Natural Gas: Make or Break National Policy Issue

Natural gas policy decisions in the next 30 years could make or break nations. They will be critical in the long-term health of the economy, a country’s geopolitical partners, and its energy security. Many developed countries are focused on moving as fast as they can toward renewable-energy sources and ignoring the risks of making this humongous bet on relatively unproven technology. Developing countries aren’t likely to move rapidly toward renewable sources, and will likely take advantage of the plentiful, low-cost natural gas that will be available for the foreseeable future. Progress toward having substantially more renewable-energy sources might be better achieved and faster if natural gas were the essential partner in every country’s energy strategy. Natural gas could be the great enabler: It could enable renewables to be developed more effectively; it could enable energy security for countries making the transition away from coal; it could enable a robust and resilient national economy in the next fifty years; and it could enable faster progress toward reducing climate-change emissions.

RECENT SIGNALS OF CHANGE

The new availability of low-cost natural gas has dramatically altered the economics of energy production and the strategies for combating global carbon emissions around the world.

  • Gas is turning into a better opportunity than oil for many producers. The technology of shale oil production continues to advance steadily in spite of or perhaps because of low hydrocarbon prices. Over the last five years, production well productivity has risen more than 400%, 40% in the last year. US exports of natural gas have just exceeded US gas imports for the first time in 60 years with most of the export increases going to Mexico and Canada. From 2000 to 2015, the percentage of total energy production of natural gas in Shell, Eni, Total, ExxonMobil, ConocoPhillips, and Chevron went up significantly. Only in BP did it go down slightly. In Shell, Eni, and Total the share of natural gas is almost 50 percent.
  • New environmental risks from natural gas operations are coming to light. Recent figures indicate that around a third of the annual methane emissions in the United States can be traced to the natural gas industry. While methane doesn’t remain in the atmosphere as long as carbon dioxide (12 years compared to 500 years), it is about 25 times more potent as a cause of global warming. The Environmental Defense Fund, an American NGO that often works with industry, estimates 2-2.5% of the gas flowing trough the supply chain leaks out.
  • Global oil supply has steadily risen—almost 20 percent—since the year 2000 to over 95 million b/d in 2016, with non-OPEC producers leading the charge, competing strongly with OPEC producers for market share. In 1995, proven oil reserves (i.e., oil discovered and economic to produce) in the world were 120 trillion cubic meters. In 2015, proven oil reserves were 187 trn cubic meters.

Shipping of natural gas is rapidly becoming global, not local.

  • A single global market for natural gas is emerging. Natural gas is starting to be bought and sold around the world just like oil and petrochemicals. Behind this revolution is improved technology for moving gas as a liquid, flexible contracts, and new global capacity for sending and receiving LNG shipments. The share of gas moving by sea reached 40 percent of total trades in 2015 and according to the IEA will account for a bigger share of trading than pipelines by 2040. Thirty-nine countries now import LNG compared to 17 ten years ago.
  • Qatar is the world’s largest supplier of LNG with a market share of nearly one-third. In 2016, Qatar shipped 77.2 million metric tons (mmt) for 30.0 percent share and Australia shipped 44.3 mmt for a 17.2 percent share. Australia is expected to overtake Qatar based on current development plans in 2019 with at least 80 mmt. Ironically, Adelaide, Australia, suffered recent power blackouts during a nationwide heat wave because lack of investment in the country’s natural-gas infrastructure. The next big exporters were Malaysia, Nigeria, Indonesia, Algeria, Russia, Trinidad, and Oman.
  • The world’s seas are becoming more efficient in moving natural gas. The major Panama Canal expansion, opened in June 2016, more than doubles the canal’s capacity and includes a third lane to accommodate ships large enough to carry 14,000 TEU. A key market of the future for the canal could be LNG carrier traffic. Also, Russia’s US$27 billion Yamal LNG project within the Arctic Circle will begin operation in 2017. This remarkable project will use West-designed and Far East-built ice-class LNG tankers to enable year-round export shipments from northwest Siberia to European and Asian markets. The LNG tankers are intended for navigation both westbound and eastbound along the Northern Sea Route (NSR), the Arctic seaway along Russia’s coast linking the Atlantic and Pacific. The Russian company, Novatek, has a 50.1% interest in Yamal LNG; China National Petroleum Corporation and France’s Total Group both have a 20% holding; and the Chinese state-owned Silk Road Fund has a 9.1% interest.

