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In my February comment, I wrote about the positive impact the low oil price was having on reducing miners’ costs. With coal prices remaining low – a situation that is unlikely to change soon, according to a recent research note from Bank of America Merrill Lynch – this is a valuable boon to the mining companies. But there is a another side to the low-oil coin.

Alongside the oil prices to which they are linked, LNG prices have weakened in recent months and are expected to continue to remain low as a glut in supply (some 100 million tpy) comes online by 2020. Much of this will come from the Australian coal seam gas (coalbed methane) industry and targets Asian consumers. As Graham Tyler, Research Director for Asia Gas and Power at Wood Mackenzie recently put it: “this looming supply glut will create an environment where coal versus gas competition in Asia is a real possibility.”

Such competition has already wreaked havoc on the US coal industry, where a huge supply of shale gas has come online over the last couple of years, pushing out a significant amount of coal-fired generation. However, such dynamics were considered unlikely in Asia where cheap coal dominates the power mix, accounting for over half of all power generation. In contrast, gas provides only 11%. But this could change.

According to Frost & Sullivan, the slump in LNG prices is likely to stimulate demand for gas-to-power projects in Asia. In China, this could play well with the central government’s desire to reduce carbon emissions and improve air quality in its biggest cities. “China has the opportunity to capitalise on low LNG prices to clean up the environment and shift to gas-based power generation in a big way,” Frost & Sullivan said in a recent press release.

Wood Mackenzie’s Tyler agrees: “In China, air quality is a key issue [...] China is also introducing a national carbon trading scheme and other markets are also implementing or looking at carbon initiatives. These factors all make gas the more attractive option.”

Indeed, such a trend is already in evidence: last month Beijing announced it would close its last four major coal-fired power plants by the end of 2016 in an effort to reduce the critical levels of pollution in the city. The city experienced average airborne pollution (PM2.5) levels of around 85.9 µg/m3 last year; the national standard is just 35 µg/m3. In a sign of the times, the closed coal-fired plants will be replaced with gas-fired ones.

Asia will need over 2000 GW of additional power generational through to 2030. Previously, it was taken for granted that much of this would come from coal. And much still will. But as it has elsewhere, gas prices are aligning with environmental concerns, making it a viable alternative to the old black rock. As Tyler concludes: “with weak gas prices and increasing environmental pressures, the cost of switching to gas-fired plants could become more economical. This shift in the competitive dynamic between coal and gas must now be at the front of mind for energy planners, utilities and fuel suppliers.” Not to mention the coal industry for which the headaches keep coming.


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