Does Natural Gas Qualify as a Transition Fuel?

A Modified version of article appeared in Sunday Mail, 25th of May, 2014.

By Constantinos Hadjistassou*, PhD

petro_pipelineAn unexpected consequence of the shale oil & gas boom in the US, which commenced in the mid-2000s, was that US coal exports have increased significantly. In fact, US coal shipments have doubled ever since to 100 million tons with a sizeable amount—about half of that— being diverted to Europe and Germany, in particular. Part of this trend is attributed to the economic crisis and the fact that the EU competitiveness suffers from high energy costs. At the dismay of renewable energy proponents the high costs of renewables (RES) have recently compelled several EU countries― among them Germany― to further scale down RES subsidies.

Nuclear energy aside, lower investments in RES imply that EU countries will have to meet their short-term energy needs from other energy sources, probably, from fossil fuels. Oil is predominantly used in the transportation sector, with a few exceptions for power generation – such as Cyprus. Power plants, on the other hand, are typically fuelled by either coal or natural gas. Narrowing down options, several EU countries are confronted with the challenge of choosing between coal and natural gas. Add to this the geopolitical dimension from the EU-Russia spat, which surfaced after the Crimea annexation, and coal becomes the clear contender.

Coal is less environmentally friendly compared to natural gas. On an equal energy basis coal burning generates 1.75 times the carbon dioxide (CO2) emissions of natural gas. Moreover, natural gas combustion releases 20pct less nitrogen oxides (NOx) than coal. Lacking a technologically proven, cost effective and efficient way to arrest heat trapping emissions from coal, natural gas is the choice for cleaner and cheaper electricity. As surprisingly as it may sound the current energy tendency for EU countries is to promote coal powered plants than natural gas fired stations. Two reasons are partly to blame. One is the lower cost of coal and the other is the fact that EU countries are not important natural gas producers.

How will then EU countries honour their 2020 energy policy commitments? Binding obligations allude to at least a 20pct reduction in heat trapping gas emissions compared to 1990 levels and a 20pct renewable energy share of the final energy mix. With coal consumption soaring meeting these targets becomes even more remote.

The Case of Natural Gas
Natural gas despite being a greener fuel than coal and oil is cumbersome to transport from source to consumption point. Land pipelines offer the least expensive way to source natural gas to the markets be they domestic consumers or power plants. Yet the overwhelming share of produced natural gas is consumed domestically (locally) from the gas producing countries as a means of conserving oil which commands a higher price as an export commodity.

If Europe is serious about enhancing its energy security, by diversifying its energy mix, then shale gas is perhaps another very attractive source of indigenous fuel. Shale gas in Europe is in no short supply. According to estimates from the EIA, published in 2013, EU countries have about 470tcf (13.31tcm) of technically recoverable gas resources. Given an annual EU consumption of 18.7tcf then there is enough gas to sustain the EU for about 25 years.

Natural gas merits do not stop in lower CO2 emissions compared to oil and coal. Gas-To-Liquid (GTL) plants have the ability of converting natural gas into liquid fuels such as gasoline and diesel. Depending on its composition lean natural gas, which consists of virtually pure methane, may require minimal processing. Oil on the other hand requires more energy intensive chemical processing before its final utilisation. Conventional natural gas fields typically permit the extraction of 70pct to 80pct, if not higher, of the reservoir gas. By contrast, owing to the inability of oil to flow freely in rock formations, only about 30pct of the oil from underground reservoirs is possible to extract with prevailing technology.

Furthermore, natural gas contains only traces of sulphur. Thus when burned natural gas releases minute volumes of sulphur dioxide (SO2) implicated with acid rain. Oil and coal combustion though could emit as high as 500 and 1,175 parts of SO2 per MMBtu. Heavy use of coal in emerging economies, such as China, is partly to blame for urban pollution and smog which collectively contribute to the premature deaths toll.

Natural Gas as a Future Fuel?
In 2011, the International Energy Agency (IEA) dubbed the time horizon from 2011 to 2035 the “Golden era” of natural gas. By virtue of their nature, predictions carry a certain degree of uncertainty and run the risk of falling short of reality. Already by 2010 EU natural gas use experienced a drop which continues today. It seems that the golden era of natural gas will be delayed for a while. On the other side of the Atlantic, North America is currently reaping the fruits of the natural gas boom which caused gas prices to plummet from $9/MMBtu in 2009 to its current cost of $4.5/MMbtu.

It might be the case that coal remains the dominant fuel of choice for power generation yet natural gas will assume more appeal as gas prices are predicted to further fall. Of course the fundamental principles of supply and demand govern the market sentiment excluding unexpected events. As history has shown, the inelastic nature of Liquefied Natural Gas (LNG) in terms of export volumes can play a decisive role in shaping world prices. Prime example being the Fukushima nuclear incident, in 2011, which forced Japan to buy LNG from the spot market at a premium price of $17/MMBtu.

Although the majority of LNG exports are tied to long term contracts (e.g., 15 year), an LNG glut which shift market dynamics towards the spot market. Especially in an over-supplied natural gas market consumers will assume more leverage in terms of decoupling oil-indexed natural gas contracts. This is the case in the EU and Asian markets where gas-to-gas competition has yet to assume prominence.

Striking a Balance Between Prosperity and Environmental Footprint
Liquefied Natural Gas (LNG) exports from places like Australia, Canada, the Eastern Med, and East Africa are expected to soar in the next decade. Considering the cleaner nature of natural gas it is prudent for power generation companies to burn more natural rather than coal. It might be the case that coal makes more economic sense for the near-term profitability of power generation companies. However, when the environmental footprint of a fuel, which may take the form of a carbon tax, will be unavoidably added to the fuel prices then the aggregate costs to power companies relying on coal will surpass the costs from natural gas.

Due to its “greener” credentials, natural gas is poised to become the fuel of choice of the future despite coal continuing to rein in the emerging world. Urban atmospheric pollution will catalyse progress away from coal and towards natural gas. Natural gas is expected to establish itself as a “bridge” or transitory fuel in the world energy mix. The abundance of natural gas will surely help power the world economy for several decades to come.

Challenging the dominance of fossil fuels will require another “disruptive” energy source analogous to what happened when oil replaced coal in Royal Navy’s naval vessels in 1912. Today, world prosperity rests on a fragile balance between the most economically attractive, environmentally benign and convenient energy source. Until the decarbonisation of the world economy, if that ever happens, natural gas qualifies as a transition fuel.

*Lecturer, University of Nicosia & faculty teaching member, KIOS Center, University of Cyprus.

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