China and India are reshaping their energy supply and demand mix and their foreign trade in energy commodities. China is proceeding faster than India.

  • In 2000 China and India didn’t have any LNG imports. In 2016 they are the third and fourth largest importers after Japan and South Korea. The United States and China are currently negotiating a trade deal that could involve US LNG shipments to China.
  • China Petroleum & Chemical, or Sinopec, is attempting to double domestic natural gas production in the next five years by rapidly expanding natural gas production from shale reserves in order to reduce coal usage in the country and reduce China’s need for imported liquefied natural gas. Many investors around the world were counting on sending natural gas to China.
  • Asia accounts for two thirds of the world’s coal demand, but that demand may be falling and sooner than everyone’s base-case scenarios show. In China in 2016, coal consumption fell 4.7 percent. This was the third year in a row of declining use. Coal currently supplies about 70 percent of China’s electricity, but the Chinese government is focused on cutting coal’s use, and succeeding. Coal-fired plant capacity in China is still being added—in November 2016, China’s National Energy Administration announced it is raising coal-fired power capacity as much as 20 percent by 2020, from 900 gigawatts in 2015 to as much as 1,100 gigawatts by 2020—but capacity utilization of coal plants has fallen steadily in China from around 60 percent in 2010 to around 50 percent in 2016. It appears coal will only provide 55 percent of China’s electricity mix in 2020.
  • Coal makes up 61 percent of India’s power-generating capacity, but India has announced it doesn’t need any new coal-fired power stations in the next decade beyond what it is currently building. Capacity utilization of coal plants has fallen steadily in India from over 75 percent in 2010 to less than 60 percent in 2016. Even with the rapid economic growth of the last decade, about 40 percent of India’s coal-fired power plants are now idle because of weaknesses in the distribution system and because government planners overestimated the growth in demand.

US electricity generation from natural gas now exceeds that from coal.

  • In 2016, natural gas’s share of US electricity generation at 33 percent exceeded coal’s share at 32 percent for the first time. Coal’s share has steadily fallen from a high of over 55 percent in the mid-1980s, while natural gas’ share has steadily risen from about 10 percent then. Nuclear remains steady at 19 percent, while renewables, not counting hydro, have risen from zero in the mid-1980s to 8 percent in 2016.
  • The Tennessee Valley Authority historically has been a major user of coal plants, but that has changed radically since 2007 because of environmental agreements to reduce coal emissions, the lower prices of natural gas, and increased production from nuclear. In 2007, over 55 percent of TVA’s energy mix was coal; in 2017 a little over 20 percent of the mix will be coal. Since 2011, TVA has shut down 24 coal-fired units out of 59 in its network.

LNG supplies are changing some countries’ dependence on pipeline gas that comes from other countries, that runs through unfriendly countries, or both. Poland’s new LNG import terminal reduces its reliance on gas from Russia.

In developed countries, wind and solar renewables are beginning to change radically the energy supply mix.

  • In 2015 5.5 percent of the world’s electricity came from wind and solar. Hydropower, wind, and solar together produced 9.4 percent of the electricity. The International Energy Agency said in July 2017 that for the first time the amount of renewable capacity commissioned in 2016 almost matched that for other sources of power generation, such as coal and natural gas. In some countries, solar photovoltaics are cheaper than coal and gas.
  • An interesting example of where wind and solar renewables are becoming a significant energy source is Texas, the center of the US oil and gas industry. In 2001, renewables (wind, solar, and hydro) accounted for 2% of Texas energy; in 2016 they will accounted for 16%. One night this past winter, nearly 50% of the power flowing into the Texas grid came from wind turbines in the state. Federal subsidies for Texas renewables have been a big factor, but equally big have been the falling costs of solar and wind technology.

