How long gas can maintain its status as a transition fuel might be defined by the strength of Asian demand and industry's confidence to invest, write Jana Cervinkova and Antonio Peciccia
In its capacity as a transitional fuel, natural gas gained recognition in the outcome text of the UN Cop 28 climate talks in Dubai last year because of the role it could play in facilitating the energy transition while ensuring energy security. One year on — and with the likelihood of further reductions in Russian flows to Europe and the US' long-term LNG export prospects under review — energy security concerns remain strong, while the role of gas in the transition is facing a reality check.
Many international and national oil companies were encouraged by the wording of the Cop 28 text, as the role of gas as a flexible generation fuel to complement intermittent renewable sources is a cornerstone of their argument in favour of continued investment in exploration and production. But the text was a cause for concern for the countries most vulnerable to climate change, which lament the "litany of loopholes" and fear that "transitional fuels will become permanent", according to Antigua and Barbuda's climate change ambassador at the time, Diann Black-Layne.
The build-out of LNG import capacity coupled with European storage facilities once again brimming with gas mean that price shocks of the scale seen in 2022 are likely to remain a thing of the past. Yet energy security concerns have hardly eased since a year ago. Global gas demand grew by 2.8pc on the year in the first nine months of 2024, according to energy watchdog the IEA's most recent gas market report. But global LNG production capacity has grown by a much smaller amount in recent months, and Europe's gas market is bracing to face potential further curtailments to its Russian imports in the second half of the winter.
This makes it unlikely that gas' status could be questioned at Cop 29 in November, even though such a role is far from being universally agreed. Many environmental organisations stress that, as a fossil fuel, natural gas is still part of the problem and should be phased out. "There is little to no room for gas to act as a transition fuel," the IEA warnedlast year — the agency's "net zero by 2050" scenario predicts that global gas demand would need to peak as early as 2026, and decline rapidly in the following years.
Yet gas will also be part of the solution. It emits less greenhouse gas (GHG) emissions than coal or oil, meaning it will lead to emissions reduction if its use in power generation or heating displaces other fossil fuels. The IEA admits that its model outlines only one possible way to reach net zero, with greater use of carbon capture, utilisation and storage (CCUS) and other negative-emission technologies offering alternative possibilities. But the agency has warned against "excessive expectations and reliance on" CCUS to justify continued oil and gas production.
Reality check
Crucially, the narrative of natural gas as a complement for renewables is being tested. The rapid roll-out of intermittent renewables requires flexible sources of power to balance their production — battery storage capacity still lags way behind what is needed to balance grids.
But this argument actually weakens the investment case for constructing more gas-fired plants — if used only to complement renewables at peak demand times, gas-fired plants would see low utilisation rates and investment returns would be less certain.
Two notable examples are Spain and Portugal, where fast progress in deploying renewables has made gas-fired plants uneconomical to run. "Our clients don't need steady base-load gas" but rather "flexibility, optionality and different indexations, and we somehow need to evolve to supply that", Portuguese energy firm Galp chief executive Rodrigo Vilanova says.
The EU has shed about a fifth of its overall gas demand over the past two years — to roughly 297bn m³ in 2023 from 368bn m³ in 2021 — largely as a result of the price shocks that followed the curtailment in Russian pipeline flows. This included a substantial drop in power sector gas burning, as the EU pressed on with an accelerated deployment of renewable energy capacity. Even though there is more pressure to phase out coal over gas, the European Commission has said that gaseous fuels — mostly decarbonised gases in substitution for fossil gas — should only be used in certain sectors, such as industry.
But the path to decarbonisation might be different in many Asian economies, where coal still accounts for a large share of the energy mix. Many of these countries intend to increase gas consumption in the coming years, often to work alongside renewables in substituting coal, lowering GHG emissions and meeting growing energy demand. This could make gas more of a staple component in these countries' energy diet, facilitating investment in the supply chain.
Huge potential, uncertain path
Yet many Asian economies have been dragging their heels, which might have been partly the reason for a 10pc drop in final investment decisions (FIDs) in gas-fired generation plants last year compared with 2022.
Japan has vowed to phase out inefficient coal-fired power fleets by 2030 and to not build any new unabated coal-fired power plants, but Tokyo's latest strategic energy plan — currently under review — still foresees coal fuelling 19pc of the country's power output by the end of the decade. And South Korea has been implementing restrictions on coal-fired generation during peak winter demand periods in recent years, but its emissions trading scheme has been largely ineffective in driving coal-to-gas switching economics since it was introduced in 2015, and the government is yet to commit to a firm timeline for phasing out coal.
China is increasing domestic gas production and expanding its gas and LNG import capacity, but the government appears lukewarm about replacing coal in the power sector. Similarly, the government in New Delhi has long been flagging plans to make India a gas-based economy — increasing the share of gas in its primary energy mix to 15pc by 2030 from roughly 6pc in 2022 — but progress in displacing coal in two key sectors — power generation and steelmaking — has been slow so far.
Although the potential for incremental gas demand stemming from coal replacement is huge, uncertainties on the decarbonisation paths that different countries might choose can have a big impact on the investment cycle. Gas producers and trading companies alike have remained upbeat in the public debate. But investment in gas and LNG production has cooled somewhat, falling well short of some of the brightest expectations voiced in the aftermath of the 2022 European supply crunch.
FIDs in LNG export projects have totalled just 13.9mn t/yr this year so far, putting LNG FIDs for 2024 on a path to fall much below the 37.8mn t/yr worth of production capacity sanctioned last year, which was itself far lower than some industry figures had predicted.
Arguably, this may be partly the result of the pause on licensing new LNG export facilities in the US, where many of the LNG export projects that are closer to reaching an FID are located. The pause was widely seen as an electoral move by the administration of President Joe Biden that is likely to be reversed after the country goes to the polls in November. But it could still become a milestone in the energy transition era, as it made the US the first gas-producing country to dare to ask the question — "is this enough?"
