European gas: an industry in denial?
The natural gas sector needs to be prepared for declining demand after the mid-2020s—and there are doubts that it is
Europe's renewable energy revolution is unlikely to dent the continent's gas demand over the next five years. But the industry needs to plan ahead if it is not to become increasingly irrelevant.
On the face of it, decisions made by Germany, the UK, Italy, Spain and other European countries to phase out or severely reduce coal consumption, as they seek to lower carbon emissions, is good news for gas. The latter offers a readily available alternative source of non-intermittent power with around half the emissions of coal, depending on the technology used.
Politicians in the continent's largest economy, Germany, are expected to back the conclusions of a special commission report, published in January, which calls for coal-fired power to be phased out by 2038. While that is a longer lead time than environmental groups had hoped for, the industry will still contract in the meantime-a process that could happen quickly, if investors balk at funding the maintenance or replacement of plants that only have relatively short remaining life.
In the UK, a tough carbon tax has already all but eliminated once-dominant coal from the energy mix. On some days, the country burns no coal at all, as the fuel struggles to be price competitive with gas or renewables for grid power. Higher carbon prices in the EU Emissions Trading Scheme in the future would also make coal less attractive compared to gas and renewables.
The International Energy Agency, in its 2018 World Energy Outlook, forecasts coal's share of the overall energy mix in the current 28 member states of the European Union-the EU-28, including the UK-will fall from almost 15pc in 2017 to less than 9pc in 2030 and around 6pc by 2040.
Gas will also receive support from new areas of supply and demand. New pipeline supply via the Nord Stream 2, TurkStream and Southern Gas Corridor pipelines under development will compete with LNG from the US, Qatar and elsewhere. Bunkering of LNG as a marine transportation fuel will provide a new source of gas demand, as tough new emissions rules, coming into force next year, prompt shipowners to switch away from high-sulphur marine fuels. That could add around 6.5bn m³/yr to European gas demand by 2025 and 18.5bn m³/yr by 2035, according to consultancy Wood Mackenzie.
Renewables will continue to increase their share of the energy mix, but gas looks set to fulfil the industry's oft-stated goal of being a good bridging fuel to a greener future over the first half of the next decade.
Wood Mackenzie estimates gas demand among the current EU-28 will rise to a peak of 460bn m³/yr in around 2025 from some 445bn m³/yr in 2018. That will be supported by a second wave of global LNG supply in the early 2020s from export projects now being built, which should help soften gas prices and thus underpin demand.
The cliff edge nears
The real problems start after that. The EU is expected to hit or get close to its current emissions reduction targets for 2030, announced in November, which call for renewables to have a 32pc share of the bloc's energy consumption and for energy efficiency savings of 32.5pc, compared to a reference scenario. The 2020 targets, which are likely to be achieved, are 20pc for both renewables and efficiency.
The 2030 targets are generally regarded as modest, and well below levels for which some politicians and environmental groups were pushing. However, they are still expected to contribute to a fall in gas demand in the current EU-28, which is forecast to be around 440bn m³/yr in 2030-slightly lower than today's levels and well below the mid-2020s peak, according to Wood Mackenzie's projections.
Beyond that date, things look even more difficult for gas, with emissions targets getting tighter as Europe seeks to attain net zero emissions by 2050. Not only will renewables be more broadly deployed-Germany has said it wants 65pc of its energy to come from renewables by 2030-but efforts to improve energy efficiency are set to widen too.
"The EU's harmonisation efforts for emissions targets so far have focused mainly on the power and transport sectors. But the expectation is that household and industrial use will be next and that is causing some concern for the major gas utilities," says Murray Douglas, a European gas analyst at Wood Mackenzie.
Others put the industry's challenges more starkly. "My concern for the natural gas industry is that, by the time the penny has dropped, it will be too late to make the big changes that are needed," says Jonathan Stern, distinguished research fellow at the Oxford Institute for Energy Studies (OIES). He is the author of an OIES report Narratives for natural gas in decarbonising European energy markets, published in February.
Stern believes that the 2020s could be a good decade for natural gas markets, because it may take longer than anticipated to introduce renewables and other greener forms of energy, while coal is being phased out.
"The problem for the gas sector is that if companies enjoy the next decade, while not preparing for decarbonisation, by the time we get to the 2030s, when emissions targets are really going to start to bite, there is a risk of accelerated decline," he says.
Time for action
Stern thinks the industry's push for policy that assists a switch from coal to natural gas is currently falling on deaf ears, because it fails to address the development of viable methods to reduce atmospheric carbon emissions from burning natural gas.
The industry needs to give reasons to governments and the EU to consider gas-particularly for residential heating and high-temperature industrial processes-in the longer term, rather than focusing on electrification and renewables, he says.
Europe plays host to dozens of zero-carbon gas projects, but they are small and mostly off-grid, producing some 18bn m3 of gas, he estimates. "Those small-scale projects are fine, but what we actually need is commercial-scale projects. We've got to start talking about projects that can involve tens of billions of cubic metres of low- or zero-carbon gas, or gigawatts of power," Stern says.
The possibilities range from using natural gas to create clean-burning hydrogen for heating and transport fuel to biomethane and syngas projects.
In the UK, tests are taking place to see whether hydrogen could be distributed safely via the existing natural gas pipeline network. Steam-methane reforming to create hydrogen would almost certainly require large-scale deployment of carbon capture and storage, which has thus far been slow to develop. But it could yet prove viable around the North Sea, where there is access to offshore storage, some of it linked to shore by existing gas production infrastructure.
Big bucks needed
It is likely that state spending, government subsidies and regulatory support will need to underpin the large-scale adoption of low- and zero-gas projects, as the high cost means they would not be commercially viable in a competitive energy market. But expecting national governments and the EU to commit to such a course of action without an understanding of what is technically possible, and at what cost, is unrealistic, Stern believes.
"The industry needs to put its hand in its pocket and actually go ahead with some commercial-scale projects. Then they can go to policymakers in Brussels and say, 'OK, we have demonstrated we can do these projects. We know what the scale is, we know what the costs are, this is what it's going to take'," Stern says. "Then they will be able to demonstrate that a combination of electrification and gas is a more economic option to meet carbon reduction targets than electrification only."
Some observers see signs that the industry is starting to stir. "In the last year or two, I have noticed a shift and that the industry is taking the energy transition seriously. They are spending money trying to figure out how to prolong their business models and extend the life and profitability of their resource base," says Wood Mackenzie's Douglas.
The alternative open to gas producers would be to simply switch their attention to other gas markets that will remain more buoyant after 2030, notably Asia and possibly Africa. However, with gas exports to Europe commanding some of the world's highest prices, they may be reluctant to give up on the continent. And for European gas infrastructure companies, moving their business elsewhere is not really an option-for them, falling gas demand is an existential threat