Going for gas: the risky strategy of the world’s largest companies
The gas industry’s claims about the benefits gas will bring to the world rely on a number of unproven assumptions and seem considerably overstated.
Plant for production of liquid gases in Ohio, USA.
"The question before us today defines our industry and perhaps our society in the 21st Century." The "question" that Robert Franklin, President of Exxon Mobil’s Gas and Power Marketing Company, was referring to, during a panel debate at the World Gas Conference in Paris (1-5 June), was that of "how to meet the world’s energy demand while reducing the risk of climate change". The answer to both sides of this question, he said, increasingly was: natural gas.
Franklin was not alone. At the 26th edition of their triennial global gathering, the gas industry made it abundantly clear that they believe gas is the foremost solution to the world’s energy problems. One CEO after the other sang the praises of what Gazprom lovingly calls the "blue fuel".
Energy trilemma
Natural gas, so the industry contends, meets all three of the great challenges of the "energy trilemma": it is (relatively) good for the environment, good for "energy security", and good for the economy. "If you look at each of the three legs of the energy trilemma, you see natural gas solutions emerging", said Dick Benschop, Shell’s Vice President of Gas Market Development, in a typical statement.
Gas, echoed Robert Franklin, "is the only energy source that significantly reduces emissions while also being abundant, versatile, trusted, affordable and rapidly deployable on a large scale."
Similar claims were repeated incessantly in Paris. Peter Coleman, CEO of Australian oil and gas producer Woodside, said it had been a mistake of the industry to bill gas as a "transition fuel". That was "a politically motivated phrase", he said, which has become obsolete: gas should be seen as permanent part of the energy mix.
One might dismiss this propaganda for gas as a typical case of an industry singing its own praises. But there is a lot at stake here. The fact is, the largest companies in the world, that take up most of the top spots in the Fortune 500 list, have made a strategic decision to go all-out for gas. It is a decision with huge ramifications for the world economy and the world’s environment.
The world’s oil companies have been shifting their emphasis from oil to gas for some time of course, but in Paris they definitely put their cards on the table. (pdf) that the share of gas is expected to grow to 60% of his company’s total output over the next decade, compared to around half now. Shell is following the same course, underlined by its recent acquisition of BG Group.
ExxonMobil’s CEO Rex Tillerson noted in Paris that he expects gas to overtake coal as the second most "prolific" fuel source by 2025 and to surpass oil by 2040. He anticipates gas demand to grow by "approximately 300%" over this period. Chevron’s CEO John S Watson sounded a more cautious note, saying that "natural gas as part of Chevron’s portfolio is growing significantly", but also voicing some doubts as to where the gas would come from.
Business model
The reasons for this seismic shift are not difficult to deduce. The energy companies see climate policy tightening its noose and they believe the use of gas is compatible with stricter greenhouse gas emission standards. In addition, the US shale gas revolution has created a large new resource of "domestic" gas for them. By converting US shale gas into LNG and exporting it, while at the same exploring for shale gas opportunities in other parts of the world, they believe they will be able to create a global gas trading market in which they will be the dominant players.
An additional advantage of gas is that it doesn’t require the "oil" companies to adopt a new business model. On the contrary, the gas business is even more capital-intensive and complex than the oil business, which is exactly where the big oil companies see their unique skill sets.
The oil companies’ public pronouncements on energy and climate policy have to be viewed in the light of this new strategy. Not without reason did Europe’s top oil companies recently issue a plea for carbon pricing: higher carbon prices will enhance the competitive position of gas versus coal.
Indeed, in Paris the oil companies declared outright war against their fossil fuel brothers in the coal sector. The conference’s official newspaper reported that French giants Total and Engie (formerly GDF Suez) issued "a call to arms against coal" (pdf), while Peter Coleman of Woodside "pulled no punches as he launched an attack on coal" (pdf).
At the same time, the companies are strongly lobbying in favour of shale gas. For example, Tillerson of ExxonMobil called Europe to task over its resistance to fracking. He said "Europe could see a natural gas renaissance similar to North America’s" if it allowed fracking.
