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What does COP21 mean for the natural gas industry?

Both statistical and anecdotal evidence suggest that the consumption growth for natural gas will continue for some time yet – even with the recent promise of a decarbonised world outlined in the Paris Agreement.

Shortly after the Paris Agreement was reached, ExxonMobil released the 2016 edition of The Outlook of Energy, where it predicted natural gas would meet
40 per cent of the growth in global energy demands and that demand for the fuel would increase by 50 per cent.

Similarly, the latest BP Energy Outlook report has revealed that natural gas is the fastest growing fossil fuel and forecasts that natural gas consumption will increase by 1.8 per cent each year to 2035. The majority of the increase in demand is projected to come from emerging economies, with China and India together accounting for around 30 per cent of the increase and the Middle East over 20 per cent.

“Gas looks set to become the fastest growing fossil fuel, spurred on by ample supplies and supportive environmental policies. In contrast, the growth of global coal consumption is likely to slow sharply as the Chinese economy rebalances,”? BP Group Chief Executive Bob Dudley commented on the release.

What the experts say

Deloitte’s National Director of Oil and Gas Geoffrey Cann says the fossil fuel industry is lining up to try and understand the implications of COP21 on their business.

“This means there will be questions attached to the value of resources companies now have on their books. Direction of travel means value of resources will be different to what the value is today. To understand the implications, you have to go country by country, asset by asset and project by project.”?

Josh Frydenberg, Federal Minister for Resources, Energy and Northern Australia, observes that the natural gas industry has welcomed the clarity that COP21 has brought to the sector.

“Now the industry can move forward in planning and committing to long-term energy investment.”?

Energy Policy Institute Executive Director Robert Pritchard expects current business models in the gas industry to remain sound for “at least another decade”?.

“The industry accepts the COP21 agreement as a welcome recognition of the importance of low carbon technologies as the way ahead and the important immediate role of natural gas.

“It is widely recognised as a reliable and affordable fuel source for power generation, both for baseload and as standby generation,”? says Mr Pritchard.

Market dynamics and technology to play a role

Natural gas’s increasingly prominent role in the future energy mix is likely to hinge on its cleaner emissions profile than the likes of coal and diesel fuel. The reality isn’t quite as straightforward as it seems; however, with market dynamics extremely sensitive to slight price movements and technological innovations potentially giving coal an edge over natural gas.

Mr Cann says the falling price of oil makes natural gas an attractive fuel in the transportation sector because this allows it to displace diesel fuel in many applications.

“Low gas prices can trigger a conversion in the liquids market, but it won’t happen until there is typically a very large variance between diesel and natural gas. Gas has a high tax and diesel has a low tax and that keeps the spread wide.”?

Low oil prices could also trigger a conversion from coal to gas – although this is not as clear-cut as it may first appear. The problem, Mr Cann explains, is that if you have widespread conversion from coal to gas, coal prices fall and that will make the conversion uneconomical.

Mr Cann says many gas companies are rallying for a carbon price because that would keep the price of coal higher than the price of natural gas. Further, coal technology may see innovations that reduce its high-emissions profile.

“Very high yield furnaces which burn coal at super high temperatures can reduce coal’s carbon footprint. These furnaces can remove the greenhouse gas (GHG) effect, which will make the differences between coal and gas imperceptible,”? Cann says.

Industry commentator and director of Coolibah Consulting, Keith Orchison, echoes Mr Cann’s sentiments and says there is continuing research and development in many fossil fuel sectors.

“What technology advances can be achieved in highly efficient, low-emissions coal generation – pursued vigorously by the Chinese, Japanese and South Koreans – should not be lightly dismissed.”?

Mr Frydenberg says natural gas’s growing prominence in the energy mix will happen over time.

“A transition is already underway in both Australia and around the world as countries adopt more renewable sources of electricity generation. This does not mean that demand for coal will end. As the International Energy Agency notes, by 2040, more than 30 per cent of the world’s electricity will still be sourced from coal.”?

However, in the same time frame, the global demand for gas is predicted to increase by 50 per cent.

“With gas-fired power station emissions around half that of a typical coal-fired power station, the gas industry has a strong role to play going forward.”?

