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π Economy π Energy
Oil to lithium, the energy transition is shuffling the cards for global politics

Gas: intermediate energy source or energy of the future?

Olivier Massol, Professor at the Centre for Energy Economics and Management at IFP School
On May 13th, 2021 |
4 mins reading time
2
Gas: intermediate energy source or energy of the future?
Olivier Massol
Olivier Massol
Professor at the Centre for Energy Economics and Management at IFP School
Key takeaways
  • After 15 years of growth supported by the American shale gas boom, this energy source – which represents 25% of global consumption – is at a crossroads.
  • Proponents of gas consider that its “golden age” is far from over, given the abundance of resources at a reasonable price and its industrial infrastructure, which could be reused for “green gas” (bio-methane, hydrogen).
  • Those in favour of moving away from gas believe that demand could decrease with the momentum of public policies aimed at reducing emissions.

Gas returns to the forefront

In the ear­ly 2000s, the main issue raised in dis­cus­sions about gas was the fear of becom­ing increas­ing­ly depen­dent on sources locat­ed out­side the OECD. There were two kinds of respons­es around the world, which in large part struc­tured devel­op­ments in the inter­na­tion­al gas scene over the next sev­er­al years.

The first response, which was Europe’s pre­ferred option, is based on demand. For the Euro­pean Union, the relent­less growth in gas depen­den­cy (cf. fig. 1) and the signs that Rus­sia was plan­ning to rebal­ance their export pol­i­cy in favour of Chi­na unde­ni­ably encour­aged proac­tive poli­cies aim­ing to reduce gas con­sump­tion, espe­cial­ly in the elec­tric­i­ty gen­er­a­tion sec­tor1. Com­bined with the effects of the reces­sion and the slow­ing down of indus­tri­al activ­i­ty, these poli­cies effec­tive­ly suc­ceed­ed in curb­ing growth in gas con­sump­tion, which has remained below the peak seen in 2010 (cf. fig. 1).

Fig­ure 1: Increased depen­den­cy of EU27 + Unit­ed King­dom combined

The sec­ond response focus­es on sup­ply. The high prices preva­lent in the ear­ly 21st cen­tu­ry boost­ed invest­ment, notably in explo­ration and extrac­tion tech­niques inno­va­tion. In terms of explo­ration, there were suc­cess­es in new regions (East­ern Mediter­ranean, Mozam­bique, Tan­za­nia, Sene­gal and asso­ci­at­ed gas in pre-salt petro­le­um reserves in Brazil), which con­tributed to a shift in per­cep­tion that gas resources are nec­es­sar­i­ly geo­log­i­cal­ly scarce2. As for tech­nol­o­gy, the great­est devel­op­ment was seen in the Unit­ed States, with the swift and unex­pect­ed boom in uncon­ven­tion­al gas pro­duc­tion – true Schum­peter­ian inno­va­tion spear­head­ed by entrepreneurs.

This tech­nol­o­gy rev­o­lu­tionised Amer­i­can gas pro­duc­tion, which until that point seemed des­tined for an inevitable decline. The boom enabled the coun­try to first become self-suf­fi­cient, then an exporter of liq­ue­fied nat­ur­al gas (LNG). Beyond the imme­di­ate effects on the Amer­i­can ener­gy sec­tor (pre­ma­ture down­grad­ing and recon­ver­sion of infra­struc­ture intend­ed for import­ing LNG, drop in gas prices which stim­u­lat­ed con­sump­tion, specif­i­cal­ly replac­ing coal for pow­er gen­er­a­tion), many dis­rup­tions in the eco­nom­ic and geostrate­gic spheres accom­pa­nied this upswing.

