Gas offers bridge to a low-carbon future
The energy transition offers the sector an opportunity, but it should not be complacent
Conventional wisdom holds that gas will be the most resilient of the fossil fuels through the energy transition, and that it is a relative winner because of its low carbon intensity on burning. Yet, with radical change set to sweep through energy markets, the industry cannot be complacent about its future.
Gas will have to contend with intensifying competition among fuels, disruption from new technologies and decarbonisation policies designed to undermine fossil fuels’ dominance of energy supply.
Varied regional risks
In Europe, it is likely that policies to reduce greenhouse gas emissions will continue to eat away at gas demand. Today, gas demand is c.500bn m³/yr, down by 10pc from the peak a decade ago. Policy has already improved energy efficiency and incentivised renewables, which have displaced gas as well as coal in the power market.
If the outlook for Asia is promising, the signs emerging in Europe and the US point to future risks
The EU Green Deal, to be enacted this year, targets hard-to-decarbonise sectors. The aim is to cut greenhouse gas emissions by 50-55pc by 2030 (the present target is 40pc) and achieve economy-wide net-zero emissions by 2050.
The residential, commercial and industrial sectors, which together account for two-thirds of European gas demand, are in the Green Deal’s crosshairs.
Wood Mackenzie estimates that, across these three sectors, c.12pc of gas demand—45bn m³/yr—will be lost by 2040. This will be due mainly to an increase in energy efficiency but will also be driven by increased utilisation of new technologies, such as heat pumps and hydrogen.
New gas demand will come from the increased use of compressed natural gas (CNG) in transport and an uptick in demand for LNG in ship bunkering. Both may act as a partial offset and contribute to CO2 reduction by displacing oil.
According to our forecasts, Europe’s overall carbon emissions will fall more than 40pc by 2030 but will fail to hit the EU Green Deal’s 50-55pc target: there is further downside risk for European gas demand.
In the US, peak gas demand looms in the mid-2030s. Demand has boomed in the last decade, with cheap shale gas squeezing coal out of the power market, winning market share in the industrial sector and sparking a renaissance in petrochemicals.
Domestic gas demand growth, though, slows through the 2020s as these sectors become saturated and solar investment ramps up. LNG exports are set to become the sector’s growth segment.
A Democratic victory in November’s presidential election in the US could see the country’s gas demand peak much earlier. Joe Biden’s ambitious clean energy plan envisages a carbon-free power sector by 2035.
Delivering a nation-wide zero-carbon grid in 15 years seems a tall order—Europe is still trying to do that 20 years on. But it is a risk the industry cannot discount.
Asia is where the sector’s hopes for sustained gas demand growth are firmly pinned. At present, LNG imports of 340bn m³/yr meet almost half the region’s gas demand. Asia’s economic growth and higher gas penetration will see LNG imports double by 2040.
Coal still dominates the primary energy mix in the region, with a market share of c.50pc, and is higher still in China. In contrast, gas use—at 11pc region-wide—is less than half the level seen in Europe and the US.
However, gas should be a winner, especially as combating air pollution is high on the agenda for most Asian governments, while decarbonisation strategies are gaining traction. Developed Asian economies, such as South Korea and Taiwan, are already promoting gas over coal. Japan, where the government is considering retiring dozens of ageing coal-fired units, may shift policy in the same direction. China’s gas demand continues to grow through 2040.
c.12pc – Loss in European gas demand across residential, commercial and industrial sectors by 2040
The markets of developing Asia hold enormous potential, but gas’ growth is far from assured. Many countries lack infrastructure, and affordability is a challenge where imported gas must compete with domestic coal.
India is a case in point. Gas has a market share of just 6pc, well short of the government's 2030 target of 15pc, and is struggling to compete with coal and the rapid roll-out of renewables.
If the outlook for Asia is promising, the signs emerging in Europe and the US point to future risks. It may be some decades away, but by the middle of the century, global gas demand is going to come under increasing pressure from new technologies like hydrogen and carbon capture and storage.
In the meantime, however, there is a great opportunity for gas. The industry needs to use this downturn and low prices to sell the merits of the product—that gas is plentiful, clean, reliable and competitive, and should be a platform fuel to support sustainable economic growth for decades to come.
Massimo Di-Odoardo is vice-president, global gas and LNG, at Wood Mackenzie