Editorial: Time to act [Gas in Transition]
Welcome to the inaugural issue of Gas in Transition, the new magazine by Natural Gas World that aims to provide our subscribers with market information, insight and foresight to make informed decisions in the natural gas sector.
The energy transition has deeply rooted itself in the natural gas industry’s psyche. Many players see opportunities in decarbonisation, or at least a way to hedge against oil and gas demand risks. A failure to act could mean terminal decline for some businesses.
Big oil is now transitioning to big energy. But the concern is whether the world’s leading oil and gas companies can simultaneously scale back their profitable upstream operations and ramp up investments in lower-yield renewables, while also keeping shareholders happy.
BP’s efforts to convince shareholders of the merits of its transition plan were not as successful as hoped, at least if the subsequent drop in its share price is taken as evidence. Its rival Shell has asked shareholders to vote on its decarbonisation strategy at the company’s upcoming annual general meeting on May 18.
Investment in new gas supply nevertheless continues, as exemplified by Qatar’s final investment decision on a $29bn expansion project at the North Field in February. But when announcing the milestone, operator Qatar Petroleum drew attention to its plans to store CO2 emissions from its LNG facilities.
Others like NextDecade have gone further, announcing that its 27mn metric ton/year Rio Grande LNG will be completely carbon neutral. The company agreed terms in late March to deliver CO2 from the plant to Occidental Petroleum, which can pump it into its oil reservoirs in the US Permian basin to boost pressure.
Another recent trend has been carbon-neutral LNG trading, as suppliers and customers work together to offset their emissions. Cargoes can be classified as carbon neutral if carbon credits are bought from projects that avoid or reduce emissions associated with the entire life cycle of the gas.
Even countries that were once considered highly climate sceptical such as Russia are eager to join the bandwagon. In the recent words of Lukoil vice president and part owner Leonid Fedun, there has been an “explosive change” in attitudes towards climate change in Russian business circles recently.
The Russian government is striving to occupy a 20-25% of global hydrogen trading by 2035, believing it can leverage its close proximity to emerging markets to establish itself as a major supplier. But this target is largely aspirational, and the actual volumes that Russia sends will depend greatly on how the world’s hydrogen market takes shape.
Although it has been suggested that Russia might ship green hydrogen overseas, this seems unlikely on any significant scale given that the country’s renewables sector is still in its relative infancy. It is more likely that Russia will turn to its abundant gas reserves as a source for blue hydrogen, and preliminary plans by Gazprom and Novatek are in this direction.
Russia has even suggested using its hundreds of millions of hectares of forest space to help companies both domestic and foreign offset their carbon emissions. But this would require the international community to put a lot of trust in Russia that the system would be implemented properly.
Meanwhile, Lukoil and Russia’s other oil and gas majors are following their European peers in announcing climate objectives, eager to boost their ESG scores to appease increasingly climate-conscious investors and buyers.
At the same time, Russia is bullish on long-term gas consumption. In its latest LNG roadmap, the government projects as much as 140mn mt of annual LNG supply to meet this demand.
Over in Europe, gas transmission system operators have banded together to form the European Hydrogen Backbone initiative. They aim to develop a hydrogen transport system some 40,000 km in size spanning 21 countries. But despite noble attempts to ascertain the feasibility of this initiative, much uncertainty remains.
The cost of establishing the hydrogen system, which will mostly consist of existing, repurposed gas pipelines, is estimated at somewhere between €43bn and €81bn ($51.5-97.0bn). Meanwhile operating costs could be anything between €0.11-0.21/kg of hydrogen/’000 km.
If hydrogen becomes as big as policymakers hope, Europe will need imports to cover a shortfall in domestic supply. That is why plans for hydrogen import terminals have been drawn up Belgium, the Netherlands and most recently in Germany. German energy group Uniper has announced plans to transform the North Sea port of Wilhelmshaven into a hub for hydrogen imports. It will be hoping that the plan has better success than its now abandoned attempt at advancing in LNG project at the site.
With the rise of hydrogen and other renewable gases, the big question is how much room there will be left for natural gas in power and heating. If European commissioners are to be believed, the share of low-carbon gases in the gaseous mix could reach two thirds by 2050.
There is now meaningful progress underway to decarbonise the trickier areas of human activity such as vehicle transport and shipping. The shipping industry, usually considered very conservative, is now adopting cleaner fuels after decades of reliance on heavy fuel oil.
Almost a day does not go by when there is not another shipowner announcing the order of cleaner-fuelled vessels. LNG accounts for the overwhelming majority of these newbuild orders, although fuels such as hydrogen and ammonia are being tested as alternatives. A number of carbon-neutral cargoes have been transported in Asia and in mid-March Gazprom delivered the first carbon-neutral shipment to Europe, with Shell as the recipient.
Businesses and authorities across the world are exploring ways to benefit rather than suffer as a result of the energy transition. Which plans bear fruit, only time will tell. But inaction is not an option.