Unsettling Outlook for Gas: Chatham House
A paper from the UK's Chatham House August 11 outlines a far more unsettling outlook for gas demand globally, as a result of action agreed last December at the COP21 meeting in Paris, than perhaps recent energy outlooks from the International Energy Agency, BP and others might suggest.
Paris Mismatches: The Impact of the COP21 Climate Change Negotiations on the Oil and Gas Industries* by John and Beth Mitchell argues, given that the gap** between the current round of national pledges (INDCs) and the overall target to cap global warming at no more than 2°C above pre-industrial levels, further stringent measures are likely to be imposed on fossil fuels in future.
Whereas the impact of INDCs on oil demand “will be negative, but relatively predictable” at least while transport remains reliant on oil products and until batteries become economical, “for natural gas, the outlook is much more unsettling and unpredictable.”
The report examines INDCs from China, EU, India, Iran, Japan, Saudi Arabia and US. In developed countries where electricity demand is not growing, there will be neither room nor profitability for investors in gas-fired power, without a “managed exit from coal”, it argues.
John Mitchell was a senior advisor at BP from 1966 until 1993 and is an Oxford Institute of Energy Studies research associate; co-author Beth Mitchell has been a fund manager for over 20 years (Photo credit: RIIA/Chatham House)
In the EU, the report highlights the mismatch between the Emissions Trading System and the policies in most countries that impose a minimum share for renewables in the electricity mix, and the “havoc” caused by German government coal and nuclear policies since 2011 on utilities’ profitability. It also notes that the US Clean Power Plan "remains suspended by the Supreme Court."
In developing markets where access to power is critical, the report says that gas producers will have to persuade governments of the role for gas – over cheap coal imports -- and whether investments are justifiable: “There is a vicious circle between uncertainty about the market in major potential importing countries, and the unwillingness of investors to support major new large-scale long-life LNG infrastructure and the supply behind it.”
The report speaks of a “mismatch is between the much-vaunted golden era of gas*** as a cleaner transitional fuel -- and the likely future” where major investments in LNG and long-distance gas pipelines are difficult to justify at a time of political and economic flux. Expanding markets for gas in regions that already have gas may be a more practicable backstop option, it nervously suggests.
Producers of both oil and gas too will also have to decide how to allocate resources between these two resources.
* The report published by the Royal Institute for International Affairs (Chatham House) can be freely downloaded here or at www.chathamhouse.org
** It cites authoritative estimates that INDCs alone may cap global warming at more like 2.7°C, or even 3.25°C by 2100, if actioned --Wan rather than the COP21 target of no more than 2°C.
*** The IEA’s 2011 World Energy Outlook special report was entitled: ‘Are we entering a golden age of gas?’ while BP’s latest Energy Outlook to 2035 still showed gas as the fastest fossil-fuel, averaging 1.8% growth globally out to 2035
Mark Smedley