 The electricity system around the world is fundamentally changing because of the orchestrated growth in the use of renewables largely with subsidies. The costs of these subsidies were modest when the renewables contribution to overall energy supply was marginal, but that’s changing. Since 2008, public subsidies for renewables have been $800 billion. In 2014, the IEA estimated that decarbonizing the global electricity grid will require $20 trillion in investment in the next 20 years, and that still leaves much to be done. A new economic system for electricity is required, but the ecosystem of energy and the economy is too complex for anyone to know what that should be and how to make the changeover efficiently. Source: The Economist, “A world turned upside down,” February 25, 2017, pp. 18-20. Other risks of investing in renewables include the new technology uncertainty and costs, and the many, many land-use, energy, and environmental regulations in place that are just as big hurdles for renewables as they are for the other energy supply investments.

Nuclear energy plants are progressing in many parts of the world, but not in the United States and Germany. Electricity from US nuclear plants at about 1.5 mega-watt hours per year is expected to decline very slowly over the next 25 years as reactors close and aren’t replaced. Toshiba’s subsidiary, Westinghouse, recently declared bankruptcy over escalating costs involving billions of dollars to finish two nuclear power plants in South Carolina and Georgia. Both plants might not be completed. 

The International Energy Agency (IEA) report on CO2 Emissions from Fuel Combustion highlighted that the growth in global CO2 emissions was slowing down. In 2014, the IEA indicated the global CO2 emissions were 32.4 gigatons of carbon dioxide (GtCO2), an increase of 0.8 percent over 2013 levels. The growth in 2013 over 2012 levels was 1.7 percent, while the average annual growth rate since 2000 has been 2.4 percent. Work by the Intergovernmental Panel on Climate Change (IPCC) shows that holding warming to 2°C typically requires global annual emissions to peak sharply around 2020, fall steeply by 50% before 2040, and be close to net zero towards the end of the century. The EIA’s International Energy Outlook 2016 reference case has global energy-related CO2 emissions growing about 1 percent/year from 2012 to 2040, but will CO2 emissions peak much sooner than anyone expected? 

Governments around the world are already adopting major plans to transition to renewable energy in spite of major uncertainties about the costs and plausibility of those plans. In a June 2017 paper in the Proceedings of the National Academy of Sciences, 21 energy researchers rejected in no uncertain terms Stanford Professor Mark Jacobson’s 2015 study that made a case for 100 percent renewable energy by 2050. They wrote Jacobson’s plan “can, at best, be described as a poorly executed exploration of an interesting hypothesis. The study’s numerous shortcomings and errors render it unreliable as a guide about the likely cost, technical reliability, or feasibility of a 100 percent wind, solar, and hydroelectric power system.” In other words, it was crap. The problem is that governments around the world— Germany, California, and Portland, Oregon—are already implementing extensive plans to transition to renewable energy. Germany’s goal is 80 percent renewable by 2050; California is trying to set a goal of 60 percent by 2030; Portland wants to be using 100 percent clean power by 2035. 

Even if oil demand peaks in the foreseeable future and the world achieves a net-zero emissions state, oil and natural gas will continue to be key energy sources. Shell’s scenario group in May 2016 highlighted that for the future global population of 10 billion people to have a decent quality of life, the global energy needs would have to double by the end of the century. Oil and natural gas would have to remain important energy sources for the next forty years, until solar, wind, and nuclear sources can assume the burden of meeting the global economy’s needs. If the net-zero emissions state is reached, let’s say by the end of the century, the share of oil and gas in the overall energy mix will have fallen from 57 percent to around 15 percent, while the non-fossil-fuel share would be just under 80 percent. 

ORACLE MUSINGS ABOUT ENERGY, ECONOMIC, AND SECURITY OUTCOMES

Depending on what natural gas policy decisions are made, world economic, political, security, and environmental outcomes in the next twenty years could be very different.

For the next 20 years the demand for natural gas is likely to explode.