Increased uptake of carbon capture and storage

Dr Fatih Birol, the Executive Director of the International Energy Agency (IEA), forecast carbon capture and storage (CCS) technology to play a crucial role in future gas production – a sentiment that has been mirrored by many in the local gas industry in their efforts to adhere to COP21’s target to limit global warming to below two degrees.

CCS prevents large amounts of CO2 from being released into the atmosphere. The technology involves capturing CO2 produced by large industrial plants, compressing it for transportation, and then injecting it deep into a rock formation at a carefully selected and safe site, where it is permanently stored.

“I see a great increase in re-injection of CO2 as an enhanced production technique in gas production. With gas-fired power generation, the viability of CCS will mainly depend on proximity of suitable storage reservoirs,”? says Mr Pritchard.

“The challenge for gas is to decrease emissions by more efficient gas-fired power generation.”?

Mr Frydenberg says CCS is set to play a key role in reducing the emissions of LNG projects, including Chevron’s Gorgon LNG project.

“With the Gorgon commercial-scale capture project, we have the potential to reduce the emissions from this project by around 40 per cent. This is a promising development and provides the foundations to progress this technology further in Australia.”?

However, Mr Cann says the gas industry hasn’t yet implemented CCS on a widespread basis because there is no effective market to prop it up.

“The idea that we should do this [CCS] as a business requires carbon pricing, carbon markets and fair prices for capturing carbon.”?

Prior to Paris, Mr Cann says CCS was sidelined – with the gas industry watching on curiously – but he expects the industry to take it more seriously once proper mechanisms are fully in place.

Keith Orchison concurs: “We are in a period where it is harder for both the energy industry and governments to find the necessary funds to support further breakthroughs in CCS, but I expect the work to continue and for a point to be reached where CCS will start to be mainstream.”?

The way forward

Most commentators believe that post-COP21, there is a great opportunity for gas to move further into power generation.

Mr Orchison notes that the plans the 195 governments took to Paris allow for growth in annual gas-fuelled power production globally of some 77 per cent between 2013 and 2040.

“It is worth noting that, even in the scenario the International Energy Agency has modelled for a revved-up pursuit of limiting global warming to two degrees, it sees gas contributing slightly more to power generation in 2040 than it did in 2013 – even in an environment where it envisages power demand slashed back via energy efficiency,”? Orchison says.

Mr Cann also foresees business models changing, with gas companies set to compete for transport fuels.

“After you remove coal from the power generation equation, the biggest source of micro-particle pollution in cities is diesel fuel. Gas is cleaner – natural gas companies will get into the transport market and compete with power companies.”?

And with widespread adoption of renewables set to only increase, it is a matter of importance that natural gas and renewables collaborate in fresh and inventive ways.

“It is important that this [renewables] transition takes place in a smooth and cost effective way, without interruption to electricity supply,”? says Mr Frydenberg.

“With this in mind, it is important that the two streams of production operate closely together to ensure stable energy supply during this transition.”?

While Mr Frydenberg says it is promising to see many energy companies diversifying into renewables, he says it is paramount that stable supply is maintained.

Mr Cann foresees gas and renewables co-existing and complementing each other to maintain grid and electricity market performance.

“Gas overcomes intermittency issues with a low GHG footprint, while renewables of course have a zero GHG footprint. It results in a better outcome than coal-fired power generation.”?

Mr Orchison concurs, saying the greater the share of variable generation in any market, the greater the need for reliable back-up generation like open-cycle gas turbines.

The advent of battery storage complicates the situation slightly, as it itself functions to overcome intermittency issues and could potentially displace the role of gas moving forward.

However, until battery storage becomes commercially viable, Mr Cann foresees
coal – as opposed to gas – being the industry principally displaced by renewables.

“The post-COP21 direction of travel globally is to halt the further development and adoption of coal. It’s already on the trajectory, as we see ourselves moving closer to the renewables and gas combination.”?

Crucially, Mr Cann says it is important to remember that energy supply is a “long-term game”?.

“The world assumes that energy transitions can happen far quicker than they actually can. We’ve seen a strong emphasis on renewables in Europe, but it still only accounts for a small fraction of energy generation.

“It is going to take a long time. It’s a marathon, not a sprint.”?

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