Editorial: Following the money [NGW Magazine]
A lot has happened to people’s perceptions of the world in the five years since the Paris Agreement was signed. It took some time for the significance of the event to translate into actions, and for the promises – the unenforceable, almost jokey, national commitments to reduce emissions – that were boldly announced at the giant UN meeting, to trickle down into actual policy.
If anything, it was good news for gas. Just think of all those filthy coal-fired power stations that would have to close. They would need replacing with gas of course. And all that population growth to come in Africa and Asia, no longer happy with burning biomass. Then came the next great hope: LNG as a fuel for commercial shipping, ferries and other sulphur-belching craft.
Renewable energy has however stealthily slid down the cost curve, often with government help but also making strides of its own backed by investors with an eye on the long game. Gas is the new coal, but not – needless to say – in the sense of a dependable, affordable fuel: a guarantor of national energy security.
There is still talk of the need for new gas infrastructure, but not often is it the infrastructure the market needs. More often it is a government’s vanity project or a politically motivated “diversification” of delivery routes – as though molecules can be tagged and traced from the hubs.
Indeed it is becoming harder to say where the value now lies in the gas chain, at least in liberalised markets. Competition has eroded most areas of the business so that no one sector – upstream, transport, storage or retail – is dependably profitable. Each is subject to external forces, be it the oil price, regulation or ambient temperatures.
Where are private investors to look for low-cost dramatic returns upstream – apart from the AIM-listed explorers, of course, who are always just a few wells away from a spectacular new play?
European governments have a lot to answer for. In their zeal to announce decarbonisation targets they have attracted converts to the green cause before presenting them with a viable alternative. Both Denmark and Ireland have signalled the end of new upstream licences which will make them more dependent on imports, or expensive renewable energy, for baseload supply.
The UK is still reviewing its own regime but with COP 26 in Glasgow later this year there is speculation it will do something similar. Countries that rely heavily on exports of gas will no doubt encourage this thinking, as they did when there was the discussion about onshore hydraulic fracking in Britain and continental Europe – still an issue, less than five years ago!
But stopping licensing would be risky unless the prime minister were to set a date that is a decade or two in the future when the cash has been banked, the infrastructure exhausted and new energies are keeping us warm. To do so much earlier would be very costly, given the high-carbon footprint of the alternatives, to say nothing of the shift in the balance of payments, loss of tax revenues and many other benefits.
Gas transportation at least in Europe is also a dull business, as it is entirely dependent on the good will of the regulator to make a modest return on capital. For that business, the future is about zero carbon gas and that has fired the imagination of continental European operators such as Dutch Gasunie and Italian Snam as well as off-off-grid distribution networks dotted around the place, experimenting with biogas and hydrogen.
More than two decades after being spun off, Britain’s National Grid has taken the decision to float a majority stake in its gas grid, which will allow it to buy a power distribution company and at the same time reduce its exposure to carbon. It knows what side its bread is buttered. The company had been roughly half and half gas and power but this will shift to 70-30 in favour of power once the deal is done. Investors will like the sound of that.
European storage seems to have a more promising outlook now than it used to, thanks to the relationship between markets in Asia and Europe. The past winter has shown the need for capacity within a few hundred miles of peak demand. An LNG tanker will take time to arrive while gas in store is ready for use now. But that might change too. With more storage, Asia could have avoided those prices by stockpiling in the summer.
Retail too is subject to regulatory whim. Dozens of suppliers have gone out of business in the UK for one reason or other; while even some of those in what was once the Big Six have been forced into defensive mergers by sudden changes to tariffs. It will be interesting to see whether some of the bigger new entrants, backed by equity gas, will manage any better in Europe.
As to what the future brings, ammonia and hydrogen – unthinkable five years ago – are now seriously considered and being tested for shipping, power generation and industrial use; while the first signs of scaleable carbon capture and storage projects are visible in Norway and the UK.
All these will require plenty of taxpayer support and this new boom is a far cry from the buccaneering past exemplified by the international oil companies. We can only hope, as trillions of dollars of public money are thrown into reconstruction, that the result will be a fairer world.