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A golden age for gas – but not in Europe

March 21st, 2012 by Pierre Noël, University of Cambridge

Forget the gloom about fossil fuels. True, oil is scarce; granted, coal is dirty – but natural gas is clean and plentiful. In terms of local air pollution, gas burns very cleanly indeed. In terms of greenhouse gases it emits half what coal does, per KWh generated. Unlike oil, or even coal, the world’s gas reserves are expanding dramatically. The coming decades could be a golden age for natural gas, as the International Energy Agency explored in a recent report by this title. However, it is doubtful that Europe will share in this new gas era.

Gas consumption stopped growing several years before the start of the economic crisis and has been declining since. If the current policies and market conditions are sustained, this decline will continue.

In the United States, where conventional (including offshore) gas production had peaked in 2001, the industry developed new technologies to access a resource base most expert thought could never be produced economically: shale gas. The decline was reversed in 2005 and since then US gas production has grown by about 45%. The annual production rate has grown by 220 billion cubic meters (bcm), the equivalent of total consumption rate by the UK, Germany and France together, or 45% of total EU gas consumption. This “shale gas revolution” has spread to Canada and the industry is scrambling to access prospective territories all over the world where it could apply the same technologies to similar geological structures. There are many such structures, from South America to China, from Europe to Africa. We are perhaps on the eve of a global methane revolution driven by ‘unconventional gas’.

The shale gas boom combines with another major development of the last few years: the expansion of an international market for ship-borne, liquefied natural gas (LNG). LNG trade started in the late 1960s and has grown regularly since but it is only in the late 1990s and 2000s that it became the default way to commercialising natural gas. A step-change has been achieved with the entry of Qatar into this market. In less than a decade the tiny Middle East country added about 100 bcm (equivalent) of supply to the global LNG market. The new emerging giant supplier is Australia, which should overtake Qatar as largest LNG exporter by 2018. Some of Australia’s LNG export projects are fed with ‘coal-bed methane’, another form of unconventional gas.

The main change brought about by the growth in LNG trade is the possibility of ‘arbitrage’ between regional markets, hence the tendency towards price convergence through gas-to-gas competition. Convergence first came to the Atlantic market (the USA and the spot markets of Western Europe). Prices suddenly diverged again with rapid shale gas production growth in North America, which sent prices way below the spot price for LNG, leaving import terminals idle. LNG trading will also make spot prices converge between Asia and Europe. The fortuitous timing of the recession and production ramp-up in Qatar had delayed this process, with Europe (and especially the UK) being hit by a wave of Qatari LNG that had nowhere else to go apart from price-depressed America. Rapid growth in Asian LNG demand, driven by economic fundamentals supplemented by Japan’s exit from nuclear power after Fukushima, are now wiping out this “LNG glut” and Western Europe will increasingly have to pay Asian prices for its cargoes. Eventually, LNG exports from North America will allow the market to arbitrage the large price difference between the US and Europe or Asia, bringing about a global gas market where price differences will more or less reflect transport costs.

This double revolution on the supply side – vast expansion of gas reserves and emergence of a global gas market – could allow for rapid growth in gas consumption. Asia is home to large industrialising economies that drive the growth in global energy demand but have until recently consumed relatively little gas. Abundant natural gas widens the range of energy sources they can tap into to fuel their economic growth. Furthermore, they are very coal-intensive and therefore suffer from heavy local pollution that gas could help alleviate. North America is enjoying the beginning of a gas-fed re-industrialisation and the Obama administration is using old-fashioned regulatory intervention to retire older coal-fired power stations, most of which will be replaced by gas.

Europe, we are told, will join the party. According to the IEA “golden age of gas” projection, as well as the BP Energy Outlook 2012, European annual gas consumption could grow by about 100 bcm by 2030, or 20%. These figures look very optimistic to say the least.

