The future of natural gas at a time of unpredictability

By Nobuo Tanaka

v  Nobuo Tanaka

addressing Gastech 2017 in Tokyo in April. He chaired the Japan Gastech Consortium.

To mark Japan’s hosting of the 2017 Council meeting, the IGU Magazine asked the Japanese member of IGU’s Wise Persons group to look at the opportunities and challenges for natural gas. We also have a timeline of key developments in Japan’s gas market.

“Unpredictability” was a popular buzzword at the Gastech 2017 conference held in April in Tokyo.

Thanks to the US shale revolution the Henry Hub gas price has been so low that gas became the leading power generation source in the US in 2016, replacing coal and reducing CO2 emissions. This development in the world’s largest gas producer and consumer contributed to global energy-related CO2 emissions being flat for a third straight year in 2016 despite global economic growth. This is a triple win for natural gas simultaneously addressing environmental concerns and economic growth as well as energy security.

The recently announced “Energy Dominance” strategy of the US favours domestic production of fossil fuels and is likely to further encourage shale oil and gas production. Indeed, the US is the game changer of the natural gas market. According to the IEA (Gas Market Report 2017), the US will account for 40% of the world’s extra gas production to 2022, leading to the second stage of the shale gas revolution as new LNG export projects expand gas trade. Over 70 bcm of new liquefaction capacity is under construction in the US with many more projects proposed. Expanding US LNG exports will reshape the LNG market with market based pricing and flexible destination clauses. In Asia, lower prices may bring new LNG importers into the market while encouraging large users to

further expand gas consumption. The Golden Age of Gas is happening in the US and elsewhere thanks to the new US LNG supplies.

And yet, President Trump’s foreign policy is fostering unprecedented unpredictability as regards the geopolitics in the Middle East. His strong support for Saudi Arabia seemed to encourage three Gulf nations and Egypt to cut off diplomatic relations with Qatar in June. In fact, Qatar has played a pivotal role in LNG security by providing more than half of global uncontracted LNG volumes in the tightened market caused by the Fukushima nuclear accident (IEA’s Global Gas Security Review 2016). President Trump has also been questioning the value of the nuclear agreement reached with Iran in 2015, which is known as the Joint Comprehensive Plan of Action (JCPOA). So far he agrees with Iran’s compliance with the JCPOA but, if the US should revoke the deal, it

would significantly destabilise the Middle East and push the Persian Gulf into crisis. This is a nightmarish scenario for the Executive Director of the IEA and a very serious energy security risk for Asian nations which need more and more oil and gas from the region.

The US’s withdrawal from the Iranian deal may increase geopolitical risks in north-east Asia. As Executive Director of the IEA, I was invited to the G8 Summit meeting in L’Aquila, Italy in 2009. This was the first summit for President Obama. At the lunch table with invited African leaders, I sat next to Colonel Qaddafi from Libya. He was outspoken in his criticism of colonialism for fostering African misery. Hosni Mubarak of Egypt, Jacob Zuma of South Africa and other African leaders agreed saying “the problem is colonialism”. Then President Obama entered the debate and said, “I understand the African situation well because I have a cousin in Kenya. He told me that to get a job in Kenya he has to bribe government officials. But bribery or corruption didn’t come from colonialism”. Angela Merkel of Germany, Nicolas Sarkozy of France and Gordon Brown of the UK echoed him by saying “the issue is corruption”. The discussion was reoriented dramatically by the eloquent President Obama. Recently I heard a story from the then Japanese Ambassador to Libya that Qaddafi started an anti-corruption campaign in early 2010 and believed that the US would never go to war with him. Qaddafi also revealed at the G8 lunch that he had abandoned his nuclear weapons programme and tried to convince North Korea to do the same but in vain. Qaddafi did comply with the US but he was eventually killed in the Libyan civil war. Unintentionally maybe, but the US sent too clear a message to North Korea; its leader, Kim Jong-un firmly committed to nuclear bomb and missile development by saying he would never repeat the mistakes of Saddam Hussein and Qaddafi. There’s no point crying over spilt milk. But if the US should revoke the Iranian nuclear deal, it would send another clear message to Kim Jong-un in favour

x  US LNG exports started

in 1969 from Alaska to Japan but the highest annual trade was 1.8 bcm. Now a huge amount of liquefaction capacity is being built in the continental US. Sabine Pass on the Gulf coast was the first of the new plants to start exports (in 2016) and Freeport (pictured) is due to start up in 2018.

of continuing nuclear weapons development over diplomatic dialogue. Geopolitical risks are contagious.

Another uncertainty created by President Trump is his withdrawal from the COP 21 Paris Agreement. The leadership role for sustainability may shift from the US to the EU and China. In this respect the news about France and the UK banning sales of gasoline and diesel cars by 2040 is very important. As China commits strongly to electric vehicles, it may eventually join France and the UK to combat air pollution and maintain industrial competitiveness. The cost of batteries is coming down significantly and electrification of the transportation sector may bring peak demand for oil much earlier than expected. Is this good for natural gas? As gas is cleaner than coal and oil, it enjoys increasing demand, replacing coal power for the time being. But to achieve the Beyond 2°C Scenario (B2DS), whereby the energy sector reaches carbon neutrality by 2060 to limit the atmospheric temperature rise to well below 2°C, carbon capture and storage (CCS) technologies must be fully applied to gas and even to biomass as well as coal power. Another option for gas producers may be to separate CO 2 and export only hydrogen as “clean fuel” while injecting CO 2 for enhanced oil recovery (EOR). The former Oil Minister of Saudi Arabia, Ali Al Naimi always told me that Saudi Arabia could export “clean oil” through innovation and Saudi Aramco is studying hydrogen technology under the ambitious “Vision 2030” strategy. Another Saudi ex-Oil Minister, Zaki Yamani, once said, “The Stone Age didn’t end because we ran out of stones”.

The IEA acknowledges that the challenge of achieving net-zero emissions by 2060 is daunting. We have to prepare for an uncertain but very risky future. Possible energy scenarios help us out of “unpredictability” by identifying the costs, benefits and risks involved.

Nobuo Tanaka is the Chairman of the Sasakawa Peace Foundation (www.spf.org) and a member of IGU’s Wise Persons Group. He was Executive Director of the International Energy Agency (www.iea.org) from September 2007 to August 2011.

This graph shows the cumulative emissions reductions to net-zero in 2060 under the Beyond 2°C Scenario (B2DS), by source of savings.

RTS is the IEA’s Reference Technology Scenario, incorporating current policies and pledges including the Nationally Determined Contributions (NDCs) pledged under the Paris Agreement. These efforts would result in an average temperature increase of 2.7°C by 2100.

The 2°C Scenario (2DS) lays out an energy system pathway and a CO 2 emissions trajectory consistent with at least a 50% chance of limiting the average global temperature increase to 2°C by 2100.

B2DS explores how far deployment of technologies that are

40

35

30

GtCO 2 20 25 15

10

5

0

2014 2020 2DS to B2DS

RTS

2030 2DS

2040 B2DS

2050 2060 Renewables 15% GtCO2 cumulative reductions in 2060

CCS 32%

Fuel Switching 18%

Efficiency 34%

Nuclear 1%

0 100 200 300 400

Note: Light areas in the right-hand graph represent cumulative emissions reductions in the 2DS, dark areas represent additional cumulative emissions reductions needed to achieve the B2DS.

Source: IEA, Energy Technology Perspectives 2017.

already available or in the innovation pipeline could take the world beyond the 2DS, achieving net-zero emissions by 2060. The B2DS falls within the Paris Agreement range of ambition, but does not purport to define a specific temperature target for “well below 2°C”.