Editorial: No free passes for gas [NGW Magazine]
So, where now for the natural gas industry? Globally, the market has seldom seemed so divided: those preparing for the imminent departure of natural gas uneasily coexist with those busy replacing declining fields or building gas-fired power plants.
Clearly there is a very large gap between what the world needs to do in order to meet the demands required by the Paris Agreement and what is actually likely to be achieved, even if the world’s population does not grow as much as forecast. Is it even worth attempting it in a few dozen countries, given the cost to society and the uncertainty that surrounds the wide range of predictions spat out by computer modelling? Many shareholders and banks clearly think so.
More could probably be done by the industry: the CEO of Shell, Ben van Beurden, conceded this week that companies need to explain more coherently to investors and society what their own plans are for the energy transition.
Predictions of the demise of gas vary wildly, although at time of press, demand seems safe in most of the world for another ten years at least. The closure of coal and nuclear plants; gas for heavy goods vehicles and shipping – a relatively new market – and of course long-term seasonal demand that extends beyond batteries’ capacity – these all play a part in prolonging its life. But again, “thou shalt not kill, but need not strive/Officiously to keep alive.”
There is a huge range of regional differences, between Asia and Europe, for example. In Asia, gas enjoys the status it did in 1990s Britain: it was a relatively good fuel, displacing coal from the power sector. And all those developments in Russia’s far north, with Chinese investors, and to come in Qatar, suggest an industry very much at ease with itself, politically and commercially.
In Europe, it is a relatively bad fuel, compared with renewable energy, and there its future looks the most uncertain. For North America, gas represents a pass to a more prosperous and healthier future, both in power plants and in exports of primarily LNG. For the world’s largest resource holder Russia, it is a vital part of its economy: a raw material that it can keep exporting and use to cement its political alliances, especially given today’s tensions.
And wherever you look now it is cheap and likely to remain that way for some time as the market absorbs more and more LNG.
Reaching the end-consumer is what matters though, if you have a product to sell. Those majors who have set up integrated gas and power businesses want to find buyers for their commodities.
This can be simple in some regions: LNG-to-power is a proven model and works especially well in archipelagos such as the Caribbean or Indonesia.
But it is harder in continental markets such as Europe. LNG for trucking and shipping is viable along the coast, but pipeline gas faces all kinds of regulatory hurdles, as Gazprom has found out through the transparent attempts to block Nord Stream 2, a project given the all-clear when it set out in life.
The separation of trading and supply from the transportation business did away with the benefits of a unified system. Network capacity planning went hand in hand with gas marketing efforts, leading back to the well-head.
With that link gone, pipeline operators now are left looking for business – throughput means revenue – but are forced into doing so in the one-size-fits-all way that has been introduced by the European network codes.
As one pipeline operator said recently, selling capacity is like running a shop that is open just a few days a year. Interconnector UK sold three quarters of its capacity for the next gas year avoiding Prisma, the electronic pan-EU platform intended to concentrate liquidity for capacity trading.
Pipeline companies have had to find creative solutions, such as bundling capacity with the gas, in order to be able to sell it when they like.
Such is the case with the IUK, a high-capacity line that is important for UK security of gas supply now that nobody is investing in storage and the biggest field, Rough, is being decommissioned. This more flexible approach is working well but it required some imagination, especially as pipeline operators are not allowed to trade gas and have to work through brokers.
On the other hand, the one-size-fits-all approach is not even consistent as national regulators have national gas management and safety regulations to follow.
This could hinder the introduction of hydrogen into national gas grids. This is more of a problem where transit countries such as Austria are involved than it is in the markets at the end of the line, such as Finland or Great Britain. The country with the lowest percentage sets the bar for the countries beyond it.
Unsurprisingly its presence in the gas grid has to meet certain standards, and each government has its own statutory health and safety agencies.
With different percentages allowable in neighbouring countries, this creates friction in what might otherwise be a seamless transition to a decarbonising grid.
This is a problem that Gazprom Export has picked up on, as its commercial future is very closely entwined with demand for gas in Europe. It needs to move with the times and decarbonise its gas as fast as it can.
But while commodity specifications can be tweaked to ensure a longer future for gas – and some of its contracts do not expire for another 15 years – tweaking the national regulations for the pipeline operators in each country might be a tougher job, and the clock is ticking.