At the end of May, the International Energy Agency reported that progress toward sources of clean energy is falling short of the levels needed to keep the global temperature increase at 2 °C or less. According to its report, Tracking Clean Energy Progress 2015, progress is being overshadowed by the expansion of inefficient coal-fired power generation.
"Low-priced coal was the fastest-growing fossil fuel in 2013, and coal-fired generation increased in all regions," the report says. "Newer coal plants can perform to a relatively high standard. But where coal-fired capacity is expanding, in emerging economies for example, less efficient, subcritical units dominate, primarily due to the absence of minimum efficiency policies."
A few weeks later, at the World Gas Conference in June, six European oil and gas utilities – BG Group, BP, Eni, Shell, Statoil and Total – came together to sign an open letter arguing for a worldwide system of pricing carbon emissions. It urged governments to take action at the UN Climate Change Summit in December.
"We are also united in believing such action should recognise the vital roles of natural gas and carbon pricing in helping to meet the world's demand for energy more sustainably," their letter reads; it does not exclude a role for renewable like wind and solar panels, but states that action is needed on all fronts.
Natural gas, the companies say, burns the cleanest of all fossil fuels – with typically half the carbon emissions of coal.
As gas and oil production are linked, the current low price of oil does not help the North Sea industry. Still, some interesting developments are on their way for Europe, at least according to the IEA's 2015 Medium-Term Gas Market Report, released last month.
Predictably, the report notes that lower oil prices will have a major impact on gas upstream and infrastructure investment on the supply side. Companies are cutting capital expenditures and refocusing on core assets with fast returns, which will unavoidably lead to slower production growth over the medium term. Due to their capital-intensive nature and long lead times, liquefied natural gas (LNG) projects, which enable natural gas to be transported at 1/600th of its normal volume, are soft targets for investment reductions. It says that several of them are likely to be delayed or even cancelled. If current low prices persist, LNG markets could start tightening substantially by 2020, with demand gradually absorbing the large supply upswing expected over the next three years, according to the report.
And during that time, some North Sea production will scale back: the IEA predicts that natural gas production in Western Europe will fall by a quarter from its 2010 production.
In the short term, gas markets will need to cope with a flood of new LNG supplies from all over the world. The report projects global LNG export capacity to increase by more than 40% by 2020, with 90% of the additions coming from new projects in Australia and the United States. Lower oil prices pose little risk to the timing of projects already under construction, the report says. Big importers include China and southeast Asian countries.
As LNG supplies rise over the next few years, Europe is likely to become an important consumer market, it predicts, stating that the region's LNG imports will roughly double between 2014 and 2020. Despite that expected rise in imports, Europe will not turn off the tap from Russia: European imports from Russia are predicted to remain constant. European gas import requirements are set to increase by almost one-third between 2014 and 2020. Some will come from Russia and the Caspian Sea, but most will come from LNG supply.
Globally, half (48%) of gas demand will be used for power, 27% for industry, 11% for transport and 9% for residential and commercial heating.
Also, outside of North America, shale gas is not likely to impact production in the medium term, according to Costanza Jacazio, senior gas analyst in the IEA gas, coal and power markets division. "Globally, the outlook is less positive than it was a couple of years ago," she says in reference to the report. "Development in China, in particular, has proved slower than expected. In August 2014, the Chinese government revised downwards its 2020 shale gas output target, to 30 billion cubic metres (bcm) from the 60-100 bcm mapped out in 2012.
"We have seen initial, encouraging developments in Argentina, where the investment climate has moderately improved. But few deals with foreign companies for development of the Vaca Muerta [Argentina] formation have been signed, as we are still in the early stages.
"So while not all is negative, in the medium term, shale gas will make only a small contribution to global gas production outside North America."
In another global LNG market outlook, BG Group's annual report published in March, Andrew Walker, vice president of global LNG, is also bullish about the global prospects for LNG in the medium term, not before.
"We expect the LNG market to become more volatile over the next few years as it responds to 'lumpy' supply and market-side additions plus [external] supply and demand factors." But the future remains bright: "Over the longer term, BG Group continues to expect LNG trade worldwide to exceed 400 million tonnes per year by 2025, representing an annual growth rate of around 5% – almost twice the rate of expected growth in global gas consumption."
Some of these trends, particularly falling production and increasing imports of natural gas, are likely to continue into the 2030s, according to BP's Energy Outlook 2035, published in February this year.
In his introduction to the report, BP chief executive Bob Dudley says that natural gas is set to become the fastest growing fossil fuel, meeting as much of the increase in global demand in 2035 (37% over 2013) as coal and oil combined. Also, since tankers carrying LNG can cross oceans, it will tend to unify the sale of gas worldwide: "We expect to see the market in gas become more global as liquefied natural gas integrates regional markets and leads to greater congruence in global price movements."
EU CONSUMPTION DOWN
Part of BP's report focused specifically on EU trends. Key is that primary energy consumption will be 6% smaller in 2035 than now. Power generation consumption is forecast to increase 7% by 2035, but other sectors, such as transport and industry, see declines. By then, fossil fuels will make up 66% of primary energy consumption, at which point, gas and oil will each account for 29% of consumption and renewables 18% (they are predicted to overtake coal in 2024).
The European focus also predicts that natural gas, mostly imported, will become much more dominant in the EU by 2035. First, less fuel will be made in the EU, and that would seem to include declining North Sea production: natural gas will decrease by 45% and oil 43% in the forecast period (and coal too: down 55%). Second, oil imports will also decline, by 20%, although oil's share of primary energy imports will remain high, at just under half (48%). So this means that net imports of natural gas will grow by 45%.
Sources of natural gas also diversify. Net imports of LNG nearly triple by 2035, becoming 30% of consumption by 2035 (it is 9% today). But the Russian pipelines are equally important, claiming a 31% share of consumption by 2035.
This article was published in the July 2015 supplement of Machinery magazine.