Aggregate gas consumption growth in Europe sharply decelerated after 2000 and demand peaked in 2005. Beyond weather and GDP some real demand destruction seems to be happening. Data from Europe’s pipeline operators recently published by Deutsche Bank shows that in the seven largest markets accounting for 85% of EU consumption, weather-adjusted demand declined by 22 bcm in 2011, including more than 10 bcm in the UK and nearly 6 bcm in Germany. Weather-adjusted residential gas demand has declined by more than 20 bcm since 2008, suggesting energy efficiency investments and behavioural change driven by higher prices. Industrial and power generation demand was lower in 2011 than even in 2009, at the height of the financial crisis.

The IEA and BP project that gas demand growth in Europe will be driven by fuel switching in the electricity sector (gas displacing coal). The case looks strong indeed. Using IEA data for 2007 I calculated that CO2 emissions from coal-fired power plants in the EU amounted to 931 million tons (Mt). With gas half as carbon-intensive as coal, replacing 25% of coal-fired generation by gas would save 1/8th of 931 or 116 Mt per annum. If gas displaced half the coal the emissions cut would reach 232 Mt. These two numbers are equivalent, respectively, to 34% and 68% of total EU27 CO2 emissions reduction achieved between 1990 and 2010. As the only place in the world where carbon emissions are not free, Europe should lead in coal-gas substitution.

The trouble is that Europe has quietly abandoned its carbon dioxide policy, based on emission pricing, in favour of a renewable energy policy based on direct (and very high) subsidies. This shift has dire implications for gas. Because emissions from the power sector are capped under the Emissions Trading Scheme, aggressive renewable deployment depresses the carbon price, allowing coal to remain competitive against gas. Emissions are displaced, not reduced. In Spain, one of the leaders in renewables deployment, gas-fired power generation has declined by 4 TWh since September 2009 while wind and coal have grown by 2 TWh each – it all adds up.

In Germany, the economics of power generation are being transformed – or destroyed? – by wind and solar output. Zero or negative prices are no longer exceptional and the most lucrative hours for thermal generation have been creamed out. In the current market no-one can build a non-subsidised gas-fired plant. Coal-fired stations, including lignite, have become swing producers.

In the UK large-scale deployment of renewables is still ahead of us and 9 GW of coal will be removed from the system by EU environmental regulations in the second part of this decade. The latter development is leading to investment in new gas-fired capacity with companies expecting to cash in on a few years of high prices. Beyond that, the system should be dominated by subsidised generation with very low marginal cost. Companies may be paid to keep their gas plants available to make for the unreliability of wind, and even build new ones for the same reason, but aggregate gas consumption should decline, unless renewables are not delivered.

A serious climate change policy, one that would target CO2 as opposed to creating green jobs in China and preserving coal jobs in Europe, would result in massive substitution of gas for coal in the short to medium term, and a longer term contest between nuclear, fossil-fuel with CCS and renewables. If their (rightful) lobbying for moving back to carbon pricing and away from subsidies is not successful, the best the gas industry can hope for is that Europe’s (and the UK’s) renewable energy policy proves so costly and problematic that it collapses under growing political pressure.
Between 1965 and 2005 the share of natural gas in total EU 27 energy consumption rose from 5% to 25%. Truly, that was a golden age. Emerging Asia’s love affair with gas may be just starting, thanks to shale gas and global LNG trade; ours is behind us. Two unlikely developments could change the outlook for gas in Europe: a move away from renewable subsidies and towards sensible carbon pricing; and a collapse in gas prices. If Gazprom can flood Europe with gas now is the time to do it.

Pierre Noël, EPRG, University of Cambridge

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2 Responses to “A golden age for gas – but not in Europe”

  1. mishasibirsk Says:

    I couldn’t locate RSS 2.0, so I don’t know if I am duplicating others’ comments. If so, mea culpa.

