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Decarbonize or die: is Europe turning its back on gas?

  • Featuring
  • Stuart Elliott
  • Commodity
  • LNG Natural Gas

Natural gas – once praised as the key to an achievable energy transition in Europe – is increasingly falling out of favor.

EU policymakers have spent years extolling the virtues of gas, calling it the cleanest of the fossil fuels and a bridge to a lower-carbon future.

But the world – and Europe in particular – is shifting its stance toward gas quickly, meaning it is at risk of being left behind in the race to net zero emissions.

Gas projects are increasingly vulnerable, as financiers and company management face pressure from their boards and investors not to invest in fossil fuels.

The International Energy Agency has repeatedly revised down its estimates for longer-term EU gas demand. In its past five World Energy Outlooks, the picture in 2040 has worsened gradually, from an estimate of 466 Bcm in 2015’s WEO to just 386 Bcm in last year’s outlook.

IEA gas forecasts revised down

Likewise, there is no escaping the scale of environmental action spurred on by Swedish teenager Greta Thunberg, who has pushed the issue of carbon emissions to the very top of every political agenda worldwide.

Even Hollywood is getting involved, with stars like Mark Ruffalo and Cher weighing in on the debate, urging Europe not to import dirty, fracked gas from the US.

Ruffalo – currently starring in a film called "Dark Waters" about chemical pollution in the US – urged the European Parliament directly to vote against the inclusion of gas projects on the EU's list of priority energy projects, the so-called Projects of Common Interest(PCI).

His lobbying efforts were ultimately unsuccessful, but the fact that in a few short years the mood has shifted away from gas projects being seen as a clean, sustainable element of European energy supply security to potentially as damaging as coal, is staggering.

Green deal

It was not long ago that the Southern Gas Corridor, for example, designed and constructed at a total cost of some $40 billion – just to allow Europe a smidgeon of extra supply security – was much heralded by Brussels.

Now, the EU is all about its Green Deal. And gas's role in it is questionable.

Go deeper: Podcast - Finding a home for new gas supply to 2025

New European Commission President Ursula von der Leyen has put climate at the top of her policy agenda for the next five years, with plans to make the EU a net-zero carbon economy by 2050.

That is more ambitious than the EU's current goal to cut emissions by at least 80% from 1990 levels by 2050, and to help achieve it von der Leyen wants to ramp up the EU's 2030 targets to cut CO2 to at least 50%, up from 40% agreed in 2018.

If this is approved by EU lawmakers – and the European Parliament has already called for a 55% cut by 2030 – then gas demand could well be displaced before 2030 by more renewables and energy efficiency.

The EC has also launched a "Just Transition Fund" which could mobilize up to Eur50 billion ($55 billion) of public money to help heavy industry like refineries and steel works cut their emissions.

The proposed fund is part of a wider plan for a Eur100 billion Just Transition Mechanism intended to help targeted carbon-intensive regions keep up with the rest of the EU becoming carbon-neutral by 2050.

In the UK, the chairman of the energy regulator said last month that the oil and gas industry's "social license to operate" was also under serious threat, warning there were "no second chances" given the realities of climate change.

Tim Eggar said he could not remember "anything like the industry rethink of the last few months."

"If the industry wants to survive and contribute to the energy transition it has to adapt," he said.

Sense of urgency

Oil and gas companies seem to be recognizing the urgency amid calls for them to make a meaningful contribution to efforts to tackle climate change.

European majors –  regularly accused of "greenwashing" given the tiny fraction of capex dedicated to renewables and low-carbon fuels – are having to adapt.

In the past, they have pledged more spending on gas and LNG, highlighting its role as a bridging fuel in the energy transition. But now even gas is under increasing scrutiny.

"We are not spending enough on new energies, especially in power, and we want to ramp that up," Shell CEO Ben van Beurden said in late January.

Van Beurden said Shell wanted to "maintain a strong societal license to operate" and to "thrive in the energy transition."

"The pressure is keenly felt. We want to be a force for good in changing the whole energy system to a low-carbon version," he said.

But his ambitions came with a warning. He said the energy transition should be done by oil and gas companies – "strong incumbents" as he called them.

These, he said, were best-placed to help transform the energy system by working with sectors that consume energy on the path toward net-zero emissions.

'Wrong shareholders paradox'

Morgan Stanley, however, warns that progress could be slow because of the "wrong shareholders paradox."

"The majors can play a constructive role in the energy transition, but their current shareholders show little appetite for large-scale investment particularly given the uncertain returns in many new energy areas," it said in a recent report.

"Instead, they show a preference for capital discipline, near-term growth in free cashflow, reduction in net debt, and increases in distributions. This puts the majors at a cost-of-capital disadvantage versus pure-play renewables firms, and may at some point limit the pace at which the majors can transition," it said.

Consultancy McKinsey said in a report in early 2020 that the minds of industry executives were being focused increasingly on climate issues.

"Investors are pushing companies to disclose consistent, comparable, and reliable data. Activist shareholders, for example, are challenging US- and Europe-based oil majors on their climate policies and emissions-reduction plans," it said.

In addition, investors are increasingly conscious of environmental issues with an alliance of the world's largest pension funds and insurers (representing $2.4 trillion in assets) in September committing itself to transitioning its portfolios to net-zero emissions by 2050.

The European Investment Bank, meanwhile, at the end of 2019 already said it had committed to stop approving unabated fossil fuel projects – including gas – from the end of 2021.

And the calls from Ruffalo and others to stop funding gas projects in Europe have support from independent consultants too.

France-based Artelys said in a damning report published last month that the majority of the 32 gas infrastructure projects on the latest EU PCI list were effectively redundant.

"Most of the projects are unnecessary from a security of supply point of view, and represent a potential overinvestment of tens of billions of euros, supported by European public funds," Artelys said.

"Existing EU gas infrastructure is sufficiently capable of meeting a variety of future gas demand scenarios in the EU, even in the event of extreme supply disruption cases," Artelys said.

Gas projects included in the PCI list are at risk of becoming stranded assets, it said, even in scenarios with higher gas demand.

"Most of the projects are shown to be superfluous from an economic point of view," the consultancy said.

CCS, hydrogen

Clearly the tide is turning against gas in Europe, but what else can be done?

One avenue to explore is the conversion of gas into hydrogen using carbon capture. Progress in scaling this technology up will be critical in the coming years.

Equinor CEO Eldar Saetre said this month the company had "several levers" to reduce the net carbon intensity.

CCUS and hydrogen are expected to be significant contributors, Saetre said.

"We have tested many scenarios. I can assure you. We know quite firmly that to reach the goals stated in Paris, CCS, CCUS and hydrogen will have to be part of the solution. I basically have seen no scenarios without it as a major component," he said.