BP now says it will reduce its oil and gas production by 40 percent by 2030 as part of its pivot to low-carbon operations. But many will wonder why natural gas--the bridge between our fossil fuel present and renewable energy future--is being included on the chopping block. Despite its much lower emissions footprint, natural gas is also under threat not only by the bare fundamentals, but by the trends shaping energy policies.
The EU Green New Deal is perhaps the best example of these trends and their effect on future fossil fuel demand, including natural gas. The deal is pretty ambitious and targets emission reductions of between 50 and 55 percent from 1990 levels by 2030 and 100 percent by 2050. According to Wood Mackenzie analysts led by Massimo Di Odoardo, this will result in the loss of some 45 billion cubic meters of natural gas demand, or 12 percent from current annual demand, by 2040.
Currently, Europe consumes about 500 billion cubic meters of natural gas. This is already lower than the peak of gas demand on this continent, which occurred a decade ago, when demand was 10 percent higher, Wood Mac’s chairman and chief analyst Simon Flowers notes. There is some good news, though: new gas demand will come from maritime transport, thanks to new emissions regulation from the International Maritime Organisation, and from road transport as public transit switches from oil-derived fuel to compressed natural gas.
But Europe is building new import terminals for liquefied natural gas, isn’t it?
Europe plans to ramp up its imports of the fuel to diversify its supply of gas. And Europe’s biggest economy, Germany, is bent on completing the Nord Stream 2 pipeline that will double Gazprom’s export capacity specifically to the benefit of Germany’s energy needs. So it seems Europe is preparing for more gas demand, not less.
As true as this might be, Europe is also preparing to become a leader in clean hydrogen production as an alternative to fossil fuels. Clean hydrogen is produced through electrolysis using electricity produced by renewable sources such as wind or solar. The plan is ambitious: from 1 GW in clean hydrogen electrolysis capacity currently, the EU plans to go to 6 GW in just four years, increasing this to 40 GW by 2030, which translates into annual production of ten million metric tons. In other words, whatever gas demand growth is in the cards for Europe will be limited. But who cares about Europe when there is Asia—the world’s biggest gas demand growth driver. Asia imports 340 billion cu m of gas equivalent in LNG, according to Wood Mac, and these imports are set to double by 2040. This is certainly good news for gas exporters.
Except it’s not the whole news.
“The markets of developing Asia hold enormous potential, but gas’s growth is far from assured,” writes Wood Mac’s Flowers. “Many countries lack infrastructure, and affordability is a challenge where imported gas must compete with domestic coal. India is a case in point. Gas has a market share of just 6%, well short of the government target of 15%, and is struggling to compete with coal and the rapid roll-out of renewables.”
Interestingly enough and likely for the above reasons, Asia was not the biggest growth region for gas demand last year, according to BP’s latest Statistical Review of World Energy. That was the United States, where demand grew by 27 billion cubic meters. In Asia, demand grew by 24 billion cubic meters last year. BP noted in its report that total global gas demand growth in 2019 was weaker than the ten-year average and sharply lower than the growth rate recorded just a year earlier. This year, with the Covid-19 pandemic, it’s anyone’s guess exactly how badly gas demand will be hurt.
But looking forward, can the U.S. continue to support solid growth in gas demand? Not according to Wood Mac analysts. Growth in demand will be weaker and weaker in the coming years as the market gets saturated with competing technologies such as solar. According to the Energy Information Administration, in 2021, gas consumption by both commercial and residential users in the U.S. will inch up by 1.6 percent. This year, however, consumption will slump by 6.8 percent from 2019 because of Covid-19 and the lockdowns.
So, there are threats to gas demand growth in all the key markets. These won’t blow up in producers’ faces—not all at once. But these threats are of the insidious kind, and they will gradually increase the pressure on gas demand over years and even decades. There is no immediate danger for global gas demand, except from the resurgence in coronavirus infections that could prompt new lockdowns. But there is a danger, and producers would be wise to keep that in mind. Alternative sources of energy are getting increasingly cheaper, and this is not a trend that is about to get reversed.
By Irina Slav for Oilprice.com
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