    The article presents an interesting, oblique and logically defensible perspective. Worth pondering. I, however, will continue to adhere to the “irrational” position of stuffing as many eggs as possible, as fast as feasible, into the renewables basket. I am keenly aware of the risks, from political, economic and other-environmental factors, to the integrity of those eggs and even the stability of the whole basket. But we have seen, especially over the last couple of years, that, with a lot of potential wrecking balls in the air, the momentum for change has continued to find a way through. Thus, we had an oversupply of solar panels, largely due to subsidised Chinese production, and consequent demise of a number of developed-world panel producers. Hard times for them, but China suddenly ramps up its installation tempo, and the depressed prices arouse interest among consumers in the developed world and put renewables on the horizon for increasing numbers of political and corporate decision makers in emerging economies.

    The argument for gas as an interim solution is consistent with calculus: a little step to the right or the left – Does the graph go up or down? Here, with CO2 emissions, we want down. That rationale has been the basis for the scientific and industrial revolutions; hard to argue against it. I’m arguing against it. My attitude is grounded in the theorem of the limit of polynomials: As x goes to infinity (in the long term), the limit of a polynomial is the same as the limit of the term with the highest power. Coal > gas gives us a nice, attractive coefficient of .5, but that’s as far as it can go. Renwables give us, not zero, no, but x to a very large negative number… Actually, that will be the smallest term, but you know what I mean.

    The article only claims for gas an interim role. I am certainly not opposed to using gas instead of coal in so far as it’s a choice between only those two. However, the only instrument identified to facilitate that, or to prevent its reversal, is carbon pricing, and that is put forward as inversely linked to subsidies for renewables. It would seem extraordinarily ungainly policy that would not enable gas to be favoured over coal – and BTW, the dispatchability* of gas naturally advantages it over coal as a partner for renewables, while their inherent, involuntary variability remains an issue – and I don’t believe that policy failure can’t be corrected.

    But suppose it couldn’t. The environmental damage we are causing now is a major concern. The necessity to transition to zero emissions within a very few decades is of vastly greater import. In a perfect world, where all parties were motivated to nullify what we are doing to the atmosphere, it might be at least notionally worth considering putting a larger proportion of the resources currently invested in production of renewables, instead into R & D in order to bring down the unit cost.

    Three problems with that: 1) If we waited to produce renewables until the point when wouldn’t, beyond that point, be able to produce them any cheaper, we would never produce anything. 2) Real world, mass production and installation, and the experience and feedback from that, is in itself a crucial element of R & D. 3) In terms of interested parties, we live in just about the antithesis of an ideal world. The propaganda and misinformation churned out by Big Energy, in its various guises, almost makes the tobacco lobby look like a philanthropic foundation. Really, that no.3 is the clincher. The unenlightened, fanatical self-interest of Big Energy precludes environmentalists’ paying too much attention to etiquette. What is needed is a fair element the corresponding level of implacability.

    One further observation: ” … a longer term contest between nuclear, fossil fuel with CCS and renewables.” The discipline of the market is an invaluable mechanism. It is not king. As nations, as the people of the world, we can make decisions according to our own precepts. We can decide that we don’t want nuclear because it is inherently dangerous and polluting. As for CCS, well… there will be a variety of opinion. At best, fossil fuels are not renewable. Where they can be mined with minimal environmental impact, then maybe. In any case, we shouldn’t cut it any slack for development time. Whatever countries decide, they can just decide. If they don’t want nuclear or fossil, they don’t have to submit that to the altar of the invisible hand. Having decided what they don’t want, they can then let the permissible remainder cavort and compete on that subordinated altar.

    * “Dispatchability” may be a Russo-Germanism, in which case I apologize; or perhaps it is part of electricity generation jargon. I mean by it: suitability for starting, stopping and adjustment rapidly and at short notice.

  2. Annabelle Sibué Says:

    This article underlines once again with reasons the issue of the return of the age of coal for Europe. Even if the energy production from coal is certainly the worst in terms of GHG emissions, there is a clear trend in Europe for its coming back, as Germany can show with its exit from nuclear production, largely replace by coal power. Indeed, there are still a lot of coal reserves in the world, and as it is the most ancient way of producing electricity – at least in Europe – the technology is still competitive, and coal plants still exist, so that there is little investment for energy production from coal.

