[GGP] Challenges to the Future of Gas: unburnable or unaffordable?
The following is the executive summary of a paper by Jonathan Stern originally published by the Oxford Institute for Energy Studies in December 2017.
Gas as a ‘transition fuel’
For the period up to 2030, the principal threats to the future of gas (outside North America) will be affordability and competitiveness. Beyond that date – and particularly beyond 2040 – carbon (and potentially also methane) emissions from gas will cause it to become progressively ‘unburnable’ if COP21 targets are to be met. Regionally, and especially nationally, the picture will be very different, and this level of granularity is crucial for any kind of detailed appraisal of the future of gas. But at a global level, a 20-year horizon prior to significant decline would qualify gas as a ‘transition fuel’.
Affordability, competitiveness, and costs
There are limited numbers of countries outside the OECD which can be expected to afford to pay wholesale (or import) prices of $6–8/MMbtu and above, which are needed to remunerate 2017 delivery costs of large volumes of gas from new pipeline gas or LNG projects. Prices towards the top of (and certainly above) this range are likely to make gas increasingly uncompetitive, leading to progressive demand destruction. International price benchmarks for the majority of 2016-17 were $5– 8/MMbtu, creating additional demand for gas in many regions. There was less evidence of falling costs for future greenfield (pipeline) gas and LNG projects, where progress will be key to affordability.
Transition from power to other sectors
In the power generation sectors of both established and new markets, gas will increasingly struggle to compete with solar, wind, and battery storage technologies which are continuing to fall in cost and appear attractive because they provide greater employment, reduced import dependence, and lower foreign exchange costs than imported gas. Domestically-produced coal has similar attributes but much higher carbon emissions. Carbon reduction policies are likely to mean that gas will be progressively squeezed out of the power generation sector, or reduced to providing a back-up role for intermittent renewables, which will not be sufficient to remunerate new gas-fired generation investments without regulatory support (such as a capacity charge). The main exceptions are: China (and possibly India) where air quality problems may lead to large-scale replacement of coal by gasfired generation; countries where gas can replace oil products; and where customers require 24/7 electricity supply.
Unburnable or unaffordable and uncompetitive?
In the low-price world of 2017, the major debate in the gas community is when the ‘glut’ of LNG will dissipate and the global supply/demand balance tighten. The unspoken assumption is that when this happens – generally believed to be around the early/mid 2020s – prices will rise somewhere close to 2011–14 levels, allowing a return to profitability for projects which have come on stream since the mid-2010s, and allowing new projects to move forward. Should this assumption prove to be correct, it will create major problems for the future of gas.
The key to gas fulfilling its potential role as a ‘transition fuel’ up to and beyond 2030, is that it must be delivered to high-income markets below $8/MMbtu, and to low-income markets below $6/MMbtu (and ideally closer to $5/MMbtu). The major challenge to the future of gas will be to ensure that it does not become (and in many low-income countries remain) unaffordable and/or uncompetitive, long before its emissions make it unburnable.
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