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LNG to help reframe global energy equation as gas gains on oil, BP says

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LNG to help reframe global energy equation as gas gains on oil, BP says

Natural gas usage will continue to gain ground over the next two decades as global energy markets shift, BP plc said in its annual Energy Outlook.

Speaking at Columbia University's SIPA Center on Global Energy Policy, Group Chief Economist Spencer Dale said natural gas should make up more than one-quarter of the world's energy supply by 2035, surpassing coal as the second-largest energy source behind oil. Under this forecast, oil's percentage of the global energy equation, which currently sits near 33%, should drop below 30% over the next two decades.

According to the energy outlook, gas will benefit from an increase in power demand, largely in the U.S., China and the Middle East. LNG, however, could prove to be transformative.

"Supplies of LNG are likely to increase rapidly over the next 20 years, far faster than pipeline gas," Dale said. "By 2035, it will be more than half of traded gas."

BP's report indicated that Australia and the U.S. are likely to become the dominant LNG exporters, with Australia's supply going to Asia, which remains the "dominant market for LNG." American LNG, however, could become the global gas price stabilizer.

"Unlike pipeline gas, LNG cargoes can be directed to other parts of the world. If there's a shock to one part of the world … there's an arbitrage incentive for cargoes from other parts of the world to be redirected," Dale said. "U.S. LNG exports are likely to be more diversified, to Asia, Europe, Central and South America. U.S. LNG producers can serve as arbitrage across global markets."

The power of American LNG exports could make the Henry Hub a far more important part of the global energy market than it is currently. "Long-term contracts will be indexed to gas prices, not oil prices as we see today," Dale said. "We're likely to see major changes to the gas markets over the next 20 years."

One of the major reasons for the projected drop in oil consumption, Dale said, is the belief that electric cars will become more popular as the technology becomes increasingly affordable over the next two decades. Increasing oil reserves, largely from unconventional resources, could also help drive the price down and cause some producing nations to get out of the market. "The two big uncertainties on oil in the next 20 years: electric cars … and low-cost producers responding to this abundance of oil," Dale said.

Much of the demand lost by oil will be likely be picked up by gas, which is the only of the major three energy sources to see its market share increase to 2035, according to the outlook.

"Shale gas is two-thirds of the increase," Dale said. "U.S. shale production more than doubles [in BP's projections]."

Even though BP projects that renewables will also increase its stake in the global supply equation, hydrocarbons will remain the key combination through the next two decades. "The world needs … as much oil and gas combined in 2035 as it does today," Dale said. "Combined, they will provide around half the global energy needs in 2035."