    However, the double revolution in supply is having a real impact on the use of gas to produce energy in the world, as well as on its price. Actually, we knew since quite a long time that resources in gas were huge in America for instance, because shale gas was discovered long ago, but its operating cost was too high and the technology of hydraulic fracturing was not mastered enough. Since a couple of years, it has been possible in the USA to produce from shale gas, and it will keep on being profitable as the technology is developing. This leap in the energy production enables great changes in the global mix, as Asia is turning to gas progressively. The production of LNG by Qatar enforces this trend of golden age for gas. As it is rather easy to ship to isolated countries, we have seen countries like Japan importing massively LNG from producers. Because of the Fukushima’s incident in Japan, this country is the living proof of the emergence of gas in the mix – Japan is the world’s first importer of natural gas – but also of other fossil energies.

    Asia hasn’t given up on coal at all. In China for example, around 60% of the fossil energies for electricity production comes from coal against 30% from gas, and primary energy production is almost 75% coal. The same proportions are found for the energetic mix of India: coal represents more than half of the primary energy production against a small 10% for gas, and if we look on the electricity production side, we can see that coal is again stronger (57% against 9% for natural gas) Thus even if the trend is changing, it is changing slowly and the age of coal is not only present in Europe, coal is far from disappearing from the energetic mix of Asia.

    As Europe is concerned, the policies on power generation make things look different. Indeed, Europe has shown first its interest and concerns about GHG emissions. In the plan 2020, the objective is clearly to reduce those emissions, starting by a 20%. That’s why Europe has established a carbon market, so that the tons of carbon emitted is not free anymore. It seems then a bit illogical that Europe prefers coal than gas, as this latter emits half what coal does per kWh generated. Here I think both the policies of subsidies for renewables and the economic crisis have their role to play.

    To my mind the situation in Europe is more or less this one: governments have given subsidies to encourage the development of renewable energies – both R&D projects and real installations. The policy adopted seems to have worked quite well, as we can see with the Germans’ overproduction with solar panels sometimes – quite astonishing for Germany which is not known for being the most profitable country to put solar panels on. European countries are at the heart of the innovation and use of the renewables, with Spain for instance who launched the first concentrating solar power plant, or Denmark generating 40% of its electricity with renewable energies – wind turbines and biomass most of all. But paradoxically, those three countries are huge carbon emitters because they produce the rest of their electricity from fossil energy and from coal in particular.

    However, one of the deepest reasons for the turning back to coal energy is the lack of money for playing on both sides – renewables and gas. We developed our policy of subsidies for renewables after the peak of production of America from conventional gases – around 2001 – and before they launched out in the shale gas exploitation. They were going into decline, and wind and solar were starting to get mature enough for installations. Europe then invested in renewables in the 2000s but with the outcome of the economic crisis, money lacked for investing in other sources.

    Gas plant are very fast to turn on – around 30 minutes of response time – and as peak demand is increasing every year, back up supplies need to provide more power very quickly. Building more gas power plant is then necessary to adjust the offer and supply but it is a huge investment for a few hours of effective production, as gas is only there for peak adjustments and not for continuous production. Europe has missed the boat for the entry of gas power and has turned back to what was already there, no matter the GHG emissions, because on the whole, they are reducing slowly as the renewables don’t emit any carbon. I agree on the fact that it is displacing the emissions and not efficiently reducing it. We could do much better.

    On the other hand, countries like France have unexploited reserves of shale gas. I don’t think it is totally stupid not to exploit it right now, as the price of gas is lower than it used to be, but we should encourage R&D in this sector, in order to be ready when it will become more profitable. If we don’t do that, I’m afraid we will have to buy their savoir-faire to the USA and it will be more profitable for them than for us.

    In the aftermath of the run for renewables in Europe, the run for gas is not ready to begin yet. Europe will probably keep on investing in renewables and should find another way for back up production, like storage, curtailment or developing the grids with neighboring countries. But to reach the objectives of low GHG emissions, Europe should ask herself if it is not worth it to finally give up the old dirty coal power production to take precedence over the cleaner and reliable gas power.

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