“Natural gas is poised to enter a golden age,” said the International Energy Agency (IEA) in 2012. In 2014, it said the golden age would spread to China. But so far the gas industry is facing instead an age of lead. Prices are low, demand is short and investors in both production and gas power face heavy losses.
As the IEA said, gas meets the three “A”s – abundant, affordable and acceptable. New gas is being found and developed everywhere from North American shale fields, to giant liquefied natural gas (LNG) projects in Australia, to huge finds off the coasts of East Africa and Egypt. Gas prices have slumped – Asian LNG import prices, which averaged above $16 per million British thermal units last year, have fallen even more sharply than oil, to around $7.45, with Goldman Sachs seeing them at $4.75 by 2019. And gas is cleaner than oil and coal, while gas-fired power plants are simple and quick to build.
In North America, the golden age has been reality for several years. Booming shale production and low prices have boosted US consumption by 17 per cent since 2009, driving out coal. The US petrochemical industry has revived, and the country should start its first LNG exports in January.
Yet, outside North America, gas is struggling to find buyers. Environmentally-friendly Europe should be a natural home, particularly as Germany winds down its nuclear reactors. But sluggish economic growth, enforced expansion of renewable energy and poor policy has worked against gas. The EU’s carbon price is too low to persuade generators to switch away from polluting coal. Last year, EU gas demand was at its lowest since 1995, but the use of coal, though declining in the long-term, has not fallen since 2009.
Gas has been seen as the natural complement to intermittent renewable energy. The UK, fearing it will run short of electricity, has offered contracts for short-term back-up but the winners are diesel generators, dirty and expensive to operate, but quick and cheap to set up.
Middle East gas demand continues to rise quickly, but supply has not kept up due to government regulation of price and barriers to investment in new supply. Instead countries are turning to oil, coal and nuclear power, or suffering damaging blackouts.
Asia has been the big hope for demand growth, but the continent is turning instead to coal and renewable energy. 500 coal-fired power plants are being built in Asia, with another thousand in planning. Coal is cheap and often available locally in China, India and parts of south-east Asia. Even in Japan, the world’s biggest LNG importer, use of coal is forecast to grow and nuclear plants are being turned back on.
The gas industry has failed in two ways. The industry has created an enormous wave of supply, but pitched gas as a premium product, not the cheap and abundant fuel it needs to be to win Asian markets. Its new projects are simply too expensive.
And it has not advocated its own cause skilfully. Despite gas companies’ much greater financial resources and contribution to energy supply, they have been completely outmanoeuvred by promoters of renewables. They have failed to convince politicians, communities or environmentalists that their fuel is part of a clean energy future. The call by 10 leading gas companies in October for stronger climate policy and a global carbon price is right but has not been heard loudly enough before. Meanwhile, Russia’s geopolitical games have made its gas seem an unreliable source of supply for Europe.
Gas needs to return to its role as a clean, flexible and cheap fuel. That means engaging on more rational environmental policies, creating new markets, and delivering future gas projects at more reasonable costs. Achieve that, and the gas companies could still turn lead to gold.
Robin Mills is head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis