Within the oil and gas sector, industry experts frequently tout natural gas as a “bridge fuel” due to its potential to bridge the gap between a fossil fuel-dominated energy mix and a renewable-led future. While they may disagree on how to implement energy transition strategies, natural gas seems to figure into all regional energy transition plans.
The energy transition has grown increasingly urgent as the oil and gas sector has faced mounting pressure to decarbonise, forcing the topic to the forefront of every executive’s mind. It was brought to the GCC’s doorstep with COP26, in which European nations took a harsh stance on fossil fuels, discouraging investments into natural gas infrastructure globally. OPEC Secretary General Mohammed Barkindo said that the oil and gas sector was “targeted” at the conference, and that it was “definitely a wake up call.”
In reality, the energy landscape is all about balance. That includes finding the balance between value and cost, safety and productivity, and on a wider level, supply and demand. In the current energy market, producers have to strike a balance between environmental sustainability, national and international economic development, and energy security and access.
This came sharply into focus during the coronavirus pandemic, as the world looked for a clean and sustainable economic recovery. While gas is neither the cleanest source of energy nor the most cost-effective, it strikes a fair compromise between the two.
“Last year showed just how crucial gas and LNG are in providing communities around the world with energy they need as they strived to get back on track following the difficulties caused by the COVID-19 pandemic,” says Wael Sawan, Integrated Gas, Renewables and Energy Solutions Director at Shell in the company’s February 2022 LNG report.
Still, the European Union (EU) is moving ahead with its own plans to reduce its dependence on Russian gas following the invasion of Ukraine and escalating political tension. The Finnish Center for Energy and Clean Air Research estimates that at the time of the invasion, Russia exported $67.3 billion worth of fossil fuels, 71% of which ($47 billion) went to the EU.
The European Commissioner for Energy Kadri Simson says: “Russia’s invasion of Ukraine has aggravated the security of supply situation and driven energy prices to unprecedented levels. For the remaining weeks of this winter, Europe has sufficient amounts of gas, but we need to replenish our reserves urgently for next year. The Commission will therefore propose that by 1 October, gas storage in the EU has to be filled up to at least 90%. We have also outlined price regulation, state aid and tax measures to protect European households and businesses against the impact of the exceptionally high prices.”
Although the EU aims to move to renewables, it has conceded that gas should be considered as a transitional investment in the EU taxonomy, reclassifying it as being “in line with EU climate and environmental objectives and will help accelerating the shift from solid or liquid fossil fuels, including coal, towards a climate-neutral future.”
“Financial and non-financial investors will be able to increase their corporate ‘green scoring’ by investing in gas, including outside Europe,” Wood Mackenzie notes in a report. “Other countries developing similar taxonomies will be emboldened to include gas too, particularly in Asian markets where coal still dominates…”
It is unlikely that energy producers will breathe sighs of relief quite yet, as executives including Saudi Aramco CEO Amin Nasser have repeatedly expressed alarm about the growing stigma against investing in oil and gas, and the drastic impact that will have on the energy sector as a whole.
Oil and gas industry leaders including Barkindo have stressed the disproportionate impact that an ‘anti oil and gas’ framework would have on communities struggling with energy poverty – a particular concern in Sub-Saharan Africa – while providing tangible benefits only to developed nations. Senegal’s President Macky Sall said that slashing gas exploration projects would be “a fatal blow” to countries across Africa, many of which are looking to natural gas as a path to reliable energy access, to boost economic development, and as a new revenue stream.
Power consumption per capita in Sub-Saharan Africa (excluding South Africa) sits at 180 kWh, compared to 6,500kWh in Europe, according to a May 2022 report by Professor Michaël Tanchum, a non-resident fellow with the Middle East Institute’s Economics and Energy Programme.
“Africa views natural gas as vital for desperately needed electrification for development and already bristled at the European Green Deal, the EU’s $1.08 trillion initiative to de-carbonise Europe and promote energy transition abroad, given its objective of reducing natural gas investment worldwide,” Tanchum writes. A shift in perspective including gas as a bridge fuel would thus have a sizable impact globally in kick-starting a realistic energy transition.
Yet challenges remain.
In a January 2022 report, Wood Mackenzie’s vice president of Gas and LNG Research Massimo Di Odoardo writes: “…The EU recognition of gas power plants as a transitional investment is no panacea for the gas industry. Gas prices will need to come down to accommodate increased investments in gas use. 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,” he adds. The Russian invasion of Ukraine has only added a further incentive for the EU to reduce its dependence on fossil fuels.
