Natural gas may be the most controversial of all fossil fuels. It has been heralded as a lower carbon alternative to coal as a fuel for electricity generation. At the same time, natural gas-fired generators have proven themselves to be a reliable backup for intermittent wind and solar power, and gas is viewed as an enabler of an increasingly renewables-based electric grid.
Yet natural gas is nonetheless a fossil fuel whose global consumption is on the rise even as a growing number of countries have set out to zero out carbon emissions from their energy systems within the coming two decades.
Peter Fraser, head of the Gas, Coal and Power Markets Division at the International Energy Agency, examines present and future demand for natural gas and the growing perception of risk that accompanies investment in major natural gas infrastructure projects should demand for gas soften. He also discusses the technologies that must be developed to ensure the cleanest possible gas supply and to enable a shift to non-gas alternatives.
Andy Stone: Welcome to the Energy Policy Now podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone. Natural gas may be the most controversial of all fossil fuels. On one hand, natural gas has been heralded as a lower-carbon alternative to coal, as a fuel for electricity generation. At the same time, natural gas-fired generators have proven themselves to be a reliable backup for intermittent wind and solar power; and gas is viewed as an enabler of an increasingly renewable-spaced electric grid. Yet natural gas is nonetheless a fossil fuel whose global consumption is on the rise, even as a growing number of countries are working to zero out carbon emissions from their energy systems within the coming two decades.
So how are we to treat natural gas? Is it a clean fuel and a durable bridge to a low-carbon future? Or is gas a remnant of a fossil fuel-dependent past, that itself must be phased out quickly if we are to avoid the worst impacts of climate change. This is a question that industry, investors, regulators, and many others are urgently grappling with as billions of dollars of new gas infrastructure projects are being decided.
Here to examine present and future demand for natural gas is my guest, Peter Fraser. Peter heads the Gas, Coal, and Power Markets Division at the International Energy Agency. His work includes the IEA outlooks used by governments and business to understand the direction of the global energy industry. Peter, welcome to the podcast.
Peter Fraser: Thanks for having me. It’s a pleasure.
Stone: So Peter, today natural gas fuels about 40% of electricity generation here in the United States, and that’s driven largely by the fact that domestic US gas is very inexpensive. Is natural gas generally as cost-competitive and widely used outside of the United States?
Fraser: Well, the United States — and North America more generally — does enjoy some of the least expensive natural gas in the world. The only other area which has cheaper, cheaper natural gas is places in the Middle East, which also often is the byproduct of oil production, having a lot of natural gas. Elsewhere it’s a different story. Natural gas in Europe, for example, is more expensive than particularly the soft coals that they use there called lignite. But it also gets a leg up because also in Europe we see a lot of carbon pricing, and quite significantly high carbon prices. So natural gas, in the power sector at least, is enjoying some competitive advantage over coal there.
But where most of the world’s energy demand is growing, which is in developing Asia and to some extent Africa and Latin America, in those regions natural gas is generally speaking a more expensive fossil fuel than coal. As a result, when it comes to the power sectors of China, of India, of Indonesia — to just take three large examples — coal is a much less expensive option to use than natural gas. Natural gas is growing in all those economies but not playing the same role in the power sector that we see here in the United States.
Stone: So in Asia, is natural gas being used as a replacement for coal, in the case of coal-to-gas switching which we’ve seen so much of here in the United States, or is that higher price of gas preventing gas from replacing coal?
Fraser: It’s being used in a more limited extent. China, when it has gone through its enormous economic expansion over the last couple of decades, also was using coal in a lot of applications that in North America we don’t see — for example, in industry and in home heating. So the Chinese in the last few years have made a very big effort to substitute out of coal in most of the domestic sector and in the industry sector, and so we do see substitution there, but not in the power sector, and not very much. There are some opportunities for combined heat and power with natural gas, but generally speaking, we don’t see a big shift to gas in the power sector, with some exceptions in, say, urban areas where closing a coal plant and replacing it with a gas plant can improve air quality.
Stone: Now there is well-known tension around the role that natural gas should play going forward, particularly given conflicting views of gas. It’s either an enabler of a low-carbon grid or alternately, it is a climate liability. Can you talk about this tension of how big a role natural gas can and should play in the energy system? And where does this debate stand today?
Fraser: What I can tell you is the tension that we had to address in our recent report “Net Zero by 2050: A Roadmap for the Global Energy Sector.” As you may be aware, this report tries to map out a way to get to net zero emissions by 2050 in a manner that’s consistent with a 1.5-degree sea warming by the year 2100. And to do that is actually two challenges. The first challenge, of course, is to substitute by 2050 all those fossil fuels with non-fossil fuel, or else to capture and store some of the emissions from the CO2.
