North America (the United States [US] and Canada) is endowed with significant natural gas resources that could play a key role in addressing three challenges that the global energy industry faces today. First, North America could provide affordable energy to help counter high prices across the US and Europe. Second, the region could provide energy security by exporting liquefied natural gas (LNG) to Europe, and third, natural gas could replace high-emission forms of energy to help advance the decarbonization agenda.
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.
These measures could reduce North American gas prices and facilitate increased exports, thereby maintaining North American energy independence and providing energy security.
Challenge 1: Inflation and affordable energy
Between July 2021 and July 2022, US natural gas prices at Henry Hub rose more than 250 percent, and European gas prices increased by almost 850 percent (Exhibit 1).
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 fertilizer, steel, cement, plastic, and glass industries, and lead to immediate cost increases in electricity production.
The US experienced an 8.5 percent rise in consumer prices between July 2021 and July 2022, with energy prices accounting for around 30 percent of the price increases during this period.1
Challenge 2: Energy security
Since February 2022, 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 European Union (EU) has brought energy security to the fore. Consequently, European countries have slowed their coal-to-gas switching programs and, in some cases, reverted to using carbon-intense forms of energy such as coal or lignite due to a lack of reliable and secure natural gas feedstock.2
Europe is implementing measures to strengthen energy security by diversifying away from Russian piped gas imports due to supply interruptions. Measures include building temporary and long-lasting infrastructure to import more LNG, accelerating renewables, supporting energy-efficiency programs, and delaying nuclear decommissioning.3
This may result in a pull of an additional 80 billion cubic meters (bcm) of natural gas—equivalent to between 7 billion and 8 billion cubic feet per day (bcfd)—increasing North American LNG demand in the next three to five years (Exhibit 2).
Challenge 3: The carbon budget
Both the US and Europe face a dual challenge of providing reliable energy supply while reducing emissions. According to the Global Carbon Project, future emissions cannot exceed a carbon budget of 450 metric gigatons of CO2 equivalents (GtCO2e) from 2022 onwards to have a chance of limiting average global warming to 1.5°C.4 Emitting more than 450 GtCO2e increases the risk of severe weather events and is likely to accelerate climate change.
Over the ten years between 2009 and 2019, emissions from fossil fuels grew by 1.7 percent a year.5 Even though global emissions declined in 2020 as a result of COVID-19, 2021 emissions rebounded to almost 2019 levels. At the current rate of annual emissions, at around 40 GtCO2e, the global carbon budget will be consumed within 12 years or by 2033 (not taking the effects of the COVID-19 pandemic into account).6 In other words, the window for the energy transition is closing (Exhibit 3).
The world faces the immediate challenge of finding a solution to address climate change as quickly as possible, while providing affordable and accessible energy to sustain lives and livelihoods.
North American natural gas could help to address these challenges
The region’s natural gas resources could help to provide affordable energy, address energy security, and offer a decarbonization lever to help reduce carbon emissions.
Tackling transportation to reduce prices
North America could meet more than 30 years of domestic and LNG export demand, even when factoring in demand growth (Exhibit 4). Of the region’s estimated 2,750 trillion cubic feet (Tcf) of natural gas resources, around 1,700–2,000 Tcf could be produced at a cost below $3 to $4 per metric million British thermal unit (MMBtu), which is likely to be the benchmark for cost-effective production in the long term.
However, natural gas prices at demand centers show steep fluctuations, often rising well above the $3/MMBtu threshold, while gas prices at supply centers remain steady and low. The demand center fluctuations are the result of transportation constraints, coupled with spikes in demand, seasonality, and other market issues. Addressing these transportation challenges could significantly reduce natural gas prices in the US.
Reducing European prices and providing energy security
The US and Canada are net energy exporters and have decreased reliance on other energy-producing countries through the discovery of large shale oil and gas resources. The US has the fourth-largest natural gas resource in the world; only Russia, Iran, and Qatar have larger natural gas reserves.7
These US and Canadian gas resources have provided a secure and economical energy supply to domestic consumers and limited the impact of energy price shocks currently seen abroad. The US and Canada could also provide a secure supply of natural gas to countries in Europe (for example, Germany) and Asia (for example, Japan) through new LNG export facilities that could be developed within the next three years.
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 (for example, hydrogen and ammonia as proposed by the REPowerEU). At stable production prices of around $3/MMBtu, North American LNG exports are globally competitive and can provide reliable and affordable gas to European consumers at a cost below $8/MMBtu—compared with recent prices of $40 to $70/MMBtu (Exhibit 5).
This impact will likely only materialize over the medium term, as it takes between three and five years to develop new LNG export facilities in North America, and existing LNG export capacity is fully utilized.
Achieving a 1.5° pathway
Natural gas could help to achieve a 1.5° pathway by reducing emissions in power generation, particularly by switching from coal to gas as a source of energy in the short to medium term.
