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Natural gas has always had a differentiated risk profile to oil,
most notably because of higher barriers to monetisation. But with
rising pressure to shift to a lower carbon energy system, there is
a growing divergence between perceptions of gas as a 'bridge fuel'
indispensable for energy transition on the one hand and gas as
'just another fossil fuel' on the other.
For those advocating a continued role for natural gas as the
cleanest hydrocarbon and a means to smooth the transition to
lower-carbon fuel types, there are sharp variations in the future
demand trajectory to contend with, depending on policy choices
across multiple producing and consuming countries. Working in gas
proponents' favour are arguments that energy is still a luxury in
some developing countries where gas can increase energy access and
lower emissions where biomass and coal are the alternatives.
Elsewhere, the ability to maximise existing gas infrastructure and
potentially leverage that infrastructure for lower emissions gas
such as blue hydrogen is a plus.
Set against that, gas risks being written off as a result of its
emissions profile in a net zero-focused era, with the International
Energy Agency projecting a pathway to net zero in 2050 that
requires no new oil or gas project sign offs after 2021. That
message and broader concern about the long-term viability of fossil
fuel use has permeated the finance sector, including multilateral
financial institutions, which are increasingly eschewing the
funding of gas projects, and by climate litigation targeting gas
projects alongside other fossil fuels as part of efforts to align
all aspects of policy with Paris Agreement targets.
Recent IHS Markit energy scenarios capture some of the
possibilities for natural gas under different public policies
especially towards climate. In Inflections, the base case, global
gas production is 30% higher in 2050 than in 2020. In Green Rules,
which entails more aggressive government action on climate (though
not enough to hit net-zero emissions by 2050), gas production peaks
in 2030 and then declines, but only by a cumulative 3% from 2020 to
2050.In either scenario, new investment in E&P will be required
to meet global energy demand in 2050, but with very different calls
on producers depending on costs and the project mix available.
Which projects move ahead will depend on a number of factors
including those largely beyond government control such as resource
availability; partner priorities, including the role of national
oil companies (NOCs) and international oil company (IOC) portfolio
choices; and the availability of finance. Governments do have
several levers at their disposal, however, notably in their
approaches to balancing energy and climate policy, upstream terms
and conditions, domestic market obligations including pricing, and
the availability of infrastructure to commercialise gas.
Several of these elements factor into our indicators of
above-ground risk, which have been revamped to account for
differences between oil and gas. Our Export Risk metric takes into
account the availability of infrastructure, regulatory constraints
to exports including domestic supply obligations (DSOs), security
risks including piracy, vandalism, or terrorism, and the risk of
international sanctions that restrict exports. Scores for Export
Risk are generally lower for gas than for oil, reflecting the
difference in physical characteristics and infrastructure hurdles.
This risk is also heavily linked into producer type with export
access a particularly acute challenge for frontier and early-stage
producers such as Cyprus, Suriname, and Kenya. More so in the
current environment, where investors need to weigh the commercial
imperatives for infrastructure that might be expected to have a 30+
year life span, creating pressure on frontier host governments to
optimise other aspects of the contractual framework and,
potentially, engage directly in efforts to build out infrastructure
in a timely fashion rather than wait for external players to take
the lead.
For major gas-heavy producing states, the availability of
existing infrastructure and low-cost, sizeable resources provides
some reassurance of an ongoing competitive advantage, even in a
slower growth market, suggestion that business as usual may still
be an option for this elite group. Net importer states may not have
export infrastructure to hand and are more likely to limit access
to international markets due to domestic supply obligations, which
can deter external investment interest; set against that they do
have the advantage that host governments have a greater role in
balancing upstream policy with approaches to energy demand,
providing some reassurance for investors over future appetite for
gas.
Given current investor and finance trends, host governments'
abilities to tailor above-ground enablers to differentiated risk
profiles will be more important than ever in determining which
projects move forward and which resources are left in the
ground.
Learn more about our coverage of E&P terms and
above-ground risk at
ihsmarkit.com/PEPS.
Posted 21 December 2021 by David Gates, Senior Consultant, IHS Markit and
Mariam Al-Shamma, Director, Energy Research & Consulting, S&P Global Commodity Insights
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