The pitfalls of natural gas as the default climate change option

Cheap, plentiful natural gas is a mixed bag. With a glut of natural gas and depressed demand in the US, the industry outlook may have been glum. Plenty of big LNG projects are still going ahead. So news today that US natural gas reserves may be much bigger than thought may not be welcome news for many.

Investors hoping to take advantage of the recent unusually wide gap between gas and oil prices might be disappointed (although this depends very much on your views of what is driving natural gas markets).

Environmentalists – and for that matter, governments seeking to reduce their carbon emissions limits – could be seeing a different side of today’s cheap natural gas. It may still be more expensive than coal, but it is less polluting and today’s prices make it attractive.

Environmental policy blogger Joe Romm recently described natural gas as a ‘game changer’ making the Waxman-Markey greenhouse gas emission targets ‘so damn cheap and easy to meet’.

Like cheap oil, cheap gas is not good news for investment in renewables, as Environmental Capital pointed out last week.

But Peter Hughes, the energy & utilities director at Arthur D. Little, says there are other concerns. (We wrote about a brief but interesting paper he wrote about peak oil demand.) Hughes, who previously worked at BP in the gas business, has strong views on the risk of natural gas becoming the ‘default climate change option’ which he voiced in a speech earlier this year at Stanford University’s Program on Energy and Sustainable Development.

In comparison to say, carbon capture and storage or nuclear plants, the relatively short lead times, lower costs and political simplicity of combined cycle gas turbines makes it easier. The issue of timescale is important, Hughes argues, but he adds:

As the need for new generating capacity draws closer, the failure to create an “enabling” framework for nuclear and CCS ready coal, with their much longer lead times, means that gas-fired capacity could become the only option. The knowledge that new gas-fired capacity can be brought on in such a relatively short timeframe seems to give policy-makers and politicians a degree of comfort that the lights will not go off, enabling them to put off further the big, and admittedly difficult, decisions regarding carbon regimes, nuclear and the like.

This, he argues, ignores many other risks of relying on natural gas to reduce carbon emissions. For one thing, the assumption that the US can supply its own natural gas for many years to come might not prove correct. And, as Europe has seen, gas is not free of geopolitical supply problems that oil faces. And the outlook years into the future is far from certain – Hughes points out that the US only has relatively small gas reserves compared to other parts of the world.

To illustrate this, look at the natural gas reserve estimates in BP’s recent statistical review:

At those rates, even a 35 per cent increase does not look so impressive.

Growth in liquefaction and re-gasification capabilities around the world will take natural gas into the realms of a fungibility, but Hughes fears that may not be enough:

Who is to say that in 10 years time, the US
won’t be faced with rising demand for gas from a new
generation of CCGTs at a time when domestic production has
started to decline? Furthermore, any such need for imports will
have to be met primarily by LNG, and while LNG supplies are
likely to be plentiful for the next year or two – when the US does
not need them – the situation may look very different in 10,
or whenever, years’ time. There may be intense competition,
from the UK and Europe in addition to the Asian markets, for
potentially limited natural gas supplies. At the very least,
this will have major implications in terms of price volatility.

Low carbon solutions such as CCS and nuclear power need extensive planning and investment support and to some extent more technological development; but the easier option of natural gas may do little for long-term energy security.

Related links:

Estimate puts natural gas reserves 35% higher (New York Times, 17/06/09)
Majors continue LNG investments with eye on niche markets (FT Energy Source, 05/06/09)
Oil and gas prices: why have they diverged and when will the divergence end? (FT Energy Source, 02/06/09)
Looking on the bright side of the LNG glut (FT Energy Source, 22/04/09)
Will US natural gas recover soon? (FT Energy Source, 30/04/09)

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