But there’s a second one. It’s not good enough to actually keep going as we’re going, and then in the year 2050 change over to non-fossil. We have to start cutting emissions now. So in the short run, we have to do other things beyond substituting, say, renewable for non-renewable, and that includes a growing role in the short term for natural gas. So out to 2025, 2030, natural gas demand actually grows as it’s being substituted for coal or for oil. But beyond 2030, going to 2040 or 2050, natural gas, like other fossil fuels, has to itself be substituted for renewables in the electricity sector, be substituted for low-carbon electricity in the end-use sector or with other low-carbon gases such as hydrogen. So in the short run, it does contribute to reducing emissions, but in the long run, it itself has to be replaced.
Stone: I wanted to ask you just for a moment to take us back a decade or a decade-and-a-half or so and talk about that initial promise of natural gas, particularly here in the United States when the shale gas revolution really got underway around 2005 to 2010, that window. Can you tell us a little bit about the environmental promise that natural gas brought along with it?
Fraser: Indeed, a decade ago IEA wrote a special report talking about the golden age of natural gas, and the golden rules for the golden age of natural gas. I think looking back on it over the past decade, we can say that the golden age did happen in the United States. We saw a lot of the benefits that could have happened did happen in the US, particularly its substitution for coal that we’ve seen quite extensively that accounts for the majority of the emissions savings that you’ve seen in the United States. The United States has cut in absolute terms emissions more than any other country.
We’ve seen also the United States, which was on the verge of becoming an importer of natural gas become a significant exporter of natural gas. And natural gas, as a result, has been making greater penetration into markets not just in Europe, but particularly into developing Asia, in no small part because of the increased role of US shale. But that said, elsewhere in the world, we didn’t see the big developments in shale that we saw in the US. There is some additional shale in South America and also in China, but we did not see the same growth that we thought might be able to be reproduced that we saw in the United States.
So as a result, there was this big success in the US, but the success wasn’t duplicated. The other factor behind that, of course, is the progress we’ve made on renewables. Ten years ago, we wouldn’t have said that solar was the cheapest electricity that you could find as a way to make electricity anywhere in many of the developing countries, but that’s now the case. In places like India and places like China, solar PV is cheaper than making it even with coal, never mind gas. So the growth of renewables has also affected strongly the future of natural gas. We see a much smaller role for gas in the power sector in particular because as a complement to renewables, indeed, but you don’t need a lot of natural gas to play that complementary role. And of course there are now new resources such as batteries and other things which can also help the power system in addition to gas.
Stone: So looking forward, you just talked about some of the things that may influence the demand for gas generation — the rise of renewables, and much less expensive renewables. We’ve got battery storage, which is really just starting to take off. Are there any other factors that might be important in influencing the demand for gas going forward? What are the key other factors we might take into account?
Fraser: On the upside for gas, there’s gas being used as the component of industrial growth. So we look out the next few years, and we see industries in the short run just recovering from the pandemic, but in the longer run continuing to grow. A number of them will be using natural gas, so that’s a source of growth.
The second, again if there’s a strong policy push to cut emissions quickly, for example by closing coal plants, which we see a number of countries now have policies to do so and to do so in the next few years. In the short run, that’s good for gas, although we’ll see a big growth in renewables, as well, and gas will have to fill part of that gap. So that’s a second area. But on the other hand, policies that accelerate renewables even faster than, say, coal plants close, will actually increase the squeeze on gas-fired generation and limit the possibilities there. So that’s one of the big negative things in the short run, and of course if certain countries take measures to limit gas growth. For example in the Netherlands now, a new building cannot be connected to the gas grid. If you have more jurisdictions implementing policies like this, that’s obviously going to be negative for gas.
Stone: One of the things that struck me in looking through some of the data in recent IEA reports is how quickly energy demand and demand for natural gas has recovered from the worst days of the COVID economic downturn and lockdowns in many countries. And in fact, natural gas has already surpassed demand from 2019, pre-COVID. In your view, this quick rebound of natural gas, what does it say about the role of gas in the immediate term? How essential is it, versus other options in the immediate term, as countries have had the opportunity to make some choices potentially coming out of the crisis to switch to other sources of fuel?