For companies like ExxonMobil and Shell shale gas exploration outside of the US, where they are not hindered by the competition of hundreds of small, low-cost producers, represents an important opportunity, both to grow their production and their resource base, and to be able to create the competitive global gas market which is an essential element in their scheme of things.
Grumbling
So we may ask how do the companies’ claims about the virtues of gas stack up? Unfortunately at the World Gas Conference itself, no outsiders had been invited to provide critical notes or engage the industry leaders in serious debate. The CEOs gave their speeches and left.
Lesser company representatives debated the question largely among themselves. At one plenary session, called "Political leaders, industry, industries and NGOs: geopolitical debate", there were no political leaders and no NGOs. Five of the six panel members were from the gas industry (ENI, Gazprom, ExxonMobil, Gasterra and Shell). The only "outsider" was a representative from the US Department of State.
This was unfortunate, in view of the importance of the issue. It also caused some grumbling among attendants. One CEO of a gas company called the conference a "missed opportunity".
We are left to our own devices, then, to analyse the merits of the industry’s case for gas. Let’s look at some of the main arguments.
Perhaps the most straightforward – and most frequently cited – argument in favour of gas is that it leads to lower CO₂ emissions – that is, compared to coal in power generation (and oil in transport). "Gas releases up to 60% less CO₂ emissions than coal", said Franklin of ExxonMobil. Patrick Pouyanné, CEO of Total, said in Paris that the use of coal causes twice the carbon dioxide emissions of gas.
For this reason, the gas industry contends that "fuel switching" is the most cost-effective step the world can take to reduce emissions. As Franklin put it: "Fuel switching can make meaningful reductions quickly without affecting economic growth."
The US shale gas revolution is often referred to in this context as a great benefactor of the climate. Franklin claimed that thanks to the shale gas revolution "energy-related CO₂ emissions have fallen more in the US than in any other country" and are "at their lowest since 1994". He even cited a report from Carnegie Mellon University saying that US "LNG exports will be good for the climate".
The famous Daniel Yergin, Pulitzer Prize-winning author, founder of consultancy IHS CERA, also proclaimed his allegiance to shale gas, saying that US CO₂ emissions are "at their lowest since the early 1990s", thanks to shale.
Alexander Medvedev, Deputy Chairman of Gazprom (CEO Alexei Miller was notably absent in Paris) similarly jumped on the climate bandwagon. "It may surprise you", he said, "but I will start my presentation speaking about ecology and the environment". And he went on to say that for fifty years Gazprom had benefited the climate by delivering to Europe "the most friendly fossil fuel". If, he said, Europe had used coal instead of the 4.2 trillion cubic meters (tcm) of Russian gas supplied by Gazprom, CO₂ emissions would have been 1.7 billion tons higher.
Of course neither the US shale gas producers nor Gazprom ever gave a moment of thought to "ecology" or the climate when they developed their business, but we will let that pass. What counts is the result. But is the result as great as the gas champions would like to have us believe? Hardly.
Logical fallacy
The first thing to note about the gas-for-climate argument is that it is an argument for fuel switching only, not for the use of gas as such. In other words, the use of gas only leads to lower emissions if it replaces coal or oil. As Laszlo Varro, lead author of the latest IEA medium-term gas market report said in Paris: "If shale gas replaces nuclear and renewable energy, it does not benefit the climate."
A recent study from the New Climate Economy initiative (pdf) shows that gas benefits the climate only "if a series of tough conditions are met". As Simon Evans of the Carbon Brief writes, according to this report: "A 10% increase in global gas supplies could prevent 500 gigawatts (GW) of new coal capacity being added by 2035, avoiding 1.3 billion tons of annual carbon dioxide (CO₂) emissions. But (…) any theoretical benefits could easily be wiped out without controls on methane leakage, limits on total energy use and targets to ensure low-carbon energy sources are not displaced."