  • Natural gas production could grow even more than base case scenarios because of technology innovation, rapid development of LNG shipping infrastructure, new government restrictions around the world on use of coal in power generation, and high costs of clean coal technology.
  • Technology innovation will likely continue to lower the costs of shale gas development. China and Argentina could see rapid expansion in their natural gas productions.
  • Global shipments of LNG will expand rapidly as more infrastructure for receiving LNG is built in countries around the world. Since most of the shipments will be headed toward Asia, issues around the security of shipping lanes in Asian waters will develop.
  • Russia leverage will both increase and decrease because of natural gas. Many traditional buyers of Russia’s gas will strive to reduce their dependence on Russian piped gas by investing in LNG. At the same time, Russia will be able to serve the new LNG markets.

Future of coal: Global coal demand could begin to fall soon.

  • The momentum to substitute natural gas for coal in electricity generation will likely accelerate.
  • Coal use will likely continue to decline in the United States. It’s uncertain how Trump administration policies could affect that decline, but in general the trend won’t likely reverse.
  • The biggest changes in coal usage could be in China and India. If natural gas prices remain low, coal demand will most likely keep falling. In fact, China and India could struggle to keep up with the forces driving those declines.
  • Clean coal technologies will likely struggle to become commercial. Consequently, in a couple of years, new coal plants may never be built again in a large industrial economy.

The biggest economic winners of using more natural gas could be the rapidly growing Asian economies, particularly China.

  • Natural gas supplies could help meet the extensive energy growth needs throughout Asia, and enable Asian countries to move faster away from coal.
  • China companies will likely continue to be industrial leaders in all commodities, including oil, gas, and coal. The Chinese companies will continue to be the biggest, invest the most money, and generally be aggressive to capture the most market share.
  • China could bet big on natural gas for its economy. It could expedite LNG receiving facilities and new natural gas burning power plants.
  • China’s changing policies toward improving the country’s air quality and energy supply in the next ten years could have the greatest impact on global CO2 emissions and the world’s goal of reaching a net zero CO2 emissions state as soon as possible.
  • China will likely ride the wave of coal use reduction and assume a much large leadership role on environmental issues in international forums, like the IPCC.
  • In many respects, India’s accomplishments will be greater, but they will follow China’s.

National energy plans in developed economies may not fit with reality.

  • Germany and California and others focused on making a complete transition to renewable sources as fast as possible could struggle with their goals. Physical and financial barriers could be too large to reach 50 percent of power from renewable sources. Disruptions in power services could increase. The goals will likely stay in place, but the old energy systems could remain critical.
  • Nuclear power could gain more advocates and expand, but not likely unless major problems with renewables appear.

Renewable power could expand more rapidly than projected in rapidly developing economies.

  • For many countries, in ten years more than 50 percent of new power capacity will be from renewables sources. Major investments in infrastructure for using more renewable technologies will be made.
  • Chinese corporations will likely continue to invest heavily toward becoming global leaders in renewable-energy technologies, like solar electricity generation and electric cars.
  • If net CO2 emissions per year start falling, societies could struggle to maintain their commitments toward renewables.

The battles over the development and use of fossil fuels could become even more intense.

  • Greenhouse gas emissions will likely continue to accumulate in the atmosphere and ocean for the foreseeable future. CO2 emissions from gas will continue to grow because of the growth in natural gas production.
  • NGO’s will likely continue to object to natural gas and oil development and production activities and the companies that conduct them.
  • Gas companies are unlikely ever to be viewed as good world citizens.
  • Large private oil and gas companies could experience more protests wherever they operate.
  • Russian and Chinese companies will likely be singled out more and more by NGOs.

New economic system for electricity will emerge over the next 15 years: But no one can predict the dynamics of that system because there are too many uncertainties in technology, geopolitics, human behavior, climate change, energy supply sources, energy demand, and economics. The wide range of possible outcomes include:

  • A very unreliable electricity delivery system, with major disruptions, could develop in major industrial economies, particularly those with the biggest commitments toward renewables.
  • On the other hand, an integrated system of diverse power sources with higher electricity prices could develop that is much more efficient and robust than current systems.

 

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