Natural Gas Is Bringing Down Big Oil

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Abstract

g the infrastructure they already have to generate electricity using what is largely domestic coal. But it was assumed that relatively low gas prices, plus carbon emissions savings over the transition, would justify the higher upfront spending on new gas facilities.After international gas prices multiplied by a factor of ten or more last year, both Beijing and New Delhi decided natural gas was too unstable to justify the spending. They didn’t announce such a policy change, they just did it. Their new policies involve a quicker and more complete transition to solar, wind, and battery backup as the least expensive means for reducing carbon emissions, and continuing to use coal to generate electricity until that transition to renewables is complete. China and India are largely skipping over the natural gas stage — taking the direct path to renewables that many climate activists and environmental groups have long recommended.This is why China opposes naming coal at the upcoming UN climate talks in Dubai as a fossil fuel that should be phased out, while avoiding any mention of oil and gas to placate oil exporting countries.Europe had been gradually reducing use of both natural gas and coal even before the Ukraine War brought a painfully abrupt cutoff in their supply of Russia gas in 2022. Germany and the EU responded by paying absurdly high prices for replacement LNG, thereby contributing to turning China and India away from natural gas. The Europeans have also reduced their own use of gas much more sharply than it had been doing, further weakening prospects for the fuel.What Does It Mean?Renewables are not only being adopted faster, they will take on more of the job of power generation than was projected earlier. Experience has shown that power grids can operate reliably and relatively cheaply with large percentages of solar, wind, and battery backup in the generation mix. The portion of grid power that needs to come from gas-or coal-fired plants — or from other non-intermittent baseload sources such as nuclear or hydro — may well be as little as 10%, according to recent findings from the US government’s National Renewable Energy Laboratory.Big oil and its supporters often point to multi-decade LNG contracts signed by Chinese and European buyers over the last couple of years to counter doomsayers on internationally traded gas such as the IEA — and myself. However, the volumes involved in such contracts are tiny compared to the pipeline gas sales Russia lost and is unlikely to replace. For example, Shell, France’s TotalEnergies, and Italy’s Eni recently signed contracts to buy a combined 11 billion cubic meters (8 million tons) per year of LNG from top Mideast producer Qatar for a period of almost 30 years. By comparison, though, Russia’s Gazprom is still sending nearly 30 Bcm/yr of pipeline gas to Europe, and that’s down from almost 150 Bcm/yr in 2021.Natural gas isn’t used only in power generation,

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but power generation has been the presumed growth area for gas for decades. Gas is also used in manufacturing, but that’s not growing, and efforts are underway to shift these activities to electricity. Natural gas is also used to heat buildings, but there it faces growing competition from much more efficient electric heat pumps.These calculations about natural gas versus coal and renewables may add up differently in large gas-producing and exporting regions such as North America and Russia. Although both also have some coal, they have much more gas, and they benefit in terms of emission counts by shifting more generation off coal and onto natural gas. The US can brag at climate conferences that its emissions have dropped steadily over the last decade, despite a mediocre performance when it comes to renewables. The savings came in large part from utilities switching off coal and onto to gas because US and Canadian gas has mostly been cheaper than coal.Relatively low domestic natural gas prices also help gas compete for longer against renewables in these areas. US determination to <a href="https://readmedium.com/us-still-stuck-on-oil-029e062c9944">minimize reliance on China</a> — maker of the cheapest and most plentiful solar panels and components — increases the likelihood that the US will remain more reliant on natural gas for longer. Russia’s loss of its vital European customer base means much of its gas will become “stranded assets.” Moscow is still hoping to sell more to China, but so far, the Chinese have shown no more interest in additional Russian natural gas than in anybody else’s. This gives Russia every incentive to sell natural gas cheaply at home and to friendly neighbors.One thing this natural gas-heavier US transition path means is that gas could remain a bigger contributor to earnings for American companies such as ExxonMobil and Chevron — which are depending heavily on US shale oil and gas — than it will for European-based majors such as Shell, which tend to have a more international focus when it comes to gas. That isn’t to say that natural gas has strong growth prospects even in North America, though. Solar is leading the pack in additions to generating capacity in that relatively gas friendly part of the world nearly as much as it is elsewhere.Investing heavily in natural gas as the “sustainable” fossil fuel has proven to be a bad bet for the oil companies. That’s proving a hard pill to swallow, and some of these companies are still in denial. But it’s the path the transition is taking.<figure id="091d"><img src="https://cdn-images-1.readmedium.com/v2/resize:fit:800/1*cF5xNOQDUDA79fYIDGGpCg.jpeg"><figcaption><a href="https://commons.wikimedia.org/w/index.php?curid=105133654">“Seri Balqis (51053356116)</a>” by <a href="https://www.flickr.com/people/93416311@N00">Tim Green from Bradford, UK</a> is licensed under <a href="https://creativecommons.org/licenses/by/2.0/?ref=openverse">CC BY 2.0</a>.</figcaption></figure></article></body>

