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    From the Editor: Emergencies provide no room for idealism [Gas in Transition]


A failure in invest in gas infrastructure risks recurrent supply/demand imbalances. [Gas in Transition, Volume 1, Issue 7]

by: Ross McCracken

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Natural Gas & LNG News, Liquefied Natural Gas (LNG), LNG Condensed, Top Stories, Insights, Premium, Editorial, Gas In Transition Articles, Vol 1, Issue 7, Supply/Demand

From the Editor: Emergencies provide no room for idealism [Gas in Transition]

Asia and Europe lack gas. This is evident from the sky high prices at European gas hubs and the price of spot LNG globally. Even in the gas-rich North American continent, US prices have tripled in the course of a year.

High prices historically prompt two reactions; producers see an opportunity for new investment to meet strong demand, while price-sensitive buyers look to cheaper alternatives, curbing investment in new import capacity. The result is boom and bust, a cycle generated by the lumpy investment profile and long lead times of upstream gas field and LNG plant development. Price volatility aids neither producer nor consumer.

But environmental concerns have changed the acceptable response options. Coal-to-gas switching is a primary driver of the current gas shortage and there should be no turning back.

Oil and gas investment

The IEA concluded in its report, Net Zero by 2050, that a pathway aligned with holding the rise in global temperatures to 1.5°C above pre-industrial levels meant no additional oil and gas investment beyond that already sanctioned.

Yet in the same report, referring to the oil sector, it warned that there was a dangerous risk of under-investment, one which could produce a temporary but damaging imbalance between supply and demand.

The IEA was addressing the extreme difficulty of ensuring sufficient fossil fuel supply during the expected period of declining demand resulting from the energy transition. The risk is that a retreat from oil before there is sufficient electricity-based mobility, and the power and infrastructure to supply it, could result in fuel shortages, price spikes and widespread economic dislocation. With energy transition-led demand destruction in full swing, oil investment would wither prematurely.

Moreover, production capacity becomes increasingly concentrated in the lowest-cost producers, namely Middle Eastern OPEC members. The IEA’s report sees OPEC’s market power reaching unprecedented levels as the energy transition progresses.

It asserts that this holds little danger as oil prices would be weak, but this part of its argument is highly debatable and counter historical. If supply falls faster than demand, prices will be high and the impact of oil prices on the global economy will not disappear overnight.

Gas shortage

The problem of ensuring sufficient supply is writ large in today’s gas crisis because of the role gas can and does play in displacing coal and oil.

The reality is that as gas and LNG prices climb, utilities have little choice but to fall back on coal-fired power generation. In some countries, for example Pakistan, fuel oil for power generation is still an option, although in most countries it remains a last resort.

The first priority should be to support the expansion of renewable energy technologies both established and emergent. There is not to be questioned. Solar power and wind, particularly offshore wind, are the two technologies best placed to deliver clean energy on a mass scale. They need active and sustained support.

But, in the interim, misjudging the balance between supply and demand for gas could be a ruinous mistake.

Scale and timing

China and Japan’s withdrawal from overseas coal-fired generation investment is a positive development, but the retreat of multilaterals and green investors from gas infrastructure investment is not because the decline of coal needs to be balanced by both renewables and gas.

In short, gas use needs to rise.

If this simple fact is ignored, the risk of supply/demand imbalances in energy commodities that remain critical to the functioning of the world economy is multiplied manifold.

It is a not a question of desirability but of scale and time. As the cleanest burning fossil fuel and the one most suited to a transition to hydrogen, gas still only accounts for about 25% of primary energy consumption globally, while coal and oil meet 27% and 31% respectively. Renewables, despite their rapid expansion, remain far behind, at 13%, more than half of which is hydropower.

Despite being more than a decade into the energy transition, getting rid of coal is still the immediate priority, and the economies of Asia, China and India in particular, can only do so through a combination of massively increased renewables, sustained electrical grid investment and more gas and LNG as their domestic gas resources and productive capacities alone cannot meet their coal-to-gas switching requirements.

From this perspective, indeed any perspective, the current roller coaster ride in gas and LNG prices benefits no-one. Price stability and supportive regulation to provide investment clarity are required.

Lock-in and idealism

Environmental organisations argue that investment today in gas infrastructure will detract from renewable energy investment. This argument does not stack up. Banks report a host of capital looking for good quality renewable energy investments. Capital shortage is not the problem, it is the supply chain readiness of relatively new industrial sectors to expand and the regulatory immaturity of many markets which are holding renewables back.

Environmental organisations also argue that gas infrastructure investment will lock a fossil fuel technology into the world economy long-term, if not permanently. They are right, this is a real, potentially unavoidable risk, but one which can be mitigated.

The LNG sector has multiple options to improve its greenhouse gas emissions. It should not be left to police this alone. It must earn its place in the energy transition by cooperating with regulators and environmental organisations to prove its environmental worth, both as a critical transition technology and one with the biggest potential to meet the engineering challenges of hydrogen production, transportation and distribution.

The lock-in argument is real but misframed, fossil fuels are already locked in. That is the starting point not a potential future risk. The short and medium-term goal is to free ourselves of the most polluting of these commodities from oil shale to lignite, hard coal and oil first. It is not an ideal approach, but a practical one, which recognises the timing and scale of both climate change and its solutions. There is no room for idealism in an emergency.