IEEJ：March 2021©IEEJ 2021
Special Bulletin
A Japanese Perspective on the International Energy Landscape (524)March 19, 2021

Decarbonization Trend and Future of Natural Gas and LNG in Asia
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanAt a time when major countries in the world have announced carbon neutrality targets andare about to enhance decarbonization initiatives, the future of fossil fuels supporting the global
economy and people’s livelihood at present is growing uncertain. Decarbonization requires
maximum energy efficiency improvement, the promotion of non-fossil energy sources such as
renewables and nuclear, the electrification of energy consumption and the elimination of greenhousegas emissions in the power sector. These measures will still fall short of achieving decarbonization.
Innovations will be required for complete decarbonization, including the utilization of CO2-freehydrogen and the direct capture of CO2 in the atmosphere that are costly and have yet to becommercialized.
Given the above, the future of fossil fuels as mainstay energy at present does notnecessarily look bright. Divestment in fossil fuels and a clampdown on financing in the fossil fuelsector are attracting interests in energy discussions. A foul wind blowing against coal in Westerndeveloped countries and a global oil demand peak have become great matters of concern. The futureof fossil fuels is thus uncertain and insecure.
In the abovementioned international situation, uncertainties have emerged even about
natural gas and LNG, known as the cleanest and environment-friendliest among fossil fuels.
However clean natural gas and LNG are, they are positioned as one of the fossil fuels. In this sense,a rising number of people have become critical of natural gas and LNG. Since the beginning of thisyear, I have had multiple opportunities to talk with energy experts and business stakeholders in Japanand other countries about how we should view the future of natural gas and LNG in Asia. Based on
the timely talks on the matter, I here would like to make some comments on particularly impressive
arguments.
First, I would like to point out that natural gas and LNG demand in Asia is dominantly
expected to continue moderate growth until 2040, although specific growth rates are likely to differ
depending on decarbonization initiatives. In Asia, Japan and South Korea have vowed to achievecarbon neutrality by 2050. China has set 2060 as the target year for carbon neutrality. However,other Asian countries have not given such decarbonization targets. In India and Southeast Asian
countries where energy demand is likely to continue expanding on economic and population growthover the long term, affordable energy prices are expected to be required. Though being expected toenhance initiatives to address environmental issues such as climate change and air pollution, thesecountries apparently fall short of seeking carbon neutrality. Carbon neutrality is not necessarily any
easy target for Japan, China or South Korea to achieve. This is the same case with such Westerndeveloped economies as the United States and the European Union. Carbon neutrality is anextremely challenging target that would be achieved at heavy costs through maximum government/public and private sector efforts.
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As Asia transitions from coal as a mainstay energy source at present to cleaner energysources, natural gas and LNG are likely to continue playing a key role. This is the reason Asiannatural gas and LNG demand is dominantly projected to steadily increase until at least 2040 in
long-term outlooks released by international organizations and energy companies.
As a matter of course, we can conceive a scenario in which natural gas and LNG demand
would peak around 2040. In such case, most Asian countries would set carbon neutrality targets andstrive to achieve the targets. In a scenario in which Asia as a whole would pursue net-zero emissions,
Asian natural gas and LNG demand would decline substantially. In the European Union that is about
to take leadership in achieving carbon neutrality by 2050, for instance, natural gas demand isdominantly projected to plunge substantially towards the year, with natural gas replaced bycarbon-free gases including hydrogen and biomethane. This future picture is not easy even for theEU to realize in 30 years. Given the current realities, such future picture is difficult for Asia torealize.
However, Asian developing countries cannot be allowed to neglect decarbonization
initiatives. As noted above, Asian countries may be required to accelerate energy efficiency
improvement, promote non-fossil energy, speed up electrification and minimize carbon emissions in
the power sector. This is because these measures are expected to contribute much to resolving not
only climate change but also air pollution as their urgent environmental problem.
In such situation, important initiatives and interesting problems for the future of natural
gas and LNG in Asia are emerging. Among them is a carbon neutral LNG initiative. Carbon neutral
LNG, though defined variously, is provided through supply chains from which CO2 emissions areoffset through such means as renewable energy consumption and forest absorption. Carbon neutral
LNG cargoes have already begun to be traded. There are various challenges and problems regarding
the carbon neutral LNG initiative, including how far this initiative would expand and how carbon
neutrality would be measured and verified. How this initiative would develop as a system unique toAsia where LNG demand continues expanding will attract attention.
Price affordability is another major challenge on which the future of natural gas and LNG
in Asia depends. We must take note of the possibility of natural gas and LNG demand growth being
restricted if their supply costs rise beyond a certain level in Asian developing countries as the centerof global economic growth. In India that attracts attention as the center of future global economic
growth, for instance, natural gas and LNG demand growth heavily depends on price affordability.
While cheap natural gas and LNG prices can expand potential demand in India and other Asiandeveloping countries, the problem is who can provide natural gas and LNG at cheap prices. Whatprice levels would allow both supply and demand to sustain their expansion is an important question
for the Asian market.
The diffusion of innovative technologies for using CO2-free hydrogen and ammonia isimportant for considering the long-term future of natural gas and LNG in Asia. If CCS (carboncapture and storage) and CCUS (carbon capture, utilization and storage) technologies diffuse forblue hydrogen and ammonia to be produced from natural gas among fossil fuels, natura gas demand
will increase on the upstream supply side. If coal-fired and gas-fired power plants use these newfuels, however, natural gas demand will decline on the consumption side. As the decarbonization offossil fuels attracts global attention, the impact of these technologies on the Asian natural gas andLNG market will become a focus of attention.
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