A low CO2 future: Not so great for natural gas, after all?

Natural gas advocates (and producers) might want to be careful what they wish for.  The IEA is canvassing the likelihood of a natural gas glut, which could have implications for energy security around the world — and also for gas producers.

Huge new sources of shale gas that have now become economic to recover in the US have led many to argue that natural gas can kill two birds with one stone: solve the dependence on foreign oil, and reduce CO2 emissions.  Natural gas prices may be low today, compounded by recession, shale and new sources coming online — but the longer-term future has seemed bright for this relatively clean-burning fossil fuel.

However the IEA suggests that a scenario in which strong greenhouse gas policies are implemented would actually have the opposite effect, dampening natural gas demand in the not-too-distant future.

From Carola Hoyos’ story in the FT:

The watchdog says that environmental policies to limit carbon dioxide emissions to prevent global warming, far from supporting demand for gas, would cause gas demand to peak in the early 2020s. Industry executives have promoted gas as an low-carbon alternative to coal for power generation.

The early decades of the oil industry demonstrate just how much energy is captive to variations in supply and demand: fortunes were made and lost just as quickly when new sources of abundant supply made prices per barrel plummet. A big portion of the world’s oil supply is controlled (not always tightly) by Opec for this very reason.

Of course natural gas is not yet a fully fungible market: it is too difficult to ship around the world unless it’s liquified first; which requires expensive LNG infrastructure, and re-gasification at the destination point.  But big LNG developments are under way in many countries, and the timing could be everything for these massive investments. Plummeting demand combined with more supply coming online is not what they need.

This means a natural gas glut will play out differently in different regions. Stay tuned…

Related links:

Forecast of gas glut challenges Russian grip (FT, 04/11/09)
Is natural gas a real low-carbon option? (FT Energy Source, 05/10/09)

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