The problem is it’s not clear at all if and when gas replaces coal. True, gas can be a complement to renewables, if it is used as a source of back-up power. But it can also compete with renewables, as Woodside’s CEO Coleman noted.
Franklin claimed the growth of shale gas production in the US did "not come at the expense of renewables", since "renewables have also shown considerable growth", but this is an obvious logical fallacy. There is no telling how much renewables would have grown if there had been no shale gas. Just consider that the US has still only about half the solar PV capacity of Germany, in absolute terms.
Coal exports
In addition, what shale gas advocates routinely fail to mention is that the US shale revolution helped drive down prices of coal. Although it is difficult to prove cause and effect, the fact is that US coal exports rose steadily until 2012, including to Europe, although they declined again in 2013 and 2014.
As to CO₂ emissions in the US, these too represent a complex picture. First of all, it is not true that they are "at their lowest level since the early 1990s" and it is certainly not possible to prove that shale gas has been the major factor in any emission reduction. US CO₂ emissions rose till about 2008, when the financial crisis hit, and then went into a decline, as a result of this crisis. Since 2012, they have been rising again. Last year, they stood at 5.4 billion tons, compared to 5 billion tons in 1991.
According to this remarkable article by US energy consultant John Miller, one of the reasons why US carbon emissions are no longer going down, is that "despite the increase of cheaper, lower-carbon natural gas production (pdf) during 2012-14, the consumption of coal [in the US] actually increased and natural gas decreased (pdf) within the power sector." The US did use more natural gas, writes Miller, but that went to industry and domestic heating.
For all these reasons Harvard historian Naomi Oreskes concludes in a recent article that there is no evidence that higher gas use has led to lower emissions and there is every reason expect that the dash for gas will "simply increase the total amount of fossil fuel available in the world to burn, accelerating what is already beginning to look like a rush towards disaster".
Economic basket case
Shale gas, which is as we have seen a key element in our energy future as the oil companies view it, is invariably presented by its supporters as a resounding economic success story. Franklin of ExxonMobil said: "Look at the US: GDP has grown 20% of the past five years, manufacturing has rebounded, employment is down to 5.5%." How did the US economy manage to go up while emissions went down, he asked? "The major fact has been the growth of shale gas."
Franklin said "fracking is the technology of the future, certainly from the point of view of the US, or Argentina, or China". Only Europe remained blind to its blessings, he suggested.
Now I don’t want to diverge into a macro-economic debate, since this is an energy publication, but it is clearly preposterous to compare US GDP and unemployment figures to "European" figures and ascribe the difference to the influence of shale gas. The US, with its very limited welfare schemes and very little employment protection, has a totally different economic system from "Europe". The high unemployment and stagnation in parts of Southern and Eastern Europe have many causes, but lack of shale gas is not one of them.
Besides, there is no such thing as a "European" economy. It would be more reasonable to compare the US to a country like Germany, which is after all the European leader in renewable energy and does not have any oil or gas production to speak of. Yet Germany is hardly an economic basket case. It actually has an unemployment rate of less than 5%, lower than the US. It also has longer holidays.
France performs worse economically, but to suggest that allowing fracking in France would solve its economic problems, is hardly credible. The problem of French industry is not high energy prices.
It seems equally demagogic to pretend, as Tillerson did, that the US shale revolution can easily be replicated in Europe. Tillerson said that the European continent holds more than 1600 tcf (44.8 tcm) of natural gas resources, citing the International Energy Agency (IEA), but this is highly misleading, as it refers to resources most of which cannot under any circumstances be produced.
He also boasted that "our industry" has "hydraulically fractured more than 2 million wells in the US and Canada" and "done so safely". But this is of course exactly the problem that densely populated countries like Germany and France have: they don’t want millions of wells to be drilled on their land, whether "safely" or not. Yes, if the choice were between abject poverty and a million gas wells, they might go for the wells. But that’s a false choice.
Whether fracking is the "technology of the future", as Franklin said, also remains to be seen. In China, fracking has so far not been very successful, reports the IEA. Argentina, the other potential new great shale player, has yet to produce its first shale gas in commercial quantities, according to the US Energy Information Administration.