Fraser: I think in the immediate term, gas globally dropped 1.9% last year. Actually it was somewhat less than the other fossil fuels. In the case of oil, it was closer to 8%, and coal 5%. Gas was only 1.9. But there were two things holding it down last year. Number one was, of course, the pandemic which was affecting all the fuels and all the energy demand. But the second thing, less appreciated, less important, but still significant was it was actually a rather warm winter in the Northern Hemisphere last year. We had a significantly colder one in the Northern Hemisphere this year. So we’re actually seeing that part of the bounce-back, and so we see a bounce-back to going to 3.6% growth, we now expect for the year 2021 over 2020. And for the most part, in a year, this change doesn’t happen on a dime. If anything, you’re really using your existing infrastructure to do this. So if anything, if there were policy changes, say on the climate side, in the short run, it would probably be good for gas because they’d probably be closing coal plants sooner. And indeed we did see some plants close in places in Europe, for example in Spain, where they closed several coal plants ahead of schedule, and in Germany earlier this year, where they closed some coal plants earlier than expected. So that, actually, is somewhat favorable for gas in the very immediate term.
Stone: Earlier this month, the IEA released its gas demand outlook for the coming three years. That report forecasts substantial growth in natural gas demand well beyond what can be accommodated if climate targets are to be kept in view. What precedent does this set for the future of both meeting climate targets, as well as gas demand, if we’re already seeing that gas is exceeding what’s necessary to meet climate targets, particularly when we have very aggressive 2030 targets now, for example in Europe, which is setting out to reduce its emissions by 55% by the end of this decade?
Fraser: In our report that we issued a short time ago, we were trying to make it clear that growth was being driven by a couple of factors. On one hand, it was this increase in economic growth, industrial production, which was increasing gas demand. That’s the part we say overall is inconsistent, and we want to start to substitute for cleaner options. But the other part of the gas growth was associated with substitution mainly for coal but also for oil.
And that part of the growth is actually rather consistent with what we think a low-carbon path has to follow in the short run. Again, we have to start cutting the emissions now, and to the extent that gas is substituting for coal — that part didn’t concern us too much. It’s this other bit that we have to focus on. And so how do we deal with that? In the short run, in industry, it’s going to be a greater use of energy efficiency, and it’s going to be starting to use low-carbon alternatives to natural gas in that industry.
Stone: Can you tell us a little bit about the potential of low-carbon natural gas?
Fraser: Yes, certainly. Natural gas that we extract — much of it comes from a byproduct of oil production in its fossil form, but it can also be produced via biological processes such as methane, as CH4. And so today we actually have a relatively small amount of methane produced as a renewable resource. So to compare the units, it’s about 5 billion cubic meters of methane produced in the world today, compared to about 4,000 billion cubic meters that are produced of fossil natural gas. But there is a lot of room to increase that production. So that’s an example of a low-carbon gas.
Second, and the one probably everyone has heard about is, of course, hydrogen. You can burn hydrogen like you can burn methane or natural gas. And so that’s something which is hardly used for that purpose today. Hydrogen is produced, but it’s mainly used in the oil refinery sector. But you can use it as a fuel, like you can natural gas. And indeed, one of the short-term options for companies wanting to reduce the carbon content of their natural gas is not just to use biomethane, but also to inject some hydrogen. There are some limits as to how much you can do because the burners in our equipment don’t necessarily work if you have high concentrations of hydrogen. But at relatively low blends at a few percent or so, hydrogen can be mixed in with methane, with natural gas, and be used in our appliances quite safely and producing less carbon.
So those are areas where people see a lot of growth, and interestingly, there are two ways to make hydrogen. One way, and the way I think would in the long run become predominant, to make hydrogen in the low-carbon way, is to start with water, use electricity to split the hydrogen from the oxygen, and use that hydrogen. That’s sometimes called “green hydrogen.” And over time, we think that will become a relatively inexpensive way to make hydrogen — but it’s not inexpensive today.
The other way, which is also a low-carbon way to make hydrogen is to use natural gas, which is the way that it’s made today. But instead of allowing the CO2 from that process to escape, to allow it to be captured. And we think up in our net-zero 2050 case, that even in 2050, maybe 38% of the low-carbon hydrogen that we’ll be using in 2050 would come from this process of natural gas with carbon capture and storage.
Stone: At the end of this year, the Glasgow Summit will take place, where countries will present their updated, nationally-determined contributions or their climate targets. Is there a potential for the outcome of that conference, the Summit, to impact global gas demand if countries are particularly aggressive with their 2030 carbon targets?
Fraser: Well, indeed, with aggressive targets, it’s pretty clear. And again, going back to our net zero in 2050 report, there are two things that will need to happen that will affect the future for natural gas. And it really does reflect, number one, we’re very clear in our report that a lot of coal plants will need to close relatively quickly. That’s a big challenge because most of those coal plants are now in developing countries, not in advanced economies. And the cost of changing your power systems from ones that are dependent on coal to other fuels and renewables mainly also requires a lot of finance. We have to make sure that stuff can be financed. But that’s one element that actually will have an effect on the renewables’ growth, and the closure of coal plants could have a very mixed picture on natural gas. On one hand, a much higher renewables growth that we’re going to need should push gas down further. I expect to see a lot of that decrease in the developed economies. Whereas in the developing economies, we’d see that the renewables’ growth is actually reducing coal and won’t have as much of an effect on natural gas in those economies.