Natural gas is a CO2-emitting form of non-renewable energy and accounted for 33 percent of US energy emissions in 2021.8 However, natural gas does have the ability to replace other higher emitting forms of energy, such as coal.
McKinsey’s Global Energy Perspective 2022 puts forward four potential scenarios and, in one of these (the Further Acceleration scenario), coal power generation could be responsible for 16.5 percent of global emissions over the next five years. Natural gas emits roughly one-half the CO2 per unit of energy when combusted, compared to coal.9 Consequently, it is viewed as a more environmentally sustainable alternative for power generation.
The potential for emissions savings from coal-to-gas switching varies significantly between regions. 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. Power-generation emissions dropped by around 18 percent since 2010, leading to the abatement of 4.2 GtCO2 over the last decade.10 Reducing pipeline constraints could lead to more rapid removal of coal in favor of gas. Accelerating this trend by even one year would abate an additional 1 GtCO2.
In China, emissions from coal have increased by 15 percent in the last ten years as new coal-fired power plants have come online. Substituting these plants with gas-fired power plants has the potential to reduce Chinese emissions by up to 35 percent.11
Even in regions with strong decarbonization commitments, local disruptions can drive regression to high-carbon power solutions. In Europe, the risk of interruption to Russian-supplied natural gas has led to a resurgence in coal- and lignite-powered generation, given its domestic abundancy. If Europe’s current gas shortage—which is driving lignite and coal usage—were alleviated through US LNG imports, emissions could be reduced.12
Natural gas plays a role as a transition fuel and longer-term demand for gas 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, transport CO2 from carbon capture and storage (CCUS) developments or renewable natural gas (RNG)/syngas.
A potential path toward lowering prices and increasing exports
The North American gas industry, together with regulators and other stakeholders, could collaborate to develop gas infrastructure, reduce gas prices, and boost LNG exports to Europe (see sidebar, “Regional gas prices”).
Enabling gas infrastructure development and lowering prices
The most prolific and lower-cost North American gas resources are in Appalachia and Western Canada, while growing demand centers, driven by industry and LNG export projects, are on the US Gulf Coast. (For more detail, please see The future of natural gas in North America.)
Challenges around developing natural gas pipelines in North America have led to higher consumer prices. There are numerous large US natural gas pipelines in progress. Still, many have been delayed in recent years due to regulatory challenges, while others have been abandoned as costs have risen. Examples of this include the Constitution Pipeline, which was announced in 2018 and cancelled in 2020; Atlantic Coast, which was also cancelled in 2020; and PennEast, which was cancelled in 2021.13
Consumer gas prices could be reduced by two means: i) by allowing the transport network unconstrained access to the lowest-cost gas supply; and ii) by improving access to historically undersupplied demand centers.
Access to the lowest-cost gas supply: Appalachia holds the highest volume of low-cost technically recoverable gas reserves that would usually satisfy market demand. However, current infrastructure to take the gas out of the basin is constrained or at nearly full capacity, meaning that those molecules in Appalachia can’t find their way to the new demand centers (mostly LNG facilities in the Gulf Coast region), resulting in a need to produce gas from higher-cost basins.
Increasing natural gas supply from advantaged basins (such as Appalachia) could reduce gas prices to $3/MMBtu at Henry Hub (compared to recent prices at over $8MMBtu), which could potentially help reduce inflation. Should Appalachian infrastructure constraints remain, prices could increase by between 15 and 30 percent.14 Furthermore, this situation would require additional upstream spend due to other basins requiring more wells and rigs, as well as higher transport costs than for the equivalent gas production from Appalachia. This could increase prices by an additional 22 to 52 percent and maintain long-term inflationary price pressure.
Access to historically undersupplied demand centers: Building strategic natural gas pipelines that access historically undersupplied demand centers could help reduce regional gas prices. The gas shortages caused by the 2018 “bomb cyclone” provide an example of the effect of supply on regional gas price premiums. On January 4, 2018, Boston’s Algonquin Citygate pricing surged to almost $80/MMBtu due to insufficient gas supply requiring importation of Russian LNG.15 This capacity could have been provided by Appalachian gas at a significantly lower cost (with production costs below $3/MMBtu) from merely 500 miles away. Building new pipeline infrastructure could prevent future price surges. Furthermore, new infrastructure could be designed to be re-purposed in the future for other uses such as hydrogen as energy needs change.
Strengthening LNG exports to Europe
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 multi-billion-dollar up-front expense for capital projects that would provide US LNG, buyers in Europe, and other LNG importing regions would need to commit to long-term offtake agreements.
The McKinsey LNG Buyer Survey, covering more than 80 percent of the LNG market, indicates that buyers in Europe prefer five-year contracts over 15-year contracts, given the uncertainty of demand in the context of energy transition.16 However, LNG producers in the US may need at least 15-year contracts to secure financing and take final investment decisions on new projects.
Affordable energy, European energy security, and staying within the global carbon budget are a few of the global 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.