An inter­na­tion­al trade revolution

From an eco­nom­ic stand­point, the Amer­i­can LNG boom had a pro­found effect on the way that inter­na­tion­al gas trade was organ­ised, by accel­er­at­ing its “com­modi­ti­sa­tion”. His­tor­i­cal­ly, this sec­tor was dom­i­nat­ed by long-term con­tracts (10 years or more), which were rel­a­tive­ly inflex­i­ble and spec­i­fied restric­tions on import des­ti­na­tions, fixed vol­umes, prices that were in large part indexed to gas prices, and rigid naval logis­tics along set routes. Due to the unex­pect­ed increase in Amer­i­can pro­duc­tion, the inter­na­tion­al LNG mar­ket expe­ri­enced excess sup­ply, which strength­ened importers’ nego­ti­at­ing pow­er. They were able to obtain more adapt­able con­trac­tu­al terms (such as the pos­si­bil­i­ty to redi­rect car­go or greater vol­ume flex­i­bil­i­ty) and index the mar­ket prices of nat­ur­al gas. This new set-up pro­vid­ed a favourable envi­ron­ment for inter­con­ti­nen­tal arbi­tra­tions. Con­se­quent­ly, the LNG mar­ket became more glob­alised3.

Geostrate­gic disruptions

The Amer­i­can shale gas boom also had seri­ous geostrate­gic reper­cus­sions, beyond sim­ply putting the plan to cre­ate a gas ver­sion of the Orga­ni­za­tion of the Petro­le­um Export­ing Coun­tries (OPEC) on the back burn­er. In the Mid­dle East, the big Qatari LNG export chains that planned to export to the Unit­ed States had to find new prospects. For Iran and its immense reserves, the excess sup­ply sit­u­a­tion made devel­op­ing export projects dif­fi­cult. In Asia, Amer­i­can LNG allowed for diver­si­fi­ca­tion, pro­vid­ing alter­na­tives to resources locat­ed in the Mid­dle East, South-East Asia and Aus­tralia. What’s more, it is well-known that for cer­tain Asian import coun­tries (par­tic­u­lar­ly South Korea and Japan), defence and nation­al secu­ri­ty con­sid­er­a­tions played a role in the deci­sion to import Amer­i­can LNG. With Chi­na an LNG importer, the gas issue has also sparked trade dis­putes with the Unit­ed States.

Amer­i­can LNG plays a role in Europe as well, even when it’s not import­ed. For exam­ple, after a new regasi­fi­ca­tion ter­mi­nal opened in Lithua­nia, Russ­ian com­pa­ny Gazprom (their dom­i­nant sup­pli­er) chose to reduce its prices to avoid the risk of Amer­i­ca mov­ing in. There­fore, excess sup­ply strong­ly curbs the mar­ket pow­er of dom­i­nant sup­pli­ers out­side the EU.

Future stakes

In a well-known study from 2011, the Inter­na­tion­al Ener­gy Agency (IEA) pre­dict­ed the dawn of a “gold­en age of gas”. They sup­port­ed their con­tention by high­light­ing the abun­dance of reserves, the low cost of Amer­i­can gas (less than $4/million Btu) and the flex­i­bil­i­ty of gas-gen­er­at­ed ther­mo­elec­tric­i­ty, which makes it a good coun­ter­part to renew­able energy.

But is the future of gas real­ly so bright? It is true that nat­ur­al gas cur­rent­ly rep­re­sents near­ly one quar­ter of inter­na­tion­al pri­ma­ry ener­gy con­sump­tion, and this pro­por­tion is grow­ing4. But beyond the next decade, the role of gas in the tran­si­tion to a low-car­bon world remains uncer­tain, and it’s impor­tant to remem­ber the pros and cons when dis­cussing this source of energy.

In the pros col­umn, at least three things sup­port main­tain­ing this source of ener­gy. The first is its ver­sa­til­i­ty – gas can be used for a range of appli­ca­tions, includ­ing elec­tric­i­ty pro­duc­tion, heat­ing res­i­den­tial and ter­tiary build­ings, sup­ply­ing indus­tri­al fur­naces, fuel for trans­port, and as a raw mate­r­i­al in the chem­i­cal indus­try. The sec­ond is the fact that a sig­nif­i­cant reserve of trans­port and dis­tri­b­u­tion infra­struc­ture exists, which could be used to obtain short-term emis­sion reduc­tions. The car­bon foot­print for gas is small­er than oil’s, coal’s and lignite’s. Replac­ing these big­ger pol­luters with nat­ur­al gas on a large scale would there­fore reduce green­house emis­sions. The third argu­ment is that this infra­struc­ture can also be used to sup­port the devel­op­ment of renew­able gas­es (such as bio-methane and hydro­gen). In this regard, nat­ur­al gas is often pre­sent­ed as a “tran­si­tion fuel,” which could assist in mov­ing away from petro­le­um or coal prod­ucts and towards “green” gases. 

