Dash for gas as it becomes fuel of choice

By Ed Crooks
Published: November 3 2008 02:00

Natural gas is the fossil fuel that has undergone the most profound change over the past decade, in its production, transportation and use.
The transformation of the economics of liquefied natural gas by exploiting economies of scale has enabled previously "stranded" resources to be be developed, at the same time as gas has established itself as the fuel of choice for power generation in Europe and the US.
Advances in technology have made possible a flourishing industry, particularly in the US, producing "unconventional" gas, trapped in rocks where it has not previously been accessible.
Gas has also emerged as an attractive prospect for the big international oil companies, struggling to secure access to resources. When the IOCs make their pitches to resource-rich countries, two of the principal benefits they will cite are technology and access to markets.
In oil production, much of the technology is in the hands of national oil companies or the service companies that they can hire, and access to markets is an irrelevance: oil is a liquid global market, and there will always be someone to take it if the price is right. In gas, on the other hand, some of the technology is held by relatively few companies, and a downstream position in markets in developed countries is important for maximising the value of sales.
For all those attractions, however, the gas industry is facing problems: above all, the delays and cost overruns to production and transportation projects caused by shortages of personnel, equipment and materials.
The demand pressure for gas comes from its growing use for power generation, and as a source of heat in emerging economies.
Combined-cycle gas turbine stations are among the cheapest forms of power generation in terms of investment, and can be among the cheapest to run. They are also the quickest to build, making them attractive for generators seeking to manage medium-term variations in supply and demand.
Pressure to control greenhouse gas emissions is also driving the use of natural gas. CO 2 emissions per kilowatt hour of electricity generated for the best-performing gas-fired power stations are typically only about half those for the best-performing coal-fired plants.
In Europe, the majority of new power generation capacity under construction is gas-fired. As 3i, the private equity group, put it in a recent report: "We believe the lack of other economically viable and rapidly scaleable energy sources to power Europe's growing needs have led to a new 'dash for gas'."
In the US, coal still generates almost half the country's electricity, but gas-fired power generation capacity grew at 4.6 per cent a year on average during 1995-2006. A study by the Energy Information Administration found last year that from 2007-11 US utilities planned to add 46,000 megawatts of gas-fired capacity and only 29,600MW of coal-fired, and those coal projects have faced stiff opposition from environmentalists.
In emerging economies, the International Energy Agency, the rich countries' watchdog, expects gas to grow as a fuel for power generation. But there is also a rising demand for gas for heating and cooking.
The IEA projects that China's demand for gas will rise by 6.5 per cent a year between 2005 and 2030, by which time the proportion used for power will have grown from about a sixth to about a third.
Meeting that growing demand will be a challenge. Big gas production projects such as Gorgon off the coast of Australia have been hit by delays and soaring costs. The global financial turmoil may ease pressures in the supply chain, but also threatens the financing gas producers need to invest.
For example, Gazprom, the state-controlled Russian company, is under growing pressure that some analysts believe threatens plans to invest in gas production and transport in Russia.
Launching the IEA's report on the medium-term outlook for the gas industry in September, Nobuo Tanaka, its director-general, said: "Investment uncertainties, cost increases and delays continue to be a major problem in most gas markets and are continuing to constitute a threat to long-term security of supply."
Like oil, the price of gas has been falling as forecasts of demand have been scaled back.
But just as with oil, the prospect of sustained growth in demand, once the downturn has passed, coupled with limited increase in supply, which is likely to be made even worse as projects are delayed or stopped as a result of the financial crisis, promises a tight supply/demand balance and higher prices in the future.
Copyright The Financial Times Limited 2008