Outlook for Fossil Gas is “Bumpy”

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Wood Mackenzie’s recent press release highlights the difficulties that may lie ahead for the gas industry. As the preeminent global research and consultancy business powering the natural resources industry, Wood Mackenzie’s voice is a voice that should be heard.

Issues like high prices, constant government and societal pressure, and even the weather will have significant effects on the gas industry over the next 5 years. Milder winter weather in Europe and Asia will put downward pressure on prices, as would the commissioning of Nord Stream 2 — currently at risk due to Russia’s actions in Ukraine.

The enthusiasm for carbon-offset LNG appears to be fading, partly because of high LNG prices, but also as a consequence of increased criticism of perceived “greenwashing” due to  the low quality and costs of the offsets. As a result, the LNG industry is likely to turn its focus to CO2 reduction across the value chain.

Wood Mackenzie reports, “Producers have been exploring programmes to reduce flaring, venting and methane leakages, while LNG developers in the US have been looking at procuring gas certified by third parties that is closer to the plant and with low methane emissions (responsibly sourced gas, or RSG). However, more capital-intensive projects, including use of low-carbon power and/or carbon capture and storage (CCS), remain at an evaluation stage.

“Despite strong economic growth in Europe, gas demand in industry and power is down 4% since the summer, compared to the past five years. In Asia, LNG demand has continued to increase as most supply is priced at legacy oil-indexed contracts, currently trading at half the value of Asian LNG spot prices.”

Time will tell whether Asian demand will fall when these contracts end and new prices are implemented.

Increasing investment in renewables and batteries is limiting the growth in gas demand. The recent EU proposal to support biomethane and hydrogen will accelerate the movement away from natural gas as an energy resource. Despite the recognition by the EU of gas plants as a transitional investment demand, growth will depend on price reduction. 

“And the proposed CO2 emission cap of 270g/KWh, alongside the commitment to use at least 30% of renewable or low carbon gas by 2026 and 100% by 2035, means that the use of conventional natural gas would need to reduce over time if a gas fired power plant has to be classified as ‘transitional’. The use of unabated natural gas in the EU is set to decline, even if the EU classifies investments in gas-fired plants as transitional investments,” Vice President of Gas and LNG Research, Massimo Di Odoardo said.

It is expected that global gas demand will remain constant in the short term, but the role of gas in the energy transition is uncertain and likely to reduce as prices remain high.

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David Waterworth

David Waterworth is a retired teacher who divides his time between looking after his grandchildren and trying to make sure they have a planet to live on. He is long on Tesla [NASDAQ:TSLA].

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