Gas at the crossroads

2022-05-02 0 By

The risk profile for gas and oil has always been different, most notably because of the high monetization barriers.But as pressure mounts to move to a low-carbon energy system, there is a growing divide between viewing natural gas as a “bridge fuel” essential to the energy transition and as “another fossil fuel”.For those who advocate the continuation of natural gas as the cleanest hydrocarbon and as a means to smooth the transition to low-carbon fuel types, the trajectory of future demand varies widely, depending on the policy choices of multiple producers and consumers.Working with natural gas supporters, the argument is that energy is still a luxury in some developing countries, where natural gas can increase energy access and lower emissions, while biomass and coal are substitutes.Elsewhere, the ability to make maximum use of existing natural gas infrastructure and potentially use that infrastructure to produce low-emission gases, such as blue hydrogen, is an advantage.In contrast, natural gas is at risk of being written off because of its emissions profile in the net zero-focused era, with the IEA projecting a path to net zero by 2050, requiring no new oil or gas projects to be signed after 2021.This message and broader concerns about the long-term viability of fossil fuel use have filtered through to the financial sector, including multilateral financial institutions, which are increasingly avoiding funding natural gas projects, as well as climate litigation against natural gas projects and other fossil fuels as part of them.Work to align all aspects of policy with the goals of the Paris Agreement.The most recent IHS Markit energy scenario captures some of the possibilities for natural gas under different public policies, particularly with regard to climate.Under the base case, global gas production in 2050 is 30% higher than in 2020.In the green rules, which require more aggressive government action on climate (though not enough to achieve net zero emissions by 2050), gas production in 2030, then declines, but only a cumulative 3% decline from 2020 to 2050.In either case, new investments in exploration and production will be needed to meet global energy demand by 2050, but the requirements for producers will vary widely depending on cost and project portfolio.Which projects go forward will depend on a number of factors, including those that are largely beyond the government’s control, such as resource availability;Partner priorities, including portfolio selection of national Oil Companies (NOCs) and international Oil Companies (iocs);And the availability of funds.However, the government does have multiple levers at its disposal, particularly in balancing energy and climate policy, upstream terms and conditions, domestic market obligations including pricing, and availability of gas commercialisation infrastructure.Some of these factors affect our above-ground risk indicators, which have been modified to account for the difference between oil and gas.Our export risk indicators take into account the availability of infrastructure, export regulatory restrictions including domestic supply obligations (DSO), security risks including piracy, vandalism or terrorism, and the risk of international sanctions restricting exports.Natural gas generally has a lower export risk score than oil, reflecting differences in physical characteristics and infrastructure barriers.This risk is also closely related to the type of producer, with export access posing a particular challenge for frontier and early stage producers such as Cyprus, Suriname and Kenya.This is especially true in the current environment, where the existing infrastructure and availability of low-cost, substantial resources provide some assurance of continued competitive advantage for major gas-heavy producing states, even in slower growth markets, suggesting that business as usual may remain an option for this elite group.Net importers may not have export infrastructure and are more likely to have limited access to international markets due to domestic supply obligations, which may discourage external investment interest;On the contrary, they do have the advantage of host governments playing a greater role in balancing upstream policies with energy demand approaches, thus providing investors with some assurance about future gas demand.Given current investor and financial trends, the ability of host governments to adjust above-ground drivers to different risk profiles is more important than ever in determining which projects move forward and which resources remain underground.