None of this is to suggest that there can be no case for the production of shale gas in certain places under certain circumstances. But to claim that shale presents some kind of unique solution to our energy challenges is something else again.
Only with Russia
A crucial argument for gas relates to the combination of energy security and competitiveness that it is supposed to offer. Shell has long emphasized that gas is "abundant" and "affordable" (in addition to being "acceptable"). Benschop of Shell said in Paris that gas "allows for diversification of supply". Bob Dudley, CEO of BP, noted that "sources of supply are opening up all around the world, namely shale gas, tight gas and deep-water gas, that will help meet increasing demand for clean energy."
Yet these claims again seem overstated. Gas may be "abundant", but conventional resources are heavily concentrated. Russia, Iran, Qatar and Turkmenistan hold 60% of global proved gas reserves. There are no other major gas resource owners in the world, apart perhaps from the US. Certainly supplies of gas are less diversified than of coal or oil.
This could change if unconventional gas resources are developed successfully, as Dudley suggests, elsewhere in the world. But this is not yet the case and there is no guarantee it will happen.
True, LNG exports from the US will increase diversification of supply somewhat, as gas industry advocates are endlessly telling us, but only to a limited extent. Robin Dunnigan, Deputy Assistant Secretary at the Energy Diplomacy section of the US Department of State, noted that new LNG supplies to Europe would only partly reduce the continent’s dependence on Russia and Norway. "Europe is going to benefit for a long time from Norwegian and Russian gas", she said, "and it should".
Mario Mehren, the new CEO of German gas and oil producer Wintershall, went one step further. Noting that the demand-supply gap in the European gas market will be "widening", with domestic supply declining and demand recovering, he stressed that "Europe has energy security only with Russia. Diversification is fine, but only if Russia is part of it."
Growing dependence on Russia is precisely one of the reasons why a country like Germany is expanding into renewables or why a country like Poland relies so heavily on coal. One of the great advantages of solar and wind power is of course that they do not depend on limited natural resources. They are truly "abundant".
What is more, unlike gas and oil, renewable energy is not exposed to the serious risk of price volatility. What will happen to oil and gas prices if the Middle East is further destabilized and, say, countries like Qatar and Saudi Arabia are thrown into disarray?
It should also be noted that the two largest countries on earth, in terms of population, China and India, have no intention to rely on gas to any significant extent. As a new eye-opening report from the IEA notes, China does to some extent encourage coal-to-gas switching, but currently relies on gas for less than 4% of its power generation. The IEA bluntly states that "gas will not become the fuel of choice in China’s power sector".
The same applies to India. Both countries are pursuing a combination of coal-fired power, nuclear and renewables, to solve their energy challenges and limit CO₂ emissions to some extent.
The IEA report also notes, more generally, that gas is not really so "affordable" as its advocates are making out. "In a world of very cheap coal and falling costs for renewables", says the IEA, "it is difficult for gas to compete." But the "renewables revolution" taking place in the world, with costs for solar power plummeting, and even countries like Saudi Arabia seemingly willing to commit huge resources to solar power, was barely mentioned in Paris. The oil companies simply keep repeating the mantra that "the world’s energy demand cannot be met by renewables alone". That may be true, but for how long?
Overstated
All in all, the gas industry’s claims about the benefits gas will bring to the world seem considerably overstated. They rely on a number of unproven assumptions. For one thing it remains to be seen whether unconventional gas can be developed outside of North America to the extent necessary to create a globalized commodity market that would afford countries the security of supply and affordability they require. For another there are serious questions about its alleged climate friendliness.
This does not mean that gas has nothing going for it. It could yet become the world’s fuel of choice, although this would seem to depend strongly on technological progress in unconventional exploration and production, and even more on carbon policies that would favour fuel switching in the power generation and transport markets.
But to put all one’s cards on gas, as the world’s oil companies seem to be doing, seems a risky bet. If I were an investor in Shell or ExxonMobil, I would feel much better if I saw them hedging their bets.
