THE Russia-Ukraine War has brought to the fore the importance of natural gas, whether via pipeline or in the form of LNG (liquified natural gas) as a source of energy for much of the world. The curtailment of pipeline gas supply from Russia to Europe following the outbreak of the conflict not only led to a disruption in the European gas market but also upended the global LNG market. The war led to a massive diversion of LNG supplies from around the world to Europe to make up for the deficit in Russian gas. The situation shows Europe’s and the rest of the world’s heavy reliance on natural gas as a primary source of fuel.
At the same time, it has been reported that China has increased LNG purchases from Russia, forgoing their supplies from Indonesia, Australia, Qatar, and the United States. China’s economy grew an impressive eight per cent in 2021, yet uncertainty looms on the horizon. Nomura and Goldman Sachs both anticipate that China’s annual GDP growth will fall to 4.3 per cent this year. Whilst absorbing more Russian natural gas from Russia, China’s imports of LNG from other sources have declined. The import volume increase of a total of 2.35 million tonnes of LNG, valued at US$2.16 billion, resulted in 28.7 per cent year-on-year increase, with the value surging by 182 per cent. The top six LNG suppliers to China are Australia, the United States, Qatar, Malaysia, Indonesia, and Russia, all of which supply about 8.9 Bcf/d, or 85 per cent of China’s total LNG imports.
China’s recent move could be driven by, among other things, security of supply in light of increased tension following the Russia-Ukraine War. By increasing the purchase of Russian LNG and also pipeline gas, China has managed to maintain its energy supply security while reducing imports of LNG from other sources, including from the US. At the same time, Russia diverted the supplies meant for the Korean and Japan markets that are no longer accessible due to sanctions. China’s decision to divert its LNG import volume commitments from the United States to the lucrative European LNG market was a smart commercial move due to higher prices for LNG there.
Not only are LNG and natural gas an important part of the world’s energy mix, but they also have a useful and strategic role in the future when the major sources of energy come from renewable sources, which is the primary focus of the rest of the article below.
I spoke in September 2021 at an international business conference on the role of natural gas and liquified natural gas (often abbreviated and commonly used as “LNG”) as a logical and important transition fuel to link the present, mainly fossil fuel-based energy world, with the much talked about future world that totally uses renewable energy. In that session, one of the key points I stressed was the logical and natural role of natural gas as a key transition fuel. The narrative below seeks to reinforce this view.
The transitioning process towards a totally renewable, green and clean energy future is not going to be a smooth and straight journey. The search for a utopian future is fraught with challenges, stoppages, retreats, shocks, digressions and turnarounds. Shepherding the transition process well to minimise disruptions to industries and economies is imperative. Accepting that premise as a given, the next question is which fuel source would be ideal for that role. To my mind, natural gas fits the bill like a glove.
In this transitioning process, the role of natural gas and LNG will be critical to bridge the present and the future. At this juncture in time LNG, fossil fuel is seeing a boom and helping to position the super-chilled gas as an important transition fuel. Some may argue that doing so is backpedalling on the move to wean the world from fossil fuels. As a realist, I beg to disagree. Granted at the moment, the focus on LNG may be backpedalling according to those who champion a quick transition to a total renewable future. But as argued below, it is a necessary phase toward a total renewable future, that is, if there is indeed such a thing.
At its 48th summit held from June 26 to 28 this year in Schloss Elmau, Krün, Bavarian Alps, Germany, it was reported that the Group of Seven (G7) supported ‘temporary’ public investments in gas projects to help navigate the unprecedented energy crisis in Europe that’s contributing to inflation and leading to more coal use in power generation.
This G7 decision was seen as a U-turn because the rich countries that make up the group are now favouring investments in LNG terminals, especially in Europe. The investment in LNG terminals means investing in using natural gas as a source of energy generation. As it is, investment in liquefied natural gas terminals is already booming in Europe before the G7’s latest announcement. The decision is just a mere endorsement of a fait accompli and indicates of the group’s determination to stop energy dependence on Russia following the Russia- Ukraine war.
Investments in LNG terminals are set to get another boost from additional injections of funds to build new greenfield terminals or expand existing ones in the face of concerns for longstanding climate change and energy transition.