The Gas Exporting Countries Forum (GECF) echoes the central role of gas in the energy transition, with Secretary General Mohamed Hamel noting that the true potential of natural gas lies in its ability to enhance global energy security, eliminate energy poverty, and create resilient, sustainable, and flexible energy systems. He stresses that natural gas functions in synergy with other energy sources.
In the current energy landscape, further investments in gas would go hand-in-hand with the shift to renewables, providing a reliable backup in the event of intermittent supply. A recent report by Shell notes that Brazil tripled its imports of LNG in 2021 to more than 7 million tonnes due to dry weather which impacted hydropower generation.
The GECF estimates that natural gas will make up 27% of the global energy mix by 2050, requiring upstream investments of $7.5 trillion. Regional energy producers are already working on major projects, most notably Qatar Energy’s North Field LNG project expansion, which should net the nation a 40% boost in LNG output per year by 2026. It currently exports approximately 77.1 Mtpa of LNG per year, placing it among the leading LNG producers globally.
While Qatar is the regional heavyweight in terms of gas production, ADNOC Group, Saudi Aramco, and other major national oil companies are also investing heavily in their gas production in tandem with their growing interest in blue hydrogen.
The relationship between gas production and blue hydrogen could also facilitate the actual transition to green hydrogen. Blue hydrogen is expected to be more cost efficient than green hydrogen until at least 2030 at the earliest, according to data from BloombergNEF, which notes that the cost of green hydrogen will drop by 80% by 2030, becoming cheaper than blue hydrogen in all 28 markets included in its report.
Gas producers have a dual advantage in blue hydrogen, due to the availability of gas as well as existing infrastructure which can be used to transport hydrogen – storage tankers and gas pipelines can be converted to carry hydrogen.
As a case study, the Middle East Institute (MEI) examined Egypt’s gas production as well as its ties to renewables. The nation’s gray hydrogen production emits 20 million tons of carbon dioxide every year, according to the Oxford Institute for Energy Studies. While it aims to bolster its green hydrogen production, MEI notes that Egypt is likely to grow its blue hydrogen production capacity thanks to its massive natural gas resources (with 850 billion cubic metres of natural gas in place in the offshore Zohr field), which it is already developing in tandem with renewable projects.
“With natural gas ensuring self-sufficiency in its domestic power supply and then creating a surplus, Egypt was further motivated to develop its electricity interconnection with Europe, Africa, and the Middle East to create the transmission infrastructure for an electricity export market,” the MEI report notes. “This, in turn, is catalysing the accelerated development of Egypt’s renewable resources. Cairo is now aiming to create 61 GW of installed capacity from renewables by 2035, more than the equivalent of its entire current gas-fired power generation capacity.”
COP27 is set to take place in Sharm-el-Sheikh, Egypt, in November 2022, and will “likely” be an opportunity to “give greater voice to those nations, particularly key nations in Africa, that seek a larger role for natural gas in the energy transition process,” Tanchum says. He further notes Egypt’s “diplomatic achievement” in signing the April 2022 agreement with the EU to reinforce cooperation on LNG and green hydrogen supplies between Europe and Africa.
“Both through its energy diplomacy and the further development of its renewable energy and green hydrogen production capacities, Egypt will be one of the primary actors over the next decade determining the shape and pace of energy transition in the MENA region and thereby also influencing the course of energy transition in Europe and Africa,” Tanchum adds.
Egypt’s renewable energy programme has been supported by its natural gas projects, which have allowed it to become a net energy exporter, with its marketable electricity surplus expected to grow as other renewable and nuclear projects come online. Egypt has developed its electricity interconnections thanks to this surplus, allowing it to export electricity to Europe, the Middle East, and Sub-Saharan Africa, supporting economic development in areas with limited energy access.
Minimising natural gas emissions will be crucial to its survival as a long-term energy source, Sawan says. “As countries develop lower-carbon energy systems and pursue net zero emissions goals, focusing on cleaner forms of gas and decarbonisation measures will help LNG to remain a reliable and flexible energy source for decades to come,” he adds.
Natural gas is a bridge to a cleaner energy mix, but like all natural resources it is victim to major fluctuations based on geopolitics, supply and demand concerns, weather changes, and changing public perception. There is no quick and easy solution – that much is clear. A global effort will be required to ensure that natural gas provides a steady and reliable path ahead, and international bodies will have to make some concessions surrounding gas, and will have to consider those who would be left behind without access to energy.
With a considered approach and smart strategies in place, we just might see an equitable and realistic energy transition that adequately prepares the world for a renewable-led future.