The Fuse

IEA: Gas Demand is Growing. That’s a Climate Problem

by Nick Cunningham | July 09, 2021

Global demand for natural gas is set to rebound sharply in 2021 and continue to climb for the next few years, according to a new report from the International Energy Agency (IEA).

The agency warned that absent new policies to bend the curve on demand, the world would remain far off a net-zero emissions pathway by mid-century.

Gas demand on the rise

Global consumption of natural gas declined by 1.9 percent in 2020 due to a combination of mild weather during winter months in the northern hemisphere and collapsing demand from the pandemic. But that dip could prove to be short-lived. Demand is expected to bounce back by 3.6 percent this year, according to the IEA’s report.

“And unless major policy changes to curb global gas consumption are introduced, demand is set to keep growing in the coming years, albeit at a slower pace, to reach nearly 4300 bcm by 2024, a 7% rise from pre-Covid levels,” the IEA said.

Nearly half of the increase in demand through 2024 will come from the Asia Pacific region, with China and India unsurprisingly driving growth. In terms of sectors, heavy industry will account for 40 percent of the expected growth.

The rebound in demand, in the short-run, has tightened up the market. Prices have shot up, mirroring the broader rise in prices for a long list of commodities. Natural gas prices at the Dutch TTF hub have spiked, due to lower inventories and a rebound from the pandemic. LNG prices in Asia – the JKM marker – have also climbed.

The flip side to market tightness and rising demand is that costs for exporters are also on the rise. “Supplying liquefied natural gas to the growing Asian market has become more expensive for US producers this year,” Rystad Energy said in June. “[T]he short-run marginal cost (SRMC) of US LNG exports to the Asian market has risen to about $5.60 per MMBtu as of June 2021, up 65% from $3.4 per MMBtu in mid-2020,” the firm said. Still, U.S. LNG exports continue to grow, recently hitting record highs.

But the outlook for global gas and LNG is not necessarily as straightforward as it might seem, even as demand appears to be on the rise in the short run. The IEA said that LNG demand growth over the next few years can be satisfied by projects that received final investment decisions prior to 2020. Market tightness, should it occur, will be skewed towards the latter half of the decade.

LNG projects also face enormous financial risks. In a report called “Nervous Money,” researchers at Global Energy Monitor found that as many as 21 proposed LNG projects have either seen their final investment decisions delayed or they have run into other setbacks.

Energy transition

A very large part of the risk to global gas and LNG projects is the fact that it is increasingly seen as a climate problem, not a climate solution. Flaring, leaking methane, and burning gas as the end-use all contribute to rising emissions.

The science on climate change is clear – the world needs to be winding down fossil fuel production and consumption going forward, not expanding it. The IEA itself said in its high-profile net-zero report that new gas projects are not compatible with the net-zero emissions target. “No new natural gas fields are needed in the [net-zero scenario] beyond those already under development,” the agency stated in its report, adding: “Also not needed are many of the liquefied natural gas (LNG) liquefaction facilities currently under construction or at the planning stage.”

LNG producers are exploring ways to implement carbon capture and storage at their terminals so as to formulate a potential pathway forward in a carbon-constrained world, but there are multiple problems with this strategy.

For one, the technology is not commercial yet. Second, if it were deployed, carbon capture schemes would only capture emissions at that particular site, not upstream and not when the gas is ultimately burned at its destination. Gas and LNG would still present a problem. Third, adding in carbon capture technology would only raise the cost of the entire venture, undercutting natural gas’ business case at a time when the costs for renewables are falling.

Other strategies are at play. Reuters reported that gas producers are trying to sell “green gas” that comes from responsible drillers – the criteria for which is vague and opaque – at a 5-percent markup, but so far there have been very few takers.

The writing on the wall, at least in the long run, is pretty clear. Renewable energy will need to be taking a larger and larger share of the pie as the years wear on, which means a shrinking market beyond the next few years.

The problem for big infrastructure projects such as LNG is that they are intended to pay off over decades. From an investing perspective, that means they face red flags today. “With the energy transition accelerating, the outlook for LNG demand beyond 2030 is uncertain. As a result, the outlook for final investment decisions of new supply projects is equally unclear,” BloombergNEF wrote in its Global LNG Outlook in June.

In the U.S., regulatory scrutiny may also be on the rise. The Biden administration has been cagey on its position on LNG, but the Department of Energy and the powerful Federal Energy Regulatory Commission (FERC) are beginning to assess greenhouse gas emissions when they weigh applications for new gas pipelines and LNG export projects, suggesting that the regulatory headwinds could begin to increase.

Any change in direction would be significant – FERC’s historical track record is one of rubber-stamping, having approved more than 99 percent of gas pipeline proposals it has considered. President Biden now has the opportunity to replace an expiring FERC commissioner, which may tip the balance of the five-member panel to the Democrats.

Despite all of the headwinds facing gas and LNG, the demand trajectory is not changing fast enough, as the IEA report details. We are still staring down several years of demand growth, and each new gas project significantly complicates the challenge of reducing emissions.