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Governments gearing up for climate change talks in Paris

June was a busy month for governments and the energy industry the world over. The run-up has now started to the year-end climate-change conference in Paris

As Petroleum Economist went to press, two major energy users, China and South Korea, had just pledged their portentous, if vague, Intended National Determined Contributions to the struggle to limit climate change. We will have to start getting used to the acronyms now.

In keeping with the international spirit, the UK Secretary of State for Energy and Climate Change Amber Rudd got in an early response, saying 30 June that the “momentum was building for a deal in Paris and Britain will be working with China, South Korea and others to make sure we’re doing all we can to reach our shared goal.”

Among the measures seen as necessary to achieve this is a common way of pricing carbon, either by a tax or a market. This will help to make emissions a luxury beyond the reach of most. However previous attempts at this, such as the last meeting in Copenhagen, have been fruitless.

Gas is part of the answer

Senior oil industry executives have been making the point at a variety of forums and conferences that gas is a big part of the solution to the problem. It is a fossil fuel but only half as bad as coal and nothing else is as responsive to intermittency of solar and wind.

And yet despite the low wholesale price of gas and the environmental benefits relative to coal, take-up in demand in the power sector has been surprisingly low.

The chief executive of the Dutch gas company GasTerra told the World Gas Conference in Paris that gas should be an essential part of the energy mix.

“It has enough trump cards,” Gertjan Lankhorst said. And yet he was not convinced that by the time of the next gas conference in Washington in 2018 the outlook would be any brighter -- unless the gas industry lobbied far more effectively.

By that time, the US has the potential to be a significant LNG exporter; but unless prices rise elsewhere or fall precipitously at the Henry Hub, some of those tolling agreements may start to look like expensive options.

Energy companies say that while they can produce and trade gas, they cannot influence the power markets where the gas is used. In the US, this is not a problem as gas has displaced coal from electricity generation on grounds of relative costs, allowing it to exceed EU targets without even trying. But in the EU the power market has seen endless interventions to reward renewables, while coal plant runs at baseload.

Hence in part their open letter to the UN calling for a carbon market. This would price the use of coal significantly above gas and so raise gas demand and lower emissions.

However if governments continue to prefer to subsidise renewables, or if the coal price falls and there is no incentive to use gas, the outlook for the environment and gas producers is bleak.

One reason why prices are low is that there is so little demand for gas, even though it could be a major contribution to carbon reduction – an avowed aim of European governments. With prices in Asia and Europe low and so closely aligned, there is less and less value in spot trading.

This in turn is having a damping effect on final investment decisions: the more expensive regions, such as Australia, have not seen such a thing for several years. And buyers in China are seeking ways to delay or reduce their purchasing commitments.

Sharing the cost

The International Energy Agency has its view on what needs to be done to keep down the rise in global temperatures but achieving it will be very costly and sharing this burden will prove a major challenge in democracies where governments have to explain energy bill increases.

But without a high carbon price, there will be no reason to invest in expensive technology to sequester it underground. And coal is a vital part of the economy of a number of countries in the European Union, which explains the failure of the EC to reduce the amount of emissions available to trade.

Their present surplus, which allows coal to be burned at such little cost, reflects the economic growth that vanished with the 2008 recession, highlighting the risks of creating markets where the rules are inflexible.

On top of that, even if the will were there, there is enough strife and war even within the European landmass to distract policy-makers from the prize. Attempting to solve such intractable problems as the Greek and other national economies within the Eurozone over the past few years has mopped up billions of man-hours of creative thought and administration.

With other more pressing matters to deal with nearer to home, EU leaders are strong on rhetoric but weak in action. In consequence, and despite the hopes of the EC, major companies are prepared – on paper, at least – to invest with Gazprom in costly new pipelines from Russia, even though there is already a functioning system crossing Ukraine. But foreign investment in those pipelines will have to wait for a lasting peace, which seems a distant prospect.

Looking for the silver lining

So what are the positive signs? On the demand side, we can expect gas to remain relatively affordable compared with the years of rampant oil that abruptly ended almost a year ago. Brent trading at $63/b equates to $9/m British thermal unit (Btu) for term contracts in Asia, half where they were a year or so ago, but whether that will be low enough to create demand from previously uninterested buyers is another matter.

An obvious answer is to use gas as a road and sea transport fuel. Some companies such as Shell have already begun investing in vessels and infrastructure to fuel them as part of the regulatory changes lowering the ceiling on emissions from shipping within the EU. Price the gas at an encouraging discount to marine gasoil and watch the ship-owners form a queue, so the theory goes.

On the supply side, a deal with Iran is another key question: the June talks on lifting the sanctions, which the P5+1 powers want to stagger as Iran is seen to be complying with the requirements, appear to have ended without a result. Iran wants them lifted immediately an agreement is reached. But assuming one is achieved this year, and depending on the extent of the promised improvements to the buy-back contract terms, oil companies will be looking at re-opening talks on the South Pars development, among other things.

That gas will be as easy to produce as the feedstock for the giant Qatar LNG projects and will, shipped as LNG, have the potential to displace a number of more expensive projects from the future LNG supply stack.

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