From the Editor: Looking back, looking forward [Gas in Transition]

Welcome to the final issue of Gas in Transition this year, dedicated in large part to coverage of the COP28 summit that concluded earlier this year in Dubai. This issue weighs up the summit’s success – the merits of the key agreements to come out of the discussions, but also the lack of progress in other areas. Importantly, it assesses what the future role of natural gas will be, as determined by the conclusions from COP28.

One more year of extreme volatility

2023 has been another year of extreme volatility – not only for the global energy system, but also for the global economy and geopolitics at large.

Natural gas prices in Asia and Europe have subsided to levels not seen since prior to Moscow’s invasion of Ukraine, but they are still very high in historical terms. The year has seen unprecedented numbers of final investment decisions taken on fresh global gas supply, particularly in the US, but while this is very welcome news, it will do little to loosen the global market until around the mid-2020s. And momentum must continue, to avoid other energy crises further down the line.

Fortunately, the Global Stocktake Agreement that resulted from COP28 placed emphasis on a managed energy transition, where efforts are taken to reduce demand and not prevent new supply from coming on stream, so that energy should be kept stably affordable. Hopefully this conclusion should feed into policy-making among governments, financiers and energy companies. In that past, too much emphasis was placed on taking investment away from gas supply, contributing to the current tight market. Though investment in renewables continues to reach new heights, this misdirection also led to a resurgence in coal use.

Geopolitics has been brought to the fore in energy markets over the past two years. The war in Ukraine and Russia’s subsequent drastic cuts to gas supply to Europe have resulted in a massive upheaval in global gas trade. Europe has embraced LNG, particularly from the US, as a substitute, while a massive proportion of gas reserves in Russia are now stranded, at least until the country can advance its new LNG and pipeline projects to target more of the Asian market, or until there is a restoration of the pre-war Russia-EU gas relationship. There may come a time when Russian gas flow to the EU rises significantly once more, depending on events in Ukraine, but it is highly improbable that Moscow would ever gain anything close to its pre-war market share, given Europe’s expansion of LNG import capacity and the sabotage of the Nord Stream pipelines.

The Israel-Hamas conflict has also led to heightened concerns about geopolitical risks to energy supply. Israel temporarily had to shut down gas exports to Egypt from one of its largest fields this autumn. Fortunately that conflict has not so far escalated to a regional level, but risks remain.

Another looming threat further down the line is a potential Chinese invasion of Taiwan, though for the time being Beijing says this is not its intention. This would disrupt energy supplies not only to Taiwan but also potentially China, the world’s biggest energy importer, if the result were to step up with some form of trade blockade.  But it may be that the primary intention is to wear Taiwan down through military and economic coercion rather than resort to allout war.

COP29

With COP28 finished, we now look forward to COP29, which was announced to take place in Baku, Azerbaijan, next year. This clears up the uncertainty about who would host the next summit. It had been Eastern Europe’s turn to take over the revolving presidency, under UN rules, but that group of countries unanimously approved Azerbaijan’s bid instead, ending months of geopolitical deadlock.

As was the case with the UAE, having the presidency will give Azerbaijan significant influence over the summit’s agenda and outcomes. However, the move has led to harsh criticism, over Azerbaijan’s human rights record, given the authoritarian nature of its regime, and also over its recent seizure of the disputed Nagorno-Karabakh region from Armenia, which led to the exodus of some 100,000 ethnic Armenians from the area. Environmentalists are also unhappy that, once more, a major fossil fuel exporter will host the summit.

Like the UAE, Azerbaijan will use the event to push against any dramatic phase-out of fossil fuels. Other important issues to watch out for at the summit will be whether wealthier nations commit to increased financial support to help the developing nations move forward with their energy transitions, and whether there will be greater inflow of money to a “loss and  damage” fund for countries vulnerable to climate change.

COP28 failed to secure an agreement on the creation of a global carbon market – originally an objective for COP27. Now that matter will be kicked back to CO29. Advocates for this market say it is essential to spur the faster development of low-carbon technologies – including carbon capture utilisation and storage (CCUS).

There should also be greater action against coal at COP26. The past commitment made at COP26 in Glasgow on phasing down coal use was very unambitious, and even this policy has been a failure in light of the energy crisis which led many countries to ramp up coal consumption as a cheaper alternative to expensive gas.