As the world starts to turn its back on coal, governments and companies in Asia have been ploughing money into gas as a practical and cleaner alternative.
But critics are increasingly taking aim at that commodity’s green credentials as well, sparking worries that billions of dollars in investment will end up in so-called stranded assets.
Countries face the burden of decommissioning shunned projects if gas becomes the next pariah of global energy, while companies and others that bet big on the role of gas in Asia’s energy mix would also be hit hard.
In December, two institutions issued reports highlighting their case against gas in Asia.
One of them was the Institute for Energy Economics and Financial Analysis, a US-based non-profit organisation, which said “62% of LNG (liquefied natural gas) import terminal capacity and 61% of gas-fired power capacity is unlikely to be built due to unfavourable fundamental project and country-level factors” in the emerging Asia countries it studied.
The other was from US-based NGO Global Energy Monitor, which said switching to gas would threaten Asia’s economic and climate objectives, reported Nikkei.
The report said there are US$358 billion of planned gas projects in the region – power plants, ports and pipelines – with many risking becoming stranded assets as “cheaper renewables and clean energy policies increasingly undercut” fossil fuel power generation.
“We are already seeing financiers stop lending for gas projects, for the same reasons we have seen capital move away from coal projects” like pressure for climate action and public opposition, said Christine Shearer, one of the authors of the second report.
“Many of these gas projects will likely become ‘unbankable’, similar to coal,” she said, adding that studies have shown “increased gas use actually crowds out and blocks increased renewable use, rather than bridging to it”.
Many have argued that gas, which emits only around half the carbon dioxide produced by coal per unit of power, needs to be considered as a bridge to renewable energy.
South Korea recently included LNG in the “transition sector” of its Korean Green Taxonomy, while the European Commission, the EU’s executive arm, on 2 February proposed a plan to include certain nuclear and gas power as green investments under its EU Taxonomy.
A green taxonomy is a classification system that determines the sustainability of different economic activities, a de facto investor rule book.
The need for gas should be greater in Asia’s emerging nations, which still lack adequate funds and the technical capability for a mass rollout of renewable energy.
“Gas has to be a transitional fuel. Any jump to renewable energy sources without using gas – Asia cannot afford the cost,” said Han Phoumin, senior economist at the Economic Research Institute for Asean and East Asia.
“The effective deployment cost of variable renewable energy is much higher than gas/coal power plants.”
Unsurprisingly, that view is common across the gas industry. “LNG is necessary for economic growth in emerging countries, especially in Asia,” said a representative of Japanese trading house Mitsubishi Corp, one of the country’s largest LNG suppliers.
“Rather than jumping from coal and oil to renewable energy, it is realistic to first shift to natural gas, which has a lower environmental impact.”
But the risk that gas projects may become “unbankable” sooner rather than later is spooking industry players, more so after COP26, as the world quickly turns away from all forms of fossil fuel.
“We certainly believe that gas will act as an important transition fuel up to the mid-2030s. But thereafter, we cannot be entirely sure that there will be people needing LNG and be able to sell gas at a profitable price,” said an executive at an oil and gas company in Indonesia.
“Therefore, it is becoming increasingly difficult to propose a competitive business model to shareholders, investors, and financial institutions (on any gas project),” the executive said.
“With countries around the globe aiming for net zero (carbon emissions), gas is a resource that must eventually be weeded out. Those in the industry will need to grapple with the problem of how long the world will use gas.”
The International Energy Agency predicts natural gas demand will increase over the next five years but should the world push to achieve net zero carbon emissions by 2050, demand will drop sharply after 2025 and fall far below 2020 levels by 2030.
Even under the announced pledges scenario, whereby countries follow their own net zero timeline, demand for gas will peak soon after 2025 and begin declining.
Highlighting the waning interest in gas projects is the estimated US$19.8 billion Masela gas block in eastern Indonesia. Royal Dutch Shell in mid-2020 charted an exit from the project, in which it holds a 35% participating interest, but it has so far been unable to find a buyer.
“(Shell’s) divestment, which was originally targeted at the end of 2021, has not been implemented,” Dwi Soetjipto, chair of Indonesia’s upstream regulator SKK Migas, said in a news conference in mid-January.
“Shell will be there according to its obligations, until there is a divestment.”
Indonesia’s electricity procurement plan also points to a bleak future for gas demand.
In the state utility Perusahaan Listrik Negara’s 10-year procurement plan announced last October, renewables dominate the construction of new power plants to be built nationwide through 2030 – accounting for 51.6% of the total 40.6 gigawatts of planned additional capacity. Gas only makes up 14.3%.
Volatility in natural gas prices may be another issue for the bankability of new gas projects, as it makes profitability difficult to predict.
Benchmark natural gas prices shot up 45% from January to December last year as a rapid economic rebound from the Covid-19 pandemic coincided with a coal shortage due to extreme weather. As a result, global gas demand surged.
The IEEFA report pointed out that in countries where energy prices are subsidised, more subsidies may erode the fiscal credibility of state-owned enterprises involved in gas projects, increasing risks for financial institutions.
Gas industry insiders say that they have yet to see concrete evidence of investors and financiers moving away from the sector.
“But we are keeping a close eye” on the trend of countries and financial institutions declaring moves away from all forms of fossil fuels, said Gaku Takagi, executive officer of the business development department at Japanese utility Jera.
“Those in the finance industry are quick to move when they sense a reputational risk.”
Turning to “successor” gas fields is a potential workaround for developing gas projects at lower financial risk, Takagi said.
Jera in December acquired a 12.5% stake in the Barossa/Caldita gas field in Australia, which is being eyed as a successor to the dwindling Darwin LNG project nearby.
“There isn’t a need for a large investment since equipment such as existing liquefaction bases can be utilised,” Takagi said.
“Even if it is difficult to start a new gas project from scratch in the current environment, I think that gas field development projects that make use of existing facilities are abound around the world, including in Asia.”
A potential risk should investments in gas decline is the heightened threat of a future energy crunch, said Takayuki Nogami, chief economist at the Japan Oil, Gas and Metals National Corporation.
Europe knows this all too well, as it faced an energy crisis over the winter as supplies of natural gas remained tight through the season.
A typical LNG project is a near 30-year endeavour – there are usually five years between the final investment decision and operation, with production lasting around 20 years. Project delays could also happen.
“During this time, there is a strong uncertainty that consumers may switch fuels and so banks may become reluctant to lend … Private companies may (also) curb investment in natural gas. In the future, there is a risk that energy supply will not be able to keep up with demand due to lack of investment (in gas),” Nogami said.
Even if countries are able to scale up renewable power, it “is currently difficult to store at a low cost and may be affected by the weather, resulting in unstable energy supply”, Nogami continued.
“Until a system for storing renewable energy … is established, a realistic approach is to use natural gas while researching and developing ways to reduce the cost of renewable energy.”