James Watson, secretary general of industry body Eurogas, joined S&P Global Platts for a wide-ranging interview on all things European gas.
Watson talked to Stuart Elliott, editorial lead for European gas and power, about the state of the market and how it is likely to evolve in view of the energy transition. The interview has been lightly edited for clarity and brevity.
We are at a pivotal moment for the gas industry with the energy transition. How would you describe the market as it stands?
In Eurogas, we see the gas market as very strong. And I think we've built a very effective, very efficient gas market in Europe. I think it's something that we can be proud of. It's the countries of Europe coming together to deliver, I would say, one of the most liquid markets in the world for any type of energy.
We've got a great amount of supply. This isn't just about the domination of one particular partner to our eastern border. We've got LNG coming from all over the world. We've got the Southern Gas Corridor now coming over from Azerbaijan. This has to be one of the most liquid markets that there's ever been. There is very strong infrastructure and very effective markets.
Perhaps in Central and Eastern Europe, there's still work to be done in certain areas. We also see that some infrastructure still needs to be built, but we have the LNG terminal in Krk in Croatia just coming on, there will be another one in Greece soon.
So we're more or less there, the jigsaw has been made. We're just putting the last pieces in. And so there is a general feeling across policymakers, regulators, and analysts who see the gas market as one of the best functioning energy markets in the world today.
We have seen quite a lot of market and price volatility over the past year. Do you think this volatility is here to stay?
We have seen a situation that's been quite unique. I don't think any of us could have imagined how bad things would get with the pandemic.
And so of course, the pandemic has had a massive impact on the gas market and indeed has led to volatility and a suppression of demand. Nevertheless, we are seeing a rebound, and I think we will see that continue. It may not get back up to the high peaks that we had for gas consumption in Europe in the last few years before the pandemic, but we'll be around about that mark. And we'll be set like that for about 10 years.
I want to be an optimist on the pandemic and say, yes, we're going to get back to some level of normality, and that will mean that the volatility will reduce. And natural gas will definitely be a fuel of the 20s. In fact, you could even argue that it will be the fuel of the decade.
This year, the legislative slate looks incredibly challenging for an association in Brussels. What is concerning the gas industry most in terms of the challenges ahead when it comes to revision of all these different legislative instruments, such as the renewable energy directive?
Well, we might have had a pandemic, but the European Commission has been super busy. And yes, this year is going to be a super year of legislation. What we are dealing with is the greenest European Commission there's ever been. They have a very, very strong push on climate policy.
Needless to say, we are fully engaged on all fronts. When we look at how we see the future of gas, we don't see it in a vacuum. We see a growing synergy with other sectors. So sector integration, as it's often called, as a kind of buzzword. But really what we are thinking is that we will see greater reliance between gas and electricity and we think the gas and electricity will become the dominant forms of fuels towards 2050.
Today, you've got oil—we're still living in the generation of oil, oil is the king, and then gaseous fuels and then electricity. And we expect in the next 30 years that to be inverted. So you have electricity then gas and then liquid fuels.
Today, gas is doing its job reducing carbon emissions across Europe, replacing oil in heating and coal in electricity. But gas alone won't get us all way to carbon neutrality. So we're going to need to change gas as well. And so we think under the renewable energy directive, we need more recognition for the role of things like hydrogen and biomethane. And we need Europe to start really embracing that change sooner rather than later.
So we've been calling for targets for renewable and decarbonized gases within the renewable energy directive. Make a level playing field between different gases and set targets to actually deliver them in the renewable energy directive. The gas industry is calling for a renewable gas target of 11% in final gas consumption by 2030.
We also believe there should be a decarbonization of gas in general. And so alongside that renewable target, we're calling for a 20% greenhouse gas intensity reduction on a baseline of 2018 by 2030. This will help us also deliver hydrogen, which is derived from natural gas and coupled with CCS.
So we see that these two tools will give us a pathway to start investing in the types of gas that we want to have by 2050. And if we do it now, it will cost less than if we wait until 2030 and then start acting then.
How will guarantees of origin play into that?
Underneath the targets, in our hierarchy of asks, comes guarantees of origin. And we want to see guarantees of origin being given and recognized for all types of gas. It is allowed today in the renewable energy directive for member states to issue guarantees of origin for non-renewable energy sources. So that would cover blue hydrogen. And so we're very happy about that.
But we would like it to be not just left to the whim of the member states and actually make it an unequivocal statement. So we're looking to change that so there is more clarity that blue hydrogen should be treated the same way. I think the European Commission would agree with us that there should be a harmonized system for GOs. We would like to have one harmonized system, so from Portugal to Poland, from Finland to Greece, you can trade them. That will create a liquid, effective market in GOs.
What is Eurogas' position on market design for hydrogen?
In principle, we believe very strongly that in the first few stages of the decarbonization of gas, we will need hydrogen blending. We think that given the state of the distribution grid, you can actually blend relatively effectively up until around 20% without having to make major changes to household appliances. And now when you get to about 20%, our view is that it's probably cheaper to switch to dedicated hydrogen [infrastructure]. When you get to 20%, switch, that's the message that we have.