Oppo­nents of nat­ur­al gas point out that it remains an over­all con­trib­u­tor to glob­al warm­ing and should be elim­i­nat­ed as quick­ly as pos­si­ble from the ener­gy mix. If cli­mate objec­tives are to be respect­ed, the gas industry’s capac­i­ties must be reduced.

Recent poli­cies in Europe and Japan fall in the sec­ond camp, aim­ing to grad­u­al­ly move away from nat­ur­al gas. How­ev­er, these two large economies can­not influ­ence the future of gas demand alone. The “cen­tre of grav­i­ty” of inter­na­tion­al con­sump­tion is now locat­ed out­side of OECD coun­tries, and we will need to track which path these economies choose.

At the same time, sep­a­rate to these dis­cus­sions on demand and the future role of gas, it will be inter­est­ing to keep an eye on sup­ply. While scarci­ty no longer seems to be an issue for now, ques­tions remain on the devel­op­men­tal con­di­tions for cer­tain recent­ly dis­cov­ered reserves. Con­cern­ing shale gas, we might ask whether the Amer­i­can mod­el, based on extract­ing uncon­ven­tion­al gas, can be repli­cat­ed. Increased Amer­i­can pro­duc­tion is cur­rent­ly rais­ing hopes that this could be repro­duced in oth­er coun­tries, par­tic­u­lar­ly Chi­na and Argenti­na. How­ev­er, the exam­ples of Poland and Alge­ria – where ini­tial enthu­si­asm has died down – show that hav­ing access to the right geol­o­gy do not nec­es­sar­i­ly cor­re­late with suc­cess. A col­lec­tion of oth­er fac­tors, includ­ing indus­tri­al infra­struc­ture, water resources and pipelines, are also necessary.

1Specif­i­cal­ly, the famous “20–20-20” objec­tive from the 2008 cli­mate and ener­gy pack­age, which aimed to: (i) increase the pro­por­tion of renew­ables in the Euro­pean ener­gy mix to 20%; (ii) reduce EU mem­ber states’ CO2 emis­sions by 20%; (iii) increase ener­gy effi­cien­cy by 20% by 2020
2Despite the pro­gres­sive extrac­tion and deple­tion in mature regions (e.g. East­ern Europe), the vol­ume in proven reserves locat­ed out­side the USA and the four coun­tries with the largest gas reserves (Rus­sia, Qatar, Iran, Turk­menistan) increased by more than 15% between 2004 and 2019 (source: BP Sta­tis­ti­cal Review 2020)
3It should also be not­ed that this com­modi­ti­za­tion of LNG also affect­ed the industry’s struc­ture and allowed for new busi­ness mod­els to emerge, based on mid­stream gas, i.e. inter­me­di­aries between sources of LNG and con­sumers, sim­i­lar to the inte­grat­ed sup­ply, trad­ing and mar­ket­ing strate­gies imple­ment­ed by big play­ers like Shell and Total
4Fig­ures pub­lished in the 2020 BP Sta­tis­ti­cal Review show that inter­na­tion­al gas con­sump­tion has increased faster (+2.5% per year on aver­age) than pri­ma­ry ener­gy (+1.9%) since 1990

Contributors

Olivier Massol

Olivier Massol

Professor at the Centre for Energy Economics and Management at IFP School

Olivier Massol is Professor at the Centre for Energy Economics and Management at IFP School and Executive Director of the Gas Economics Chair. His teaching and research focus on the economic analysis of energy markets and industries.