Natural Gas: Fueling the Energy Transition

  • 21 Jun 2021
  • By Adila McHich
  • Topics: Energy

Natural gas has the potential to be the bridge fuel to a low-carbon economy. As global energy demand expands and the world population grows, natural gas has emerged as one of the most important sources of energy that is clean, reliable, affordable, and able to meet rising needs.

Major energy companies have incorporated natural gas as an integral component of their 2030-2050 energy transition roadmaps, even under deep decarbonization scenarios.

In addition, competition among major countries over energy security and supply diversification has placed natural gas firmly in the geopolitical agenda. This is particularly true of the US and China, which are the world’s largest economies and largest emitters of greenhouse gases.

Reduction of CO2 emissions

Natural gas has the potential to play a key role in the energy transition due to its favorable characteristics ‒ mainly its abundance, low cost, cleanliness, and versatility.

Natural gas has better environmental attributes than any other fossil fuel, as it has the lowest carbon intensity and emits fewer pollutants such as sulfur dioxide (SO2), fine particulate matter (PM2.5), sulfur oxides, and nitrogen oxides (NOX).

However, methane emissions through flaring, venting, or leaking along the supply chain do challenge the description of natural gas as a clean fuel.

The economic and environmental consequences of those emissions have prompted some voluntary and mandatory efforts to start addressing this issue. Energy companies are investing in different advanced technological capabilities to capture gas instead of flaring and venting, aerial methane leak monitors, drilling operations powered by renewables, among others.

Natural gas supports the integration of renewables

Natural gas is an essential engine entangled in many sectors of the economy ‒ power generation, industrial, commercial, and residential sectors where it competes with other fuels.

Natural gas has considerably increased its role in the US power sector by displacing coal by virtue of its more competitive price. Coal-to-gas switching has led to a reduction of 33% of emissions from their peak in 2007, based on EIA data.

In 2020, gas accounts for approximately 40% of electricity generation in the US. This has allowed the nation to achieve larger emissions savings than China. In addition, gas-fired generation offers the reliability and flexibility to be a backup source to intermittent renewables at least until the technology advances and cost-effective storage options are developed. 

US investments in energy R&D

Over the years, US research and development (R&D) in the energy sector has led to several breakthrough technologies that are now being utilized across the globe.

The US federal government has always played a role in funding initiatives alongside institutions, governmental agencies, and centers. Chart 1 shows the breakdown of the Department of Energy (DOE) R&D budget. The government has also formed partnerships with the private sector in order to commercialize clean energy technologies.  

Chart 1 Department of Energy R&D and related activities 1

Source: Congressional Research Service

Some US companies have put aside their competitive rivalry in order to collaborate on R&D and to combat environmental degradation. For example, Project Falcon[1] was launched by Chevron, ConocoPhillips, Devon Energy, ExxonMobil, Pioneer Natural Resources, Shell, and TRP Energy to further develop technologies of detecting and monitoring methane emissions.

Another technology that has received significant attention from both the private sector and the federal government is Carbon Capture Storage (CCS) which focuses on the capture and storage of CO2 deep underground, preventing its release into the atmosphere.

US Energy Security

The shale revolution has turned the US into one of the world’s largest oil and gas producers with the added benefit of a low-cost base.

The abundance of natural gas in the US also provides the country with energy security that adds additional geopolitical leverage. Since the US became an energy net exporter, gravitational forces have shifted from the Middle East and Russia, providing Washington with more flexibility in international affairs and foreign policy.

The importance of natural gas in providing energy security should not be overlooked. It effectively insulates the US against supply shocks. Access to energy supply has a major impact on defining the global energy order.

While the abundance of natural gas offers the US significant freedom of action in foreign policy, the supply vulnerability of some of its allies complicates the situation, limiting this freedom to a certain extent. 

China energy security issues

China is one of the other major players in the global gas market. Over the last decade, the country has embarked into massive plans for economic expansion and social development that have been the impetus for a significant growth in gas consumption.

Chinese gas demand represented 8% of world gas consumption in 2019, compared to 3% a few years ago. Its gas reserve levels account for 4% of the world’s total, compared to just 2% five years ago, while its production is approximately 4.5% of global market share.

China relies heavily on imports because its expanding demand is outpacing its production and gas reserves. In 2019, China became the world’s largest gas importer. Consequently, Beijing is well aware of its vulnerability: its heavy reliance on imports represents a huge energy supply risk that has the potential to jeopardize economic growth.

China’s Belt and Road Initiative

The importance of natural gas in China’s economic planning is reflected in the Belt and Road Initiative (BRI) that launched in 2013.

The BRI is a mega initiative that focuses on investment and development, valued over $2 trillion, to expand China’s economic, energy, and geopolitical influence throughout the East and South China Seas, the Indian Ocean, and the Middle East.

Digital and energy infrastructure is one of the pillars of the BRI, considered one of the most ambitious infrastructure projects ever. Investments on gas projects are estimated to be around $152.4 billion. As per chart 1, exploration and production (E&P) accounted for only 16.9%, while transportation and processing accounted for 81.3% for gas processing and transportation projects. Power of Siberia, a 3,000 km-long gas pipeline linking eastern Siberia with China, is one of the most high-profile gas projects due to its $55 billion cost and strategic significance, symbolizing an alliance between Beijing and Moscow.

Chart 2 BRI gas investment projects

In a surprise step, in September 2020, President Xi Jinping announced at the United Nations General Assembly a commitment to achieve net zero carbon emissions by 2060.

This pledge is very ambitious. Some critics question if it is realistic within the target timeframe, especially since China is currently the world’s largest CO2 emitter.

Coal has historically played a major role in the Chinese energy mix and accounts for approximately 60% of electricity generation. Increased concerns about air quality and the environment have encouraged the Chinese government to issue new directives and reforms to mitigate climate risk and expand the role of natural gas in different sectors.

Natural gas power plants have displaced coal boilers in those industrial and residential sectors that were major sources of greenhouse gas emissions. Also, wholesale prices at the point where natural gas is transferred from a pipeline to a local natural gas utility, referred to as Citygate tariffs, are being deregulated to allow market forces to determine prices. On the investment side, the Chinese government has opened direct ownership of city gas companies to foreign investors as a way to incentivize private companies to invest in domestic infrastructure (i.e. pipelines and LNG import terminals). Also, in September 2020, China created a new $55.9 billion pipeline company, PipeChina, to operate all pipeline and storage facilities.

China has made significant strides in advancing renewable energy technologies, such as solar, wind, and electric vehicles. China owns 36% of the world’s total new renewable (wind and solar) generation capacity, although the integration of renewables into the Chinese grid has faced some challenges in terms of transmission and reliability.

Conclusion

Looking ahead, natural gas will be a critical part of the fuel mix needed to meet the ever-increasing need for electrification around the globe. This is due to its flexibility, compatibility with renewables, and lower carbon footprint.

The role of natural gas is likely to continue to expand, and its relative importance will increase in the arena of international affairs and security agendas.

The new energy system will be more electrified, digitized, and technology driven. The path to a carbon neutral economy will not eliminate previous geopolitical rivalries over energy resources.  Instead, competition for natural gas resources and for technological supremacy may become the new “arms race” of the 21st Century.

Sources

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