We can understand why there's an idea to have a separate grid for hydrogen. We think though, you first use the existing grid, use the blending and when you've got to a certain volume, then you switch and you've saved yourself building a whole separate grid from the very beginning.
It's going to save a lot of time, a lot of money if you use existing grid. We've got over 2 million km of distribution system in Europe. We use that instead of trying to build a whole new hydrogen system, it just makes so much more economic sense. It's realistic as well.
I don't think there should be too much concern about who is actually owning and operating those networks either because they've done a very good job for methane, and they can do a very good job for hydrogen. I'm not sure that I would agree that this should be left entirely in the hands of big private companies who run their own hydrogen networks today.
I think we need a much more democratic use of hydrogen for the future, and that means using the existing infrastructure and helping the current operators make that transition to deal with the new gases that are coming in.
Let's not throw the baby out with the bathwater, because we actually really will need those people to help us run an effective market. They've been fundamental in making sure that the gas market works today, and I think they'll be fundamental in making sure the market of hydrogen works in the future. Trying to complicate the hydrogen market will probably be the downfall of it, keeping it simple and looking at what has worked for methane is a good way to take hydrogen forward.
What about using other existing infrastructure for hydrogen, such as LNG import terminals, in the future?
I would say definitely. Looking at the current southern neighborhood policy that came out this week from the European Commission, they talk about 40 GW of electrolyzers being deployed in that region. I don't think all of that hydrogen that they produce is going to be consumed in North Africa, and I don't think all the rest of it is going to be piped automatically through the pipes to Italy and Spain. There's a very good chance that it can be liquefied and you go from LNG to liquid hydrogen (LH2). And then you've got Croatia LNG just across the Mediterranean. You can upgrade it in time to start dealing with LH2 and that becomes a meaningful part of our economy. And this is the direction that policy is heading in.
And what do you think about the traditional gas suppliers to Europe by pipeline, so Russia and Norway. Do you think the onus is on them to decarbonize the gas at source using CCS to produce hydrogen and then send that through their big networks to customers? Or do you think they'll just carry on sending natural gas and then it's up to the customer to decarbonize it when they get it?
I think it will depend on the economics. Is it going to be cheaper to send natural gas and decarbonize at this end? Or is it going to be cheaper to change the infrastructure that's bringing gas from east to west or north to south and then get them to build the CCS plants or the pyrolysis plants and send hydrogen down those pipes? I think that in the end, the market will decide what is the most effective way to do that.
Do you have any vision of how you see a hydrogen trading economy developing? Might we have hubs like we have for natural gas?
That's the vision we would have at Eurogas, definitely to have it as a market—a tradable market commodity. I think that is actually very crucial to the overall cost effectiveness of hydrogen. We also believe that at the moment, we shouldn't have separate markets, and indeed, hydrogen should be traded within the gas market. Why would you change that when it's worked so well for consumers? I don't understand why you want to create a whole new market for hydrogen separate from a methane market. At the end of the day, a consumer isn't buying hydrogen or methane, they're buying warmth or something to cook with. So I think that's what we should remember. It's the consumers that matter.
And what about gas as a transportation fuel?
In a study that we did, there is gas in transport. There is hydrogen in transport, but it's not in passenger vehicles, and it's not in light commercial vehicles. The majority of that in the future will be electrified. That's our own study. On the other hand, on heavy-duty road transport, we see that very clearly there will be a strong role for gases—bio LNG or hydrogen. When you're getting into the heavy-duty and above, you're definitely talking about hydrogen. Hydrogen can also play a role in trains. There can also be ships—we see LNG coming on to replace oil and bio-LNG can take its place. And there's aviation. It's not going to be all biofuel planes. It's a growth area for us, definitely.
The EU is to propose legislation on tackling methane emissions, including those emitted by gas suppliers to Europe. How do you think this issue should be best addressed?
The first point is: get your measurement right, then you can understand if there is a problem. We are very keen to understand the best way to go about measuring, making sure we have harmonized and comparable standards and figures across Europe. So we applaud and welcome the European Commission's initiatives here, and we've been supporting them through our own industry initiatives for a while.
Now the methane supply index is a different matter. That's quite complicated. As we understand it, there would be a premium or a privilege given to imports from countries that have lower methane footprints. Is that a tax? Does that mean that if you've got higher footprint, you're going to be taxed at the border on entry? How does that work exactly? Because under World Trade Organization rules, you would be considered to have a 'like' product, i.e., a molecule of methane is a molecule of methane.
I find it very difficult to see how this can actually fly. It's not to pour cold water on the idea, but it would need to be extremely clever and extremely flexible.
I think the best way to do it is do international negotiations. So the international observatory that's been touted under this strategy is a much better way, where we can sit down and talk about the different issues. In my world, this is how you deal with international politics. You talk to your partners. As soon as you start trying to reward people for being good and punish people being bad, they will retaliate. And nothing gets solved. Much better to work with people, talk to them and say, we think that there are issues here. We're a big consumer of gas. We'd like to work with you to make things better. And I reckon you've got a much better chance of getting people to the table and then taking action.