Powering Up the Energy Transition
Natural gas is a topic we have returned to time and time again. In 2013, our Citi GPS Energy 2020 series took a look at the shale revolution and how it would propel the U.S. from being a net energy importer to a net energy exporter. As part of that series, we looked specifically at the transportation industry and the inroads natural gas was making into petroleum’s monopoly hold on the transportation fuel market.
Now, as the world comes to terms with the role of greenhouse gas emissions in climate change, consensus has shifted on the role of natural gas as a substitute for petroleum. Instead, renewable energy, “green” energy sources, such as hydrogen and biofuel, and energy storage are being championed as low-carbon alternatives. But these technologies still need time to ramp up in scale and cannot provide the full amount of energy necessary to run the global economy today. While these alternative energy technologies mature, natural gas can be used as a lower-emitting “transition” fuel to bridge to a net-zero world, particularly a substitute fuel or feedstock in hard-to-abate sectors.
As the Energy Transition proceeds, the primary proponents of natural gas as a transition fuel are the six countries making up 84% of all gas exports. The two biggest producers and exporters — the U.S. and Russia — will likely determine how natural gas could fit in to the clean energy future and how the market structure could evolve. Citi’s Global Commodities Strategy group has teamed up with Russia’s Institute for Energy and Finance Foundation (FIEF) to give their perspectives on the current natural gas market as well as ways the natural gas business can shift away from its incumbent mentality and not only learn to think outside of the box, but perhaps to think more like an upstart industry.
The report identifies five key demand areas where the proposition for natural gas is strong, including: (1) providing reliable electric grid supply; (2) using its smaller footprint to provide power generation in urban areas; (3) as a bunkering fuel to help reduce emissions in shipping; (4) as a lower-emission fuel in road transport; and (5) in the production of blue hydrogen. At the same time, the industry itself needs to work on decarbonizing its processes — from wellhead to generation — including reducing carbon gas emissions and methane leakage in production and transport.
How natural gas producers embrace the future could rest on their approach to the market. Some could manage supply and keep prices high by coordinating the trading of free float gas volume with other producers, thus extracting more export revenue but likely accelerating the Energy Transition. Alternatively, the industry could create an institution similar to a development bank to help finance the upfront liquefied natural gas (LNG) infrastructure that will drive natural gas demand into the future in ways that facilitate the Energy Transition.
Given the size of the industry and its importance to the global economy, a plan to ensure natural gas is part of the Energy Transition is needed now.
Authors: Anthony Yuen,Edward L Morse,Maggie Xueting Lin,Eric G Lee,Judy Su,