The G7 move can be viewed as backtracking from the vision of a relentless transition toward renewable and clean energy sources. This is more so if we look at the context where for example, in Europe, LNG projects have often faced opposition on environmental grounds. Politically, it is therefore risky to support more investments in LNG terminals when such projects are opposed to environmental considerations by climate change activists.
Reading between the lines, one could deduce that the G7 sought to deflect criticism by calling it a temporary measure, hence implying that it does not digress from the journey to a renewable energy future. Indeed, in a statement issued following their summit, the G7 leaders stressed they had to respond to the current crisis, that is, the shortage of natural gas supplies in Europe.
So what has triggered this seeming U-turn? Quite obviously, the trigger is the stoppage of pipeline gas from Russia to prevent Russian gas from being sold in Europe or ussed as a tool in the geopolitical game between Russia and the Nato countries.
European governments now have no choice but to back the need for investments in LNG terminal projects to increase importation of the fuel and stop over-reliance on Russian pipeline gas. Following Russia’s invasion of Ukraine, LNG and gas prices soared to record levels forcing nations to seek alternative suppliers to feed into their national grids. Grains like wheat were also badly affected in terms of supply and trade flows to the rest of the world, resulting in sharp price increase and disruptions of supply to many parts of the world.
The beneficiaries of this move to reduce reliance on Russian pipeline gas are the producers and exporters of LNG, especially the U.S. In my view, on the supply side, the sources of LNG to meet this expansion of LNG terminal capacity in Europe will mainly come from the US which is already set to become the No.1 LNG supplier and exporter in the world. Other supplies will also divert volumes to Europe to take advantage of the higher prices of the commodity.
Evidence of the swing in U.S. LNG can be seen from a recent analysis from the IEA (International Energy Agency), which stated that due to Russia’s recent steep cuts in natural gas flows to the EU, June 2022 was the first month in history in which the EU has imported more LNG from the US than via pipeline from Russia. Nevertheless, the curtailing of pipeline gas will undermine the role of pipeline gas supply to Europe.
The production of natural gas will likely pick up in the US in anticipation of more demand from Europe. Short-term measures to meet any shortage of feed gas may include the triggering of more importation of gas from Canada or elsewhere.
The pride of place being the numero uno or top exporter of LNG has been fiercely fought between Qatar, Australia and the US for a while now.
The US will be the top exporter of LNG following the G7’s decision to favour more investments in terminals to Europe’s gas requirements. With record high temperatures in Europe recently, demand for power to drive air-conditioners will increase tremendously, putting more pressure on the overall gas supply system in Europe.
On the demand side, with the building of more LNG terminals, Europe will also benefit from an alternative source of natural gas. The investment into LNG terminals in Europe will need to increase quickly for more import terminals to be constructed.
There are already 29 LNG terminals (amongst which 6 are small-scale LNG terminals) in Europe (with a total send-out capacity of around 227 bcm/y). An additional 33 LNG import terminals are under construction or being planned in Europe.
Since gas is a key source of energy supply to Europe and plays a fundamental role in its energy supply mix, it is, therefore, a net importer of gas.
As indicated earlier, Europe’s sources of supply come in one of two main ways: either as natural gas transported via pipelines or as liquefied natural gas (LNG) which is regasified in an LNG import (or regasification) terminal. Due to the insufficient domestic or regional supply, the shortfall is met by gas importations from Russian pipeline gas, and also Russian LNG and other importation of LNG from other sources.
Assuming a resumption or return to pipeline gas supply from Russia in the future, Europe will be in a better position in terms of energy security because of the now diversified supply sources of natural gas to meet their needs. The hitherto over-reliance on pipeline gas, approximately 2/3 of the European market, from Russia will be somewhat reduced but will not be substituted.
On the question of pricing, pipeline gas will outcompete imported LNG prices into Europe. In terms of reliability of delivery and supply, pipeline is relatively more secure and certain, being physically linked to demand centres and traversing over land compared to seaborne LNG imports.
Despite the now more diversified gas import infrastructure (LNG import terminals and pipelines) at the end of the day price and security of supply considerations will influence purchasing decisions. The more diversified import infrastructure would strengthen Europe’s negotiating position vis a vis the price of the commodity.
