Gas a bridge to nowhere
The fuel without a CCUS solution is reaching a “dead end” in the energy transition debate, warns the head of a bonds market non-profit
The role of gas as a transitional fuel is increasingly under question as pressure to reach Paris Agreement targets mounts, with projects that do not envisage any type of CO2 sequestration looking increasingly like a “dead end not a bridge” to the low-carbon future, Sean Kidney, CEO of the Climate Bonds Initiative (CBI) tells Petroleum Economist.
“The window to do gas unabated has closed” says Kidney, on the sidelines of a climate change financing event organised by the European Bank for Reconstruction and Development (EBRD). “We thought we could use gas as a transitional fuel, but remember that, if we build a gas-fired power plant, it has a 15-year lifespan, probably longer for all the other infrastructure that we build to get that gas out of the ground and use it.”
At the same time, “the emission caps that we need now to be able to avoid utter catastrophe—and we are heading towards that, like a supertanker that has to change course—mean we have to stop fossil fuels use pretty much immediately,” he cautions.
CBI is a not-for-profit international organisation that aims to raise money in the global bond market to finance climate change solutions. According to CBI data, issuance of green bonds is growing rapidly, reaching a total value of $257.5bn in 2019 from $170.9bn in 2018, and is projected to rise to $350bn in 2020.
CBI has also worked closely with Brussels institutions in drafting the EU Taxonomy, a classification system for green investments. “We are not banning gas altogether at this stage, what we are saying is that, unless you have carbon capture and storage (CCS) you are not sustainable … That is the difficult issue that we have to understand this year.”
Gas in peril
While thus far gas has featured in governments’ energy strategies and regulator’s plans as a critical step on the transition, “the science says that has proven not to be right,” Kidney contends. “That is mainly because emissions have gone up so fast in the past 10 years, instead of down, partly because the world is getting hotter,” with the latter pushing up demand for often fossil fuel-fired air conditioning.
“Under the emission caps that we need to avoid utter catastrophe .... we have to stop fossil fuels pretty much immediately" Sean Kidney
Moving forward, “my advice to gas companies is that investing in new [projects] is directly against what the science says we have to do and you are exposing yourself to policy risks,” warns Kidney. “There is a very strong chance that, in places like Europe and China, gas is going to be disincentivised very quickly, [through] carbon pricing and [other] restrictions.”
Similarly, oil firms must shift strategy to prove investors that they have an effective climate risk mitigation in place, Kidney advises. “Policy thresholds have already been made for oil,” he says, with demand set to “collapse very quickly”, pointing to the fact a large part of oil demand is in transport and, at the same time, key markets including China have made a pledge to shift their fleet to electric in the coming years.
The effectiveness of oil and gas firms’ preparation for the energy transition has financial implications, given instructions such as pension funds’ investments in the sector. Companies should thus feel obliged to provide reassurance on sustainable strategy, he argues.
“We have never had this degree of certainty and understanding of what the future looks like, and that is particularly important for fossil fuel companies, as they represent a big chunk of pension funds money,” says Kidney. “Some companies will go: companies that do not get ahead of the electric car revolution will disappear.”
$350bn The expected value of green bonds in 2020
Investors will, in his view, increasingly shift their interest towards renewable energy, as alternative, cleaner technologies are becoming more price competitive due both to subsidies and technological innovation. "Governments have been generally good about allowing power purchase agreements which allow you to amortise your costs on a reasonably long life of the projects,” he says, resulting in investors such as pension funds and insurance funds are looking with interest at this type of investment.
While there is no guarantee that existing subsidy schemes will continue, renewables still pose “less risk than fossil fuels” to investors. And while higher carbon pricing would help promote the transition, nor does Kidney see it as essential — the shift to renewables “is happening without a carbon price in most countries”.
“Unless carbon prices are high, they do not have a fast impact on the economy,” he says, suggesting that government intervention can have a more rapid impact than the introduction of a carbon price mechanism that does not result in motivating price levels.