Natural Gas Is Bringing Down Big Oil

Natural gas has fallen off a cliff towards international obscurity over the nearly two years since Russia invaded Ukraine. Conventional wisdom has long been that natural gas would be the longest-living of the three main fossil fuels, with coal use dying off first, followed by oil, and gas benefiting from its lower carbon-emissions count to go on being used nearly to the mid-Century “net zero” deadline.

No longer. The International Energy Agency (IEA) that sits atop the heap of international supply-demand prognosticators has made it official: Natural gas demand may edge up ever so slightly for a few more years, but by 2030 latest, it will be in decline. In fact, the IEA now expects demand for all three fossil fuels to peak by 2030, with gas going first, ahead of oil and coal. That’s the ever-cautious IEA view, and it expects the subsequent decline in fossil fuel use to be slow. Peak demand for all fossil fuels is coming sooner because solar is spreading faster, and that peak will come sooner still if economic growth is slow or even non-existent. The new order among the fossil fuels has more complex reasons.

Who cares if international gas sales decline sooner than coal, you may ask? One answer is the big oil and gas companies that bet heavily on natural gas as a slightly less carbon-emitting fuel that would extend their ability to profit from fossil fuel production even as oil demand shrinks. Gas was a huge part of some of these companies’ life-support structure. Another loser is Russia, which will leave a lot more “stranded” natural gas in the ground. Different companies and countries profit from coal sales.

Whether this will mean more or less climate-convulsing CO2 and methane in the atmosphere depends on the net effect of a tradeoff between more solar sooner and more coal-fired electricity for longer. It’s a good news-bad news story that I think will have a positive net emissions outcome. But no one knows.

What Happened?

The fate of natural gas as an internationally traded fuel was sealed by the massive price surge that accompanied Russia’s 2022 invasion of Ukraine, making Moscow both the perpetrator and the victim, since it was one of the biggest suppliers of gas to markets beyond its borders. Absurdly high spot prices for LNG — natural gas cooled and compressed so it will fit on a ship — sent China and India rushing back to good old reliable coal but also to quicker adoption of new renewables, especially solar.

Earlier IEA and other forecasts that showed natural gas acting for decades as a “bridge fuel” between carbon-heavier coal and carbon-free renewables in power generation were premised on a quick buildout of gas infrastructure. Importing more gas would certainly cost China and India — the top sources of projected new demand — more than expanding the infrastructure they already have to generate electricity using what is largely domestic coal. But it was assumed that relatively low gas prices, plus carbon emissions savings over the transition, would justify the higher upfront spending on new gas facilities.

