North America—specifically the US and Canada—is endowed with significant natural gas resources that could address three challenges the global energy industry faces today: supplying affordable energy to help counter high prices; providing energy security by exporting LNG to Europe; and replacing carbon-intensive energy to advance decarbonisation.
The region has potential to provide this low-cost, alternative energy source—and it could be activated quickly. Greater collaboration—across the industry, regulators, and consumers—could unlock this potential. Stakeholders could develop North American gas infrastructure, support reliable gas supply and commit to long-term offtake agreements.
Challenge 1: Inflation and affordable energy—Natural gas plays a key role in power generation and heating for buildings, and is used as a feedstock and energy source in industrial processes. Consequently, higher natural gas prices contribute to rising prices for the fertiliser, steel, cement, plastic and glass industries, and lead to immediate cost increases in electricity production.
Challenge 2: Energy security—The war in Ukraine has had a profound human and socioeconomic impact across countries and industries. The reduced supply of Russian pipeline gas into the EU has brought energy security to the fore and slowed European coal-to-gas switching programmes, with some countries reverting to using carbon-intense energy.
Europe is implementing measures to strengthen energy security, including building temporary and long-lasting infrastructure to import more LNG, accelerating renewables, supporting energy-efficiency programmes and delaying nuclear decommissioning.
Challenge 3: The carbon budget—The world must imminently address climate change while providing affordable and accessible energy to sustain lives and livelihoods.
However, between 2009 and 2019, emissions from fossil fuels grew by 1.7pc/yr. At the current rate of annual emissions—around 40t CO₂e—the global carbon budget will be consumed by 2033 (not accounting for the effects of Covid-19). Essentially, the window for the energy transition is closing.
Addressing these challenges with natural gas
North America could meet more than 25 years of domestic and LNG export demand, even when factoring in domestic demand growth. Of the region’s estimated 2,750tn ft³ (77.9tn m³) of natural gas resources, around 1,700–2,000tn ft³ could be produced at a cost of below $3–4/mn Btu, which is likely to be the benchmark for long-term, cost-effective production.
The US and Canada are net energy exporters and have reduced their reliance on other energy-producing countries through the discovery of large shale oil and gas resources, with the US boasting the fourth-largest natural gas resource in the world.
North American LNG could help reduce natural gas and energy pricing in Europe, the need for which is especially acute in the near and medium term as Europe substitutes imported fossil fuels with domestic renewables and alternative imports. This impact will likely materialise only over the medium term, as existing LNG export facilities are at capacity and it takes 3-5 years to develop new ones.
Achieving a 1.5⁰C pathway
Although natural gas is CO₂-emitting, it does have the ability to replace other higher-emitting forms of energy, such as coal. In the US, the increase of shale gas supply pushed down natural gas prices and underpinned large-scale switching from coal to gas in the power sector over the past decade.
In China, emissions from coal have increased by 15pc in the last decade as new coal-fired power plants have come online. Substituting these plants with gas-fired power facilities has the potential to reduce Chinese emissions by up to 35pc.
Even in regions with strong decarbonisation commitments, local disruptions can drive regression to high-carbon power solutions. In Europe, the risk of interruption to Russia-supplied natural gas has led to a resurgence in coal- and lignite-powered generation, given its domestic abundancy. If Europe’s current gas shortage were alleviated through US LNG imports, emissions could be reduced.
Future role of North America’s gas
Natural gas is a transition fuel, and its longer-term demand is expected to decline as renewable power generation expands. As a result, North American infrastructure for natural gas may need to be repurposed in the future to support uptake of renewable fuels such as hydrogen and renewable natural gas/syngas or to transport CO₂ from carbon capture and storage projects.
Firm contracts will be required if US LNG is to provide reliable gas supply to support Europe’s diversification away from piped imports from Russia. To justify the multibillion-dollar upfront expense of US LNG capital projects, buyers would need to commit to long-term offtake agreements.
Affordable energy, European energy security and staying within the global carbon budget are a few of the energy industry’s toughest challenges. North America has ample natural gas reserves to help tackle these challenges. LNG exports could strengthen European security of gas supply and serve as a carbon-reduction lever through coal-to-gas switching. However, investment in export capacity alone without further development of the pipeline infrastructure in North America could result in higher prices for all.
Dumitru Dediu and Luciano Di Fiori are partners from the management consultancy company, McKinsey. Jesse Noffsinger is the solution associate partner, Brandon Stackhouse is the solution manager and Michael Dalena is the solution associate at McKinsey.
This article is part of our special Outlook 2023 report, which features predictions and expectations from the energy industry on key trends in the year ahead. Click here to read the full report.
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