Two years ago the world noted growth in energy demand by 2.3 percent. It was primarily met by natural gas followed by renewables, oil, coal, nuclear, and others. The exploding demand for natural gas together with the proliferation of LNG and the fracking revolution was the reason for IEA’s chief Fatih Birol to conclude the coming of a ‘golden age’ for gas. Just two years later, the IEA in its latest report has reversed its prediction. How much room for interpretation is there and in which context should it be seen?
The IEA’s ‘net zero by 2050 roadmap’
The projection has been done based on the already infamous 'Net-zero by 2050 roadmap' that was published recently. In it, the IEA concluded that if the countries that have stated their decarbonization efforts towards 2050 execute them accordingly, no new oil or natural gas investments are needed. This does not include existing greenfield projects or already discovered resources.
The IEA has been criticized by many who fear that the organization has tread out of its bounds by making a 'reckless proposition' for rapid decarbonization. It is important to note that the organization was created in 1974 in response to the oil crisis to help coordinate a collective response to major disruptions. However, the IEA has evolved and broadened its scope to ‘help countries provide secure and sustainable energy for all’.
It is easy to label the IEA’s statement regarding the non-necessity of new investments in oil and natural gas as ‘revolutionary’, but it is made under a strict frame of interdependent measures. Meaning that if decarbonization is taken seriously, investments in alternatives should be increased. The most important source for the IEA's projection is the growing number of governments that have stated net-zero by 2050 ambitions. However, many caveats remain concerning the ability to pay for these measures by, especially poorer countries.
The evolving natural gas sector
In the past decade, the natural gas sector has evolved rapidly going from a regional source of energy to global primarily through the proliferation of LNG. The disaster with the Fukushima nuclear power plant pushed Germany and Japan towards natural gas (making the latter the world’s largest importer), by announcing the closure of their nuclear power fleet.
Furthermore, the relatively clean nature of natural gas compared to coal has incentivized governments to choose the cleaner alternative. Primarily China has chosen this option shown by Beijing’s coal-to-gas policy. Chinese imports have set another record last month with a 26 percent growth year-over-year.
While 2020 was disastrous for virtually all markets due to the Covid-19 pandemic, LNG has rebounded quickly. According to some analysts, global demand for LNG could rise 40-50 percent over the next ten years. It could even nearly double by the early 2040s. So how can the IEA maintain that no new investments are needed?
The foggy predictions
It is important to note that the IEA explicitly doesn’t say that natural gas isn’t needed anymore. The recent projections were made as a result of the growing number of countries that have pledged to become a net-zero society by 2050. The list has grown to 44 countries by now which represent the vast majority of the global economy.
While there are many questions and uncertainties such as the availability of sufficient amounts of raw materials (e.g. minerals and metals) and profitability in general, the IEA’s answer is mostly technological. Furthermore, the viability of alternatives to natural gas could improve if financial institutions reassess the profitability of long-term investments in carbon-based sources. If the risk of stranded assets rises, e.g. multi-billion LNG investments, cheap money could flow towards sustainable projects that will be around for decades.
According to Chris Severson-Baker, Canada’s Alberta director for Pembina Institute, “the [IEA] report suggests that private finance will now need to recognize that these heavily subsidized megaprojects [LNG Canada’s $40 billion project] are at risk of becoming stranded assets.”
However, not all is gloom for the global LNG industry. The growing demand for hydrogen could strengthen the sector in a time when the world is decarbonizing. The IEA expects the use of hydrogen to rise from 90 million tonnes in 2020 to 200 million tonnes in 2030. Hydrogen produced from natural gas could fill the gap.
It remains highly uncertain whether decarbonization at the pace the IEA is suggesting is possible. There remain many questions regarding profitability, availability of materials, and the tenacity of governments to pursue stated goals. Nevertheless, the IEA’s most recent report shows that the technological hurdles towards a net-zero society by 2050 are negligible.
By Vanand Meliksetian for Oilprice.com
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