied 51% of Europe’s LNG, while Russia has contributed 16%. Spain and Belgium remain heavily reliant on Russian LNG, with respective import shares of 32% and 49%, highlighting the region’s vulnerability to energy security threats. Furthermore, disruptions in the Suez Canal heightened this pressure, reducing the flow of LNG from Qatar and further emphasising Europe’s reliance on Russia.
Geopolitical tensions have a significant impact on global LNG prices. European spot prices for LNG surged to $70 per million British thermal units (MMBtu) in March 2022, up from just $3/MMBtu in 2020. This dramatic spike was largely driven by a sharp reduction in Russian LNG exports to Europe, which fell from about 40% of total imports to near zero after the invasion of Ukraine. The resulting price volatility reiterated the urgent need for Europe to diversify its energy sources, prompting efforts to find LNG from alternative suppliers in Qatar, Malaysia, and Nigeria. This situation highlighted the interplay between geopolitical phenomena and global commodity prices, reinforcing the importance of securing diverse and stable energy imports.
As the world transitions to renewable energy, LNG plays a critical role as a “bridge fuel”, offering a cleaner alternative to coal and oil while fulfilling the energy demands of sectors that are difficult to electrify. LNG’s ability to be transported globally and its reduced emissions position it as a cornerstone in the energy transition despite its fossil fuel status. With advancing technologies and expanding infrastructure, LNG is becoming increasingly accessible, driving up both demand and the volume traded globally. However, geopolitical tensions in regions with significant natural gas reserves have caused significant price volatility, underscoring the necessity for energy security and diversified energy sources.