Read Our Latest Energy Market Insights – Go There >>

LNG Exports Slowing Oil Power Generation Demand?

Last month, BTU Analytics explored the ramifications of increased global LNG demand, specifically from new agreements in Vietnam and Pakistan. Both nations consume oil for power generation and will use additional imported LNG to meet growing power demand and likely displace consumption of oil and coal in the existing power market. As global natural gas supply grows, crude supply will be freed up and conversely, crude demand reduced due to fuel switching. Today’s energy market commentary will provide an overview of the global demand for crude from the power sector and discuss potential implications on crude and LNG markets.

The chart above shows electricity generated from oil converted into natural gas equivalence utilizing a 6.5 MMBTU/MWh heat rate. Electricity generation derived from oil has been in a steady decline for the last two decades. The dips in 2008 and 2009 were caused by the financial crisis, and the subsequent rebound in 2010 returned levels to pre-financial crisis levels.  More recently though, the annual declines between 2015 and 2018 averaged 8%, some of the largest over the last 30 years.

In equivalent volumes of natural gas burned, global oil consumption for power generation in 2018 was just 14.3 Bcfe/d, down 1.2 Bcfe/d from 2017. While oil-fired power generation accounts for just 0.6% of the US 2018 generation mix, the rest of the world’s energy consumption varies depending on access to energy resources.

The two largest consumers of oil for power generation are currently Asia Pacific and the Middle East. Of these regions, the two nations accounting for the largest share of demand are Japan and Saudi Arabia, respectively. Japan experienced a spike in oil consumption in 2011 following the Fukushima Daiichi nuclear incident. Its appetite for power from oil has declined in the wake of this sudden spike as its generation mix stabilized to accommodate decreased nuclear power supply.

As for Saudi Arabia, domestic natural gas production has grown in recent years, both from associated gas and gas-focused drilling. This budding abundance of natural gas is leading to increased use of the fuel for domestic power generation. The surplus of natural gas in the Kingdom is reducing the consumption of oil for power. Natural gas equivalent volumes of crude burned were reduced from 3.03 Bcfe/d in 2015 to 2.68 Bcfe/d in 2018, or about 60,000 b/d less oil over the course of the year. With looming increases in global LNG imports on the horizon, these two nations aren’t the only ones expected to reduce their reliance on oil-fired power.

Global LNG imports have been on the rise as US Wave 1 facilities have entered service over the last few years. The global LNG market grew by about 2.7 Bcf/d in 2018 over 2017. A portion of this growth contributed to the 1.2 Bcfe/d displacement of crude for power generation over the same time frame. In 2019, the pace of LNG demand growth so far has doubled compared to 2018. With an additional 5+ Bcf/d of LNG in the global market, fuel switching not just from oil but from coal has been necessary to balance the global market for LNG.

With global LNG supply expected to rise over the next several years, oil-fired power generation will continue to face pressure, putting downward pressure on the ability for crude demand to grow globally. For more information about crude market dynamics and BTU Analytics’ outlook on crude differentials in the US, request a copy of our Oil Market Outlook.

Share This Article

Share on facebook
Share on twitter
Share on linkedin

Recommended for You

Log In

Energy Market Insights

Receive Free Energy Market Insights When They Are Published