After international gas prices multiplied by a factor of ten or more last year, both Beijing and New Delhi decided natural gas was too unstable to justify the spending. They didn’t announce such a policy change, they just did it. Their new policies involve a quicker and more complete transition to solar, wind, and battery backup as the least expensive means for reducing carbon emissions, and continuing to use coal to generate electricity until that transition to renewables is complete. China and India are largely skipping over the natural gas stage — taking the direct path to renewables that many climate activists and environmental groups have long recommended.

This is why China opposes naming coal at the upcoming UN climate talks in Dubai as a fossil fuel that should be phased out, while avoiding any mention of oil and gas to placate oil exporting countries.

Europe had been gradually reducing use of both natural gas and coal even before the Ukraine War brought a painfully abrupt cutoff in their supply of Russia gas in 2022. Germany and the EU responded by paying absurdly high prices for replacement LNG, thereby contributing to turning China and India away from natural gas. The Europeans have also reduced their own use of gas much more sharply than it had been doing, further weakening prospects for the fuel.

What Does It Mean?

Renewables are not only being adopted faster, they will take on more of the job of power generation than was projected earlier. Experience has shown that power grids can operate reliably and relatively cheaply with large percentages of solar, wind, and battery backup in the generation mix. The portion of grid power that needs to come from gas-or coal-fired plants — or from other non-intermittent baseload sources such as nuclear or hydro — may well be as little as 10%, according to recent findings from the US government’s National Renewable Energy Laboratory.

Big oil and its supporters often point to multi-decade LNG contracts signed by Chinese and European buyers over the last couple of years to counter doomsayers on internationally traded gas such as the IEA — and myself. However, the volumes involved in such contracts are tiny compared to the pipeline gas sales Russia lost and is unlikely to replace. For example, Shell, France’s TotalEnergies, and Italy’s Eni recently signed contracts to buy a combined 11 billion cubic meters (8 million tons) per year of LNG from top Mideast producer Qatar for a period of almost 30 years. By comparison, though, Russia’s Gazprom is still sending nearly 30 Bcm/yr of pipeline gas to Europe, and that’s down from almost 150 Bcm/yr in 2021.

Natural gas isn’t used only in power generation, but power generation has been the presumed growth area for gas for decades. Gas is also used in manufacturing, but that’s not growing, and efforts are underway to shift these activities to electricity. Natural gas is also used to heat buildings, but there it faces growing competition from much more efficient electric heat pumps.

These calculations about natural gas versus coal and renewables may add up differently in large gas-producing and exporting regions such as North America and Russia. Although both also have some coal, they have much more gas, and they benefit in terms of emission counts by shifting more generation off coal and onto natural gas. The US can brag at climate conferences that its emissions have dropped steadily over the last decade, despite a mediocre performance when it comes to renewables. The savings came in large part from utilities switching off coal and onto to gas because US and Canadian gas has mostly been cheaper than coal.

Relatively low domestic natural gas prices also help gas compete for longer against renewables in these areas. US determination to minimize reliance on China — maker of the cheapest and most plentiful solar panels and components — increases the likelihood that the US will remain more reliant on natural gas for longer. Russia’s loss of its vital European customer base means much of its gas will become “stranded assets.” Moscow is still hoping to sell more to China, but so far, the Chinese have shown no more interest in additional Russian natural gas than in anybody else’s. This gives Russia every incentive to sell natural gas cheaply at home and to friendly neighbors.

One thing this natural gas-heavier US transition path means is that gas could remain a bigger contributor to earnings for American companies such as ExxonMobil and Chevron — which are depending heavily on US shale oil and gas — than it will for European-based majors such as Shell, which tend to have a more international focus when it comes to gas. That isn’t to say that natural gas has strong growth prospects even in North America, though. Solar is leading the pack in additions to generating capacity in that relatively gas friendly part of the world nearly as much as it is elsewhere.

Investing heavily in natural gas as the “sustainable” fossil fuel has proven to be a bad bet for the oil companies. That’s proving a hard pill to swallow, and some of these companies are still in denial. But it’s the path the transition is taking.