Goodbye to Gas as a Bridge Fuel

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The days have passed when it was easy to imagine natural gas as a global “bridge fuel” in power generation. North America, Russia and some Mideast producers may continue to use domestic gas extensively for electricity beyond the next decade or so, but growth prospects for international gas have been uncertain, at best, since Russia invaded Ukraine — even as cash poured into exporters’ coffers and expansion schemes were widely touted. The fate of the fuel is probably sealed if “market players” in China are right in their expectation that Chinese gas demand will shrink for the next three to five years, as reported by Energy Intelligence. Much of the world may continue using some gas in manufacturing and space heating for a couple more decades, but power generation has remained the perceived growth area for gas, as a noninterruptible substitute for more polluting coal. Intolerable prices are quickly destroying that hope, if they haven’t already.

Europe has succeeded in building gas inventories ahead of the approaching winter, despite Russia’s best efforts to keep stocks low by slashing pipeline supply. The price paid by Germany and other European importers has, however, been gargantuan. German wholesale prices were lately at 14 times year-earlier levels, and it now seems virtually certain that, as a result, a major recession will spread outward from that industrial core to the rest of Europe and beyond. The recession is widely expected to continue until gas demand falls back in line with supply — even as Russian flows continue to fall.

Another major victim of Europe’s ongoing gas wars with Russia will likely be the market-oriented pricing reforms that Brussels has been striving to implement across EU gas and power markets for two decades. Designed to make renewables highly profitable, this system raised the price for all electricity in line with soaring gas prices, to predictably devastating effect.

Spain and Portugal got clearance from Brussels in April to move outside the EU power pricing system. After months of resisting pressure from the rest of southern Europe to join Iberia in ditching EU market rules, European Commission President Ursula von der Leyen and senior German economic officials in late August conceded the obvious: Such a market structure puts intolerable and unnecessary burdens on households and businesses even in northern Europe.

The entire European electricity pricing structure now looks set to be reworked, much of it on an “emergency” basis. Gas markets are already in tatters, if not suspended altogether. Gas is essentially on a fast phaseout track in Europe.

China Cedes the LNG Field

As China demonstrates so forcefully, damaging side effects of Europe’s restocking success don’t stop in Europe. LNG sellers may be fat at the moment, but they have scant cause to be happy if they look more than a year or two out. Cautious upstream and midstream investment policies, especially in the US, indicate most gas producers and LNG exporters realize this.

If Chinese gas consumption does fall this year and on through mid-decade, “it would be foolish for anyone to invest in long-distance natural gas pipelines, LNG receiving terminals and gas storage facilities,” an official with China’s largest city-gas distributor told Energy Intelligence. Multiple other sources are expecting “a collapse of gas and LNG infrastructure spending.” If so, odds are that such spending will never resume at high levels in China. Events will have moved on, leaving gas behind.

Gas is not used extensively in China’s coal-heavy electricity sector at this point, as it can’t compete on price with either coal or renewables. It is used for heating and, to a degree, by industry. However, hopes were high among LNG sellers that Beijing’s evident determination to reduce CO2 emissions quickly would bring some displacement of coal by gas in power generation. Instead, domestic coal mining and use is back at near-record levels, and solar, wind and nuclear are the beneficiaries of carbon-cutting — not gas. Not at these prices.

China’s official forecast is still for tiny but positive growth in gas consumption this year and recovery in growth beyond that. If that were the case, the damage to gas’ prospects wouldn’t be too dire. But if consumption continues shrinking beyond this year because of Covid-19 closures, and infrastructure development stops with it, as Energy Intelligence sources suggest it will, gas will not make a comeback in China.

Beijing is targeting 25% renewables in its electricity supply by 2025. History suggests that goal could easily be reached a year or two early. And more and more, batteries are accompanying China’s breakneck renewable generation expansion, reducing the need for backup power supply of the type that “bridge” era gas was supposed to provide. For the rest, there’s always coal — much of it mined domestically.

Moving On

China has been the growth engine for the international LNG trade for years, and was widely expected to remain so. India — always imagined as the fallback growth engine for oil and gas when China sputters — is also turning backward to coal and forward to renewables, with little remaining interest in bridges in between. Japan was long the global leader in LNG demand. Its response to this year’s run-up even in the oil-indexed LNG on which it heavily depends — much less the spot or short-term supply to which it had been turning — has been to finally get serious about restarting at least seven of the many nuclear reactors it has left sitting idle since the shock of the Fukushima nuclear accident in 2011.

“High, volatile prices are alienating the same markets that the LNG industry was counting on for growth.” Sam Reynolds, author of an Institute for Energy Economics and Financial Analysis (Ieefa) study entitled The Economic Case for LNG in Asia Is Crumbling, told Energy Intelligence recently. The result could be a gut punch for existing and planned North American export projects.

Delays in projected coal plant closures or even reopening of previously abandoned coal facilities in country after country can be interpreted as a death knell for the bridge theory of a long life for gas-fired power generation around the world. Despite all the talk about the disastrous effect of coal’s reprieve on climate-saving attempts, it probably won’t make that much difference, if only because the reprieve is likely to be brief.

The economics of wind and solar become overwhelmingly positive at the kind of prices seen this year even for coal and oil-indexed gas and LNG, much less market-priced natural gas — overwhelming enough that they also cover the cost of battery backup. And while batteries on their own don’t currently provide lengthy enough storage to be a full backup, intense research under way on longer duration batteries and other forms of electricity storage may well fill that gap before long, too.

Sarah Miller is former editor of Petroleum Intelligence Weekly, World Gas Intelligence and Energy Compass.

Gas-Fired Electricity, Gas Demand, LNG Demand, Renewable Electricity
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