From the Editor: The energy transition starts to bite [Gas in Transition]

In its 2021 outlook, UK oil major Shell put global LNG demand in 2040 at 700mn mt, compared with 360mn mt in 2020. In a more recent projection, US engineering company Baker Hughes raised its estimate for 2030 from 500-550mn mt to 600-650mn mt, implying an even steeper demand trajectory over the next decade.

These forecasts assume continued limited growth in traditional markets and are heavily dependent on growing consumption in emerging economies, particularly in Asia, where there are major constraints in terms of capital mobilisation, the financial soundness of local partners, regulatory uncertainty and infrastructure.

Most notably, these new markets need significant new domestic pipeline capacity to expand the customer base beyond existing networks and provide a more widely available alternative to the high emissions coal plants which generate so much of Asia’s electricity.

Traditional market challenge

But LNG also faces new challenges in its traditional markets. In July, both Japan and the EU unveiled radical new greenhouse gas (GHG) emissions reduction plans for 2030. These will impact LNG demand, suggesting these markets’ consumption of the fuel will peak sooner than expected.  

While rapidly being overtaken by China, Japan in 2020 remained the world’s single largest national LNG consumer, accounting for 20.9% of global LNG imports. The EU, made up of multiple markets, in which LNG plays differing roles, accounted for a further 16.7%.

There is a wider overlap between traditional LNG markets and stated net-zero-by-2050 ambitions, which includes not just the EU and Japan, but also South Korea and the UK. This is particularly so if China’s carbon neutrality by 2060 goal is included.

South Korea alone accounted for 11.3% of LNG demand in 2020. The government is mulling three options for near total decarbonisation by 2050, one of which envisages the complete suspension of coal and LNG development in favour of green hydrogen technologies.

The other two options see emissions reductions of over 95%, making it hard to see how LNG can maintain its current share of the energy mix.

In total, carbon neutrality targets for 2050 or 2060 have been set in countries representing more than 70% of existing LNG demand.

Renewable limits

The EU’s Fit-for-55 package represents a huge overhaul of legislation designed to put the bloc on track to reduce GHG emissions by 55% by 2030, up from the former target of 40%.

The role of gas and potential for state support in areas where the fuel can play a decarbonisation role – in transport, coal-to-gas switching, blue hydrogen production – were hotly debated. Broadly, the more coal-dependent East European member states wanted to retain these options, while west European states sought to exclude gas in an effort to avoid long-term lock-in to a fossil fuel.

The result is a compromise, with the overall plan remaining heavily dependent on a rapid acceleration in the construction of renewable energy capacity.

Wind industry organisation WindEurope understandably welcomed the package, particularly the increased renewable energy targets, but was quick to point out that a near doubling of annual capacity additions in the sector was unlikely without an overhaul of permitting processes, which fall under the jurisdiction of national and local bodies rather than European ones.

Permitting bottlenecks have already slowed onshore wind capacity additions in Germany, while France’s recent onshore wind tender managed to award only 57% of the capacity on offer. Blame for the lack of interest was again laid at the door of cumbersome permitting processes.

Huge calls are also being made on the offshore wind sector just as new markets in Asia and the US open up. European utilities are very active abroad and the construction of the first US offshore wind farms will depend heavily on already over-stretched European supply chains.

A report from consultants IHS Markit in July suggested that the US would miss its 30 GW by 2030 offshore wind target by some margin, achieving only 21 GW, owing to supply chain constraints. Yet even 21 GW may prove optimistic, given that the country has less than 100 MW of offshore wind currently in operation.

The report could also have noted that US expansion, even below target, will stress Europe’s ability to deliver its own offshore wind targets.

Japan’s energy transition

Meanwhile, Japan’s draft Strategic Energy Plan envisages non-fossil fuel power supply sources accounting for 60% of the country’s energy mix by fiscal 2030-31, up from 24% in fiscal 2019-2020. This means a huge drop in LNG demand. The fuel’s share of the energy mix would fall from 37% to 20%. Renewables will account for 36-38% of power generation and nuclear 20-22%, up from 21.6% and 4.6% respectively in calendar 2020.

Notably, the target for nuclear is unchanged from the country’s existing targets, which were formulated in 2015, with the challenge of accelerated transition, as in Europe, falling instead on much increased renewable energy output and ambitious energy conservation targets. Japanese total primary energy supply in fiscal 2030-31 is put at 489 million kl under the draft plan, down 62 million kl from the existing plan.

Recognising the difficulty in coordinating the ramp up of renewable energy and decline of fossil fuels, restrictions on the decline of fossil fuel generation will be maintained until sufficient non-fossil fuel sources are available.

Delivery gap

The simple fact is ambitious targets are much easier to set than to meet. The pressure to shine at COP26 is stretching the gap between resources and what is actually deliverable.

LNG demand in its core markets is probably safer than the latest tranche of energy transition regulation implies, particularly as coal-to-gas switching will continue to deliver GHG emissions reductions, while CCS and blue hydrogen production should ensure some longer-term baseload demand.

However, even if the emissions targets are not deliverable in full, they will be in large part and that raises questions about whether currently forecast levels of LNG demand in core markets – Europe, including the UK, Japan and South Korea – are still valid.

If not, this increases the reliance on emerging markets, where the greening of international energy investment finance and the low cost of onshore wind and solar power will almost certainly have a growing impact on the investment choices governments and lenders are willing to support.