ENERGY COMPANIES do not have a seat at the high climate table convened by President Joe Biden on April 22-23, to which he invited 40 other world leaders to discuss how to expedite the transition dirty energy. On the sidelines, coal companies will abandon efforts to reduce demand in Asia and oil drillers will scowl in support of electric cars. Companies that have invested heavily in natural gas will be particularly watched. As the energy transition gains momentum, no future of fuel is smokier than that of the least dirty hydrocarbon.
The promoters see natural gas as the “fuel of transition” towards a greener world. They include the five largest international oil companies: ExxonMobil, Chevron, Royal Dutch Shell, Total and BP. These supermajors saw gas drop from 39% of their combined hydrocarbon production in 2007 to 44% in 2019 (see graph 1). That year, producers approved a record level of liquefied natural gas (LNG) capacity. These projects will be put online in a few years. Shell, which in 2016 paid $ 53 billion for BG, a British gas giant, now says its oil production peaked in 2019 but will expand its gas business with annual investments of around $ 4. billions of dollars. Total expects its crude production to decline over the next decade, but for gas, it drops from 40% to 50% of sales. In February, Qatar Petroleum, a public giant, announced it would launch the largest LNG project in history.
Yet the debate is intensifying over whether gas is a bridge or a dead end. Mr Biden and his counterparts in other countries appear to be serious about achieving net zero emissions by 2050, which would require accelerating the phase-out of all fossil fuels, including gas, unless they are associated with a technology to capture and store emissions. Cheap wind and solar power is already threatening gas-fired electricity, especially in America and Europe. Even if demand appears uncertain, cheap gas from state-owned companies such as Qatar’s will increase global supply. Some companies’ bets will go badly wrong.
On the demand side, gas remains a reasonable bet in certain respects. A gas plant spits out about half of the emissions of a coal plant. Fuel also benefits from various sources of demand. In addition to generating electricity, gas is used to make fertilizers and generate heat for buildings and industry. Unlike car exhaust, emissions from a factory can theoretically be captured and stored underground. The gas can also be used to generate hydrogen, which in turn can serve as a form of long-term energy storage.
However, business investment did not always go as planned. A gas rush between 2008 and 2014 was part of a larger rush by energy giants, as rising energy prices spurred investment without worrying about costs, says Goldman’s Michele Della Vigna Sachs, an investment bank. In late 2019, Chevron said it would cut as much as $ 11 billion, largely due to the underperformance of shale gas assets in the Appalachians. Gas accounted for the bulk of the $ 15-22 billion write-downs announced by Shell last June. In November, ExxonMobil announced it would reduce the value of its gas portfolio by $ 17 billion to $ 20 billion, its largest depreciation ever. ExxonMobil’s $ 41 billion purchase in 2010 of XTO Energy, a shale gas company, is perhaps the least timely investment made by an oil major in the past 20 years.
Two big questions now weigh on future demand, which are difficult to answer with certainty. The first is the speed with which governments limit carbon emissions. The extraction, liquefaction and transport of gas produce their own emissions, in addition to those from its eventual combustion. Gas production also releases methane, a greenhouse gas that is about 80 times more potent than carbon dioxide over a 20-year period. Adding in methane leaks from hydraulic fracturing or pipelines, the Natural Resources Defense Council, an environmental group, calculates that U.S. LNG exports over the next decade could produce greenhouse gases equivalent to annual emissions. about 45 million new cars – not counting the combustion of equipment for energy.
In response to climate concerns, the Netherlands and some Californian cities have already banned gas in new buildings. Great Britain will do it from 2025. “To say the least”, declared in January Werner Hoyer, director of the European Investment Bank, “the gas is finished”. John Kerry, Mr Biden’s climate envoy, warned in January that gas infrastructure was at risk of becoming stranded assets. The International Energy Agency (IEA), an intergovernmental group, estimates that demand growth will slow to around 1.2% per year until 2040, from an average of 2.2% in 2010-19. If governments act more aggressively to limit temperatures, demand could be lower in 2040 than in 2019 (see graph 2). BP offers a more bearish scenario: If the world reached net zero emissions by 2050, gas demand would peak in the next few years and fall by almost half by mid-century. “For the company to survive,” says Massimo Di Odoardo of Wood Mackenzie, an energy consultancy, “it’s not just about marketing gas. It’s about marketing gas and managing emissions. “
The second question about demand is how quickly competing technologies are advancing. According to BloombergNEF, a data provider, about two-thirds of the world’s population already live in places where electricity from new wind and solar farms is cheaper than that from new gas-fired power plants. Electric heat pumps threaten gas in buildings. In the future, gas with carbon capture and storage (CCS) could prove to be more expensive than hydrogen produced by renewable electricity. The $ 2 billion infrastructure bill proposed by Biden includes support for CCS, but also for technologies that could challenge the role of gas in industry, electricity and heating. aspires to make its members leaders in hydrogen, which some believe could one day replace gas in many countries. applications while using existing pipelines and other infrastructure.
Then there is the issue of supply. Maarten Wetselaar, Shell’s gas chief, says the industry once expected the market to be under-supplied and the price to be set by the marginal customer. Instead, he notes, the American shale means the world has a lot of gas. In addition, private companies must compete with state-owned enterprises from Qatar and Russia, which can extract gas cheaply and have a political imperative to monetize reserves while they can. Qatar’s new project will increase its LNG capacity by 40% by 2026.
Additionally, a growing spot market and volatile demand have made LNG buyers less interested in traditional long-term contracts. At least a quarter of the LNG supply is now without a contract, says Di Odoardo. As approved projects go live, the share of uncontracted LNG could exceed 50% by 2030.
All of this is prompting some industry players to rethink their adoption of gas. Last July, Dominion Energy, a U.S. utility, canceled its controversial pipeline plans and sold all of its pipeline operations to Berkshire Hathaway, a huge conglomerate, for $ 9.7 billion. In November, Engie, a French energy company, abandoned its plan to sign an LNG contract with NextDecade, an American company, over concerns about shale emissions. Other companies are trying to adapt to a gas activity which should become both more competitive and more complex.
The big players are now applying a higher cost of capital to their investments in hydrocarbons, notes Mr. Della Vigna, with more emphasis on profitability. The scale also turns to their advantage.
Take Shell. The company’s share of gas production has actually declined in recent years as it has sold less profitable gas assets in America and Nigeria. Mr Wetselaar maintains that Shell is well positioned to face new market realities. Unlike smaller players, who depend on long-term supply contracts to attract finance for new projects, Shell can use its balance sheet. The negotiation skills facilitate the sale of LNG to various buyers. For those who want zero-emission energy, Shell has already sold ten cargoes of “carbon neutral” LNG, associated with offsets.
Total, another major European oil company, plans to double its LNG sales over the next decade, while touting its plans to reduce methane emissions. ExxonMobil believes its new investments in CCS will both limit emissions and support its traditional business.
Such plans are unlikely to affect those who want investments in all fossil fuels to plunge. Business plans can be disrupted by an unlimited number of forces: in March, an attack in Mozambique prompted Total to suspend a giant LNG project there. The changing market means that only the most profitable and secure projects backed by the strongest companies are likely to move forward.
NextDecade, failing to secure Engie as a client, deferred a final investment decision on a proposed facility in Texas and scrapped another. It had also sought to build an LNG import terminal in Ireland. In January, Irish officials allowed a preliminary deal with NextDecade to expire. The gas may not be quite finished. But industry can increasingly be defined not by projects that advance but by those that do not. ■