Upstream gas outlook dims [NGW Magazine]
The September pledge by China’s president for life Xi Jinping to aim for a net-zero carbon economy before 2060 and the election of Joe Biden in the US could mean less gas is needed in future than expected.
This will increase the risk of stranded assets, one consequence of which will be a cut in likely upstream investment over coming years.
All three major economic blocks – the US, European Union and China – as well as other key emitters such as the UK, South Korea, Japan and Canada are now targeting net-zero carbon by 2050/60. Given their combined importance to the global economy, the energy transition may now gather pace more quickly than expected. Banks can now confidently assign risk to carbon exposure, making finance for hydrocarbons much tougher.
Similarly, oil and gas companies now know there will be strong backing for an energy transition, so can plan accordingly. The rest of the world is likely to follow, especially as an eventual low carbon energy system could well be cheaper than the current one. Such a system may also present opportunities for many countries – from the UK to Morocco – to improve energy security, stimulate domestic economies and reduce dependence on energy imports. This helps politicians gain support for zero-carbon plans from those that remain unconvinced that climate change is enough of a reason.
The political consensus across the major economies is now convincing many oil and gas companies, including big national oil companies like PetroChina and Petronas, and even US producers such as Oxy, to add their names to those of the European majors that have already declared corporate net-zero targets, for Scope 3 as well as 1+2 emissions. ConocoPhillips meanwhile has opted for Scope 1+2 only.
Many utilities have already moved into low-carbon energy and have net zero targets, as do major consumers of energy and vehicle makers. With banks keen to lend, plans for sustainable energy projects are growing fast. This is likely to dramatically cut the amount of oil and gas needed in future years, compared with current forecasts, which would require a sharp drop in hydrocarbon investment plans.
Indeed, in a recent report, consultants Wood Mackenzie forecast that a 2 °C pathway – which is close to what a global net-zero by 2050 target would achieve, if successful – would mean a cut of 65% in upstream gas investment up to 2040, compared with the company’s base case outlook, which projects some 200bn barrels of oil equivalent (boe) of new gas resource developments needed to meet demand through to 2040.
Wood Mackenzie Asia Pacific vice president Gavin Thompson said: “We estimate almost $2 trillion of capital is needed to deliver this [base case] growth in supply. However, a 2 °C demand scenario dramatically alters this outlook, with future supply requiring a more modest, though still considerable, $700bn of new investment as global gas demand peaks earlier… Sustainable investment is booming and investor activism on carbon has gone mainstream as more fund managers embrace environment, social and governance (ESG) screening. This increasing scrutiny of gas’ carbon intensity is shaping investment decisions on future supply.”
Similarly, the International Energy Agency claims some 30 trillion m3 less gas will need to be developed by 2040 than otherwise if the world is to hit its Sustainable Development Scenario – which is in line with the Paris 2 °C limit and close to the equivalent of net-zero by 2050. Although gas’ low carbon intensity on burning makes it the cleanest hydrocarbon, LNG ranks amongst the most emission-intensive resources upstream and is taking an ever-greater share of the total gas market. Significant emissions are released through flaring and the combustion of gas to drive the liquefaction process. And while there are exceptions, such as the Gorgon project in Australia, any CO2 removed from the gas before it enters the plant is often vented into the atmosphere.
Competing on emissions as well as cost
The cut in investment could mean many planned gas projects do not get off the ground, and those that do may have to compete on environmental grounds as well as price. Those in the ring include Qatar’s additional LNG mega trains, as well as major developments in the US, Russia and China, which are together expected to meet 60% of global gas demand by 2040. To gain a carbon advantage, some companies are applying their own net-zero targets to production and delivery of LNG.
For example, Qatar Petroleum announced last October the start-up of a 2.1mn metric tons (mt)/yr carbon sequestration project, with plans to expand its capacity to 5mn mt/yr by 2025 as part of its plans to boost liquefaction capacity to 110mn mt/yr. The plant means it can offer zero carbon LNG, and in November it sold up to 1.8mn mt/yr to Pavilion Energy in Singapore starting in 2023 – the first ever long-term deal of its kind. Under the 10-year agreement, each cargo would be accompanied by a statement of greenhouse gas emissions measured from production of the gas to the discharge of LNG at the receiving terminal.
The trend will produce a clear ranking among producers, with US LNG particularly badly placed due to flaring and other factors associated with shale extraction. Wood Mackenzie’s senior analyst David Low said: “If we look at methane emissions, shale gas is immediately put under spotlight. With a carbon intensity at around 34 times that of CO2, the release of methane including intentional venting and unintentional fugitive emissions into the atmosphere, is of rising concern to investors. However, the variable quality of methane emissions reporting, particularly for fugitive emissions, makes reduction challenging.”
This may improve however, as in November, Amazon founder Jeff Bezos’s Earth Fund handed the Environmental Defense Fund (EDF) a $100mn grant to launch a satellite that will measure and report global methane emissions with pinpoint accuracy, which is likely to shine a light on some US producers.
The accurate measurement of CO2 is possible today, and many producers are already provided with an incentive to reduce this in the form of carbon pricing – notably in Canada and Europe. Thompson said: “Reducing emissions is not about technology. Carbon capture, use and storage (CCUS) is used extensively in the US in enhanced oil recovery (EOR). It is about carbon pricing” – which may rise and become more widespread following the political developments in the US and China.
For producers seeking lower carbon alternatives, a united front among the economic blocks means there will also be the carrot of government subsidies, at least in areas that are commercially marginal, as well as state encouragement for low carbon options generally. Investors are also playing a part: “The industry is at a critical juncture. Investors are demanding project returns stay attractive at lower oil and gas prices just as companies are looking to address multiple challenges on carbon. The global gas industry needs to respond, and soon,” he said.
Customer pressure could also force change. For example, French utility Engie has abandoned talks with US-based NextDecade over a proposed deal involving gas from the planned Rio Grande LNG terminal in South Texas. The move reportedly came following pressure from the French government – which has a 23.6% stake in the utility – to seek cleaner energy supplies instead, or at least gas with a lower flaring and emissions profile. That decision was taken despite NextDecade’s announcement – perhaps it sensed the way the wind was blowing – of plans to cut emissions by 90% initially and the rest later.
Other European buyers in Germany and Poland remain interested, but countries such as Ireland are falling into line behind France, by ruling out any LNG import projects that are intended to import fracked gas, such as US-based New Fortress Energy’s long-delayed Shannon regasification project.
India represents one bright spot for demand, with the prime minister, Narendra Modi, in September repeating his aim to raise the share of natural gas in its energy-consumption mix by up to four times, from about 6% of the total today. Gas is seen as particularly useful for clearing up polluted city air and displacing diesel in transportation.
If they are to avert the further decline of gas, Wood Mackenzie believes developers and investors need to consider three key areas: sustainability, price and new sources of capital. Sustainability is becoming the mantra across the industry, with carbon mitigation and ESG increasingly at the heart of decision making. Sustainability investments include reduction in venting, leakage and fugitive emissions, use of renewables to power LNG facilities, carbon offsetting, CCUS technology for high CO2 fields and liquefaction; and partnering with end-users to reduce emissions, as in India.