Stone: Talking about that investment going forward in natural gas, recently in the United States we’ve seen a wariness to invest in gas infrastructure, and that’s out of fear that projects will become obsolete and that those infrastructure assets will become stranded. For example, recently the Atlantic Coast Gas Pipeline Project was cancelled due to some pushback, and the sponsors of that project, Duke and Dominion Energy Companies, determined that it really wasn’t any longer worth the risk or the investment.
Also we’ve seen the Jordan Cove proposed LNG Export Terminal in Oregon also stalled or potentially cancelled now due to pushback. So to what extent is concern that natural gas investment may be not a good long-term solution and that assets built today may be quickly stranded? To what extent is that an issue? Do you see it in North America, as well as in the rest of the world?
Fraser: Well, it’s certainly an important question because as governments start to grapple with the implications of a net-zero pledge, whether there is room for gas to grow, and in short in the more developed economies, the answer is no. If there’s going to be growth, it’s going to be more in developing economies.
So what we’ll see is more jurisdictions asking the kinds of questions that these pipeline developers were asking, and we also see it in Europe, for example, today. There’s a European-level planning process to determine new gas infrastructure, mainly to deal with security of supply issues, rather than for growth. But of course, even those kinds of investments are being challenged and saying, “Well why are we investing in gas infrastructure? We won’t need fossil natural gas in the future.” Part of the answer to that one is — but to be frank, it’s difficult to say exactly how much you’re going to need. Europe might need other forms of gas in the future, and this pipeline system might be useful for that if you build the right kind of pipes and the right kind of pipeline, you may want to make it ready to take, say, hydrogen which might require some technical changes.
So that debate is also happening. It’s happening in a different way in Africa, for example — just to take a quite different example. Their gas isn’t used very much, but you have countries like Nigeria and Mozambique, where there’s potential for gas development. At one point, they would have seen gas as a big export opportunity, but now they’re taking a more critical look at it, to see if they can use the gas domestically, to substitute in many cases for oil, which is being used in power generation and other things. Where does it fit relatively to, say, renewables or other sources of energy in the future? How can they monetize these natural resources for the benefit of their country? So even there, there’s a change in perspective from the more aggressive targets that we’re seeing.
Stone: Another point on these stalled projects: Last year, two proposed European LNG terminals that would have received LNG from the United States were cancelled over concerns that the gas was too dirty. Was that specific to US gas being too dirty, or gas being too dirty generally?
Fraser: Certainly there was a debate in Europe, in part because the US had declined to implement certain regulations related to the control of methane emissions. I understand that position has been reversed under the current administration, so I don’t know if that will change European views. Certainly the upstream and indeed, through the entire value chain of natural gas, there are opportunities to reduce emissions, and reducing emissions of methane actually are among the most cost effective things you can do because the methane can be, of course, if it’s not leaked into the atmosphere, it can be gathered and as a price it could be sold. And so we think 40% of the methane leaks worldwide in the oil and gas operations can actually be recovered at no net costs, because of the value that they would get from selling the gas.
So I think that’s the kind of issue there, but what we see is the gas industry not just the production side, but also the transportation side — that’s both the pipelines and the shipping for LNG — also looking at how they can reduce emissions, not leaks of methane and more efficient utilization such as using electricity, whereas before, they would have used natural gas to cut their emissions of the entire path. We expect that to play a bigger role in the future.
Stone: Okay, Peter, so a final question for you here, and this is the 60 million-dollar question, okay? In your view, is the gas bridge that has so often been spoken about going to be a short one or a long one? What do you think?
Fraser: Well, I think it depends, and it depends, number one, on government policies. Setting a net-zero target is great. It sets the direction. It inspires, but it won’t be enough on its own to actually turn around emissions of CO2 and other greenhouse gases to get us down to net zero in 2050 or on any other date. There need to be supporting policies to do this. So the length of the gas bridge will really depend on the government policies to reduce fossil fuel emissions. My guess is that if those policies are in place, actually in the short term, gas demand could even increase for some few years. But then from that point, gas has to drop, just like the other fossil fuels need to do, in order to get us on a sustainable path.
Stone: Peter, thanks for talking.
Fraser: My pleasure.
Stone: Today’s guest has been Peter Fraser, Head of the Gas, Coal, and Power Markets Division at the International Energy Agency. Visit the Kleinman Center for Energy Policy’s website for our latest podcast episodes, policy digests, and blogs. You can keep up with news and research from the center by subscribing to our newsletter on our homepage or by following us on Twitter. Thanks for listening to Energy Policy Now, and have a great day.