Global gas-to-oil fuel switching to jump 80% as European, Asian gas prices soar

Global oil demand from gas-to-oil switching could jump by more than 80% over the next six months after soaring prices for natural gas and LNG push more power producers, refiners and industrial users to burn fuel oil and other liquid fuels, according to estimates by Platts Analytics.

Refiners, power producers, and major industries will account for 633,000 b/d incremental liquids demand in the first quarter of 2023, compared to around 350,000 b/d of incremental demand in Q3 2022, Platts Analytics estimated.

Day-ahead gas prices across Europe rose on Sept. 6, bolstered by continued market concerns around winter gas supply in Europe after Russia's Gazprom announced the indefinite suspension of gas flows to Germany via the Nord Stream pipeline.

Platts assessed Europe's gas price benchmark TTF month-ahead at a record-high Eur319.98/MWh on Aug. 26, which fell back to Eur237.98/MWh on Sept. 6 but was still four times higher year on year. S&P Global Commodity Insights data showed.

LNG prices have also climbed since the start of the Russia-Ukraine war, with facility outages worldwide adding to the increases.

As a result, most Asian countries have also been dealing with an energy crisis and refraining from purchases to cut soaring energy import bills as prices advance. Asian spot LNG prices have risen tracking a tight Atlantic Basin, with the JKM benchmark approaching all-time highs again in August. The daily physical assessment reached $71.01/MMBtu on Aug. 25, the highest level since March 7, when the benchmark hit a record-high $84.76/MMBtu.

On a Btu equivalent basis, benchmark Europe gas and Asian LNG prices currently stand five to six times higher than high sulfur fuel oil values, incentivizing widespread gas-to-oil switching at sites capable of using alternative fuel.

European switching

In Europe, refiners, power producers, and major industries will account for a 308,000 b/d growth in liquids demand in the first quarter of 2023, according to Platts Analytics, equivalent to about half the global share of gas-to-oil switching. The growth figure surpasses the 166,000 b/d, or 47%, in Q3 2022. Asian gas-to-oil switching demand growth will reach 271,000 b/d, or 43% of the total, according to the estimates, up from 136,000 b/d in the current quarter.

Residual fuel oil will account for 348,000 b/d, or 60%, of the incremental global shift to oil in Q1 2023, Platts Analytics data showed, with LPG accounting for 32% and gasoil making up the rest of the increase at 8%.

Power generators lead the fuel switching in terms of the single biggest sector, but refiners also purchase some natural gas for supplementary refinery fuel /feed for hydrogen production. Refiners can minimize their natural gas purchases by maximizing refinery still-gas production, using liquid feeds such as naphtha and LPG for hydrogen production, and substituting fuel gas used for process heaters and boilers by LPG and fuel oil.

"While natural gas prices are soaring, both naphtha and high sulfur fuel oil are currently weak. We know southern European countries are consuming more fuel oil due to switching away from gas." Rasool Barouni, head of refining economics at Platts Analytics, said.

Globally, Platts Analytics sees fuel oil demand rising 125,000 b/d quarter on quarter to 7.4 million b/d in Q3 2022, driven by higher power generation demand and waterborne trade picking up pace with the further opening of world economies. Growth will be driven by the Middle East, where it is expected to increase by 170,000 b/d, largely by the power sector due to warmer weather.