Now, back to the U-turn; the issue of reverting to natural gas is seen in the context of the intention to transition to a future by totally renewable sources of energy to mitigate the effects of climate change. The U-turn is considered bad for the aspiration to eventually use renewable, clean and green energy. At the same time, it also demonstrates the practical considerations needed to transition into a renewable future, a point I would come back to later.
But first, it is useful to understand the key terminologies used in the discourse on energy. The three common terms are ‘renewable energy, ‘green energy’ and ‘clean energy. They are not the same thing.
“Renewable energy” comes from sources or processes that are constantly replenished. It includes wind, solar or radiation from the sun, geothermal energy, hydroelectric, tidal waves, hydropower, and so on. From this list we can deduce that they are indeed “renewable”. It becomes confusing when “renewable energy” sources get associated with “green energy” and “clean energy”.
Calling renewables “green” and “clean” is generalising and can be misleading. It is more intended to differentiate renewable energy sources from fossil fuels, which are finite and less green or clean. The burning of fossil fuels is seen as a key contributor to the release of CO2 and other emissions into the Earth’s environment. In that sense it is not in the same category as renewable and clean energy sources.
“Renewable sources” meana recyclable energy sources, while the term “clean energy” refers to those energy sources that do not release pollutants like carbon dioxide into the atmosphere, and finally, the term “green energy” is that which comes from natural sources. So next time you use the terms “renewable”, “clean” and “green” energy you now know the difference.
While there is often cross-over or interchangeable usage of these terms, not all types of renewable energy are fully clean or green. One example that is often quoted is that some hydroelectric sources can damage natural habitats and cause deforestation.
Also, certain renewable sources like geothermal power plants release pollutants into the atmosphere even though they come from natural sources. The greenhouse gases emitted by geothermal power plants include carbon dioxide, methane, particulate matter, nitrous oxides, and hydrogen sulphide. Carbon dioxide is the most commonly released greenhouse gas from geothermal power plants. So we can say geothermal energy is renewable but not necessarily green!
Wind power is clean and green, but the process of building wind farms and the mining of the special minerals used in the manufacturing of the blades of windmills produce emissions. I have written about this aspect of wind power in a previous posting in this newspaper.
Zero emissions are difficult to achieve but we should not give up on reducing the emission of CO2 into the atmosphere. In addition to reducing greenhouse gas emissions, efforts to transition from heavily polluting energy sources such as coal have to be undertaken by using natural gas as it is the cleanest burning fossil fuel.
We all aspire to see a world running primarily on renewable energy, but the journey is fraught with challenges. Practical considerations demand that a phased transition is a reasonable way forward for a smoother process compared to a total and sudden change out of the current energy mix and infrastructure. Using natural gas is a logical and necessary link between the past, present and future of energy generation.
A phased transition will avoid a once-off change out which will not only require a massive amount of capital expenditure but also create major disruptions to supply and business value chains. The process of overhauling the energy system will itself engender the release of greenhouse gases and other forms of pollution to the environment.
I believe the phased transition is already happening as coal is being replaced by natural gas and complemented by other renewable energy such as wind power. What is happening in Europe now, in combination with the proliferation of LNG import terminals, will turn my proposition into reality. Natural gas (pipeline and LNG) will indeed become a key transition fuel into the future.
The decarbonisation of the energy sector requires urgent action on a global scale, and while a global energy transition is underway, further action is needed to reduce carbon emissions and mitigate the effects of climate change. It is estimated that renewable energy and energy efficiency measures can potentially achieve 90% of the required carbon reductions. But to get there, natural gas should be used the interim.
To succeed, the transition needs to be enabled by information technology, smart technology, right and timely policy frameworks and market instruments. Also, to accelerate the transition, countries need easy access to the necessary knowledge, tools and support as they embark on increasing their usage of renewable energy.
NOTE:
This article is compiled by the author from various sources and also based on his own experience in the oil and natural gas industry, including specifically the LNG industry whilst working in Petronas, a key player in the LNG industry and Gazprom, the largest gas company in the world. His current role at Bintulu Port also involves the handling of the export of a substantial volume of LNG to the world market. The views expressed in the article are the writer’s own and do not necessarily reflect the views or opinion of this newspaper.
