Rating: Advanced high school and post-secondary.
Summary: Wood Mackenzie’s latest report shows that 77% of new LNG supply is at risk under 2-degree Celsius global warming by 2100 scenario. Only about 145 billion cubic metres per annum (bcma) of additional LNG supply would be needed in 2040 compared to 450 bcma in the base case outlook. If the Qatar North Field East expansion goes, the space for new projects shrinks to 104 bcma. Only the most cost-efficient and flexible LNG projects will survive. Canadian LNG projects are unlikely to proceed.
Markham Hislop: International consultancy Wood Mackenzie released a new study today about the future of LNG development. What they did was model a two-degree increase in global temperatures by the end of the century, what would that do to LNG? And the answer is it’s not going to be very welcome in Canada. We’re going to talk to Kateryna Filippenko, the analyst who headed up the report. And she’s talking to us from Vienna, so welcome to the interview, Kateryna.
Kateryna Filippenko: Thank you for having me
Markham Hislop: If you had asked me a year ago if governments around the world were going to be much more aggressive in their climate policy, I would have been a little skeptical, but I think that the COVID 19 pandemic has changed that. I think there really has been a step-change in terms of climate policy. And this two-degree scenario that you’ve sketched out is more probable now than, than not. So what were some of the consequences for LNG development and demands that you found in your modelling?
Kateryna Filippenko: I am completely agreeing with you that even a year ago the situation was so much different. This year in fact was transformational for the industry. Not only because of the pandemic but because we saw such a big commitment to the energy transition. And we saw that the majors either stuck to the existing commitments or even set more ambitious goals. And then we saw also countries and governments committing to net-zero in 2050 or in 2060. So it was really a transformational year. Absolutely the accelerated energy transition is becoming a reality.
Our accelerated energy transition two-degree scenario looks at what will happen with the gas market if we really manage to limit global warming to two degrees. As you correctly pointed out, it is probably a difficult message for LNG developers because, in our base case, which is if we do nothing and if we just stay on this three-degree warming trajectory, the global gas demand continues growing. But in the two-degree scenario, the global gas demand can peak as early as 2025 and then decline afterwards.
With weaker global gas demand, the outlook is obviously difficult for developers of new LNG projects. For example, in the base case, we expect that by 2040, the world will need about 450 billion cubic meters of gas a year coming from new LNG projects. In the accelerated energy transition scenario, this gap shrinks down to about 145 billion cubic meters. And if we assume that Qatar proceeds with the expansion of the Northfield East, which we already see happening either at the end of this year or early next year, demand will shrink down to about 100 billion cubic meters. And this is approximately a quarter of what we expected in the base case.
As you see, the space is much smaller and that means the competition will be much tougher.
Markham Hislop: And then you point out in the release that low-cost producers like Russia and Qatar are more likely to fill that emerging demand than higher cost producers in Canada. And in fact, now this is bad news for Alberta Premier, Jason Kenney, but it’s unlikely in the two-degree scenario that further Canadian LNG development will go ahead.
Kateryna Filippenko: It is true that low-cost producers will have the upper hand. And we see in our analysis that in the early 2030s, new projects will still be needed. So the market will still call on new developments, but the long-term feasibility of these projects will be a bit questionable because of the long-term shrinking of the global gas market at the same time local producers, such as Qatar and Russia, will still continue trying to monetize on their vast gas resources. And we assume that they will continue the expansion of their LNG production.
That basically means that the longer-term visibility of these big LNG projects, which are more expensive than the Russian and Qatar projects, are questionable. So, in this scenario, we don’t assume that any new expansion of Canadian projects happens, we don’t assume any expansion of Mozambique projects. And in fact, we assume that even though new US projects will happen in early 2030s, they are high risk of being underutilized towards the 2040s.
Markham Hislop: Now your study also noted that there’s a risk of 12 trillion cubic meters of already discovered gas resources that will be stranded. That has to make LNG developers a bit cautious.
Kateryna Filippenko: Absolutely. In our two degrees scenario, the two key kinds of projects impacted are the already discovered pre-FID resources and the resources that they expected from exploration.
So, exploration is an interesting story because one would ask: do we even need to continue with exploration? And we assume that yes, some exploration volumes are still needed. The companies will use exploration as a portfolio improvement tool because sometimes it’s even easier to explore for new resources than use existing legacy production. But the other category is discovered resources that haven’t been sanctioned yet. So they haven’t had a final investment decision yet. And indeed out of these resources, we expect about 12 trillion cubic meters to be stranded. And mainly this will be in the US, in Russia and the Middle East.
Markham Hislop: I have one final question for you Kateryna and I’m kind of curious if our perception of LNG has changed over the past year. I’m wondering the role of wind and solar emerging as being the lowest cost form of energy. And particularly we see now the combination of batteries with renewals as being very competitive. There used to be this argument that gas would always be needed to firm up electricity production and that as we transitioned off coal for power generation, a lot of it would be replaced with gas. And the thinking seems to have changed around that. Is that accurate from your point of view?
Kateryna Filippenko: Coal is indeed being displaced by gas, and in fact, it plays a very important role in carbonizing developing countries. For example, in Asia, where coal still contributes about 40 per cent of the energy mix, gas will play a crucial role to decarbonize the region. It will actually provide upside to the gas demand that we have in, in this two-degree scenario.
But the longer-term renewables are going to play a bigger role in Asia. They already played a massive role in the US and in Europe. So they will put higher pressure on gas in the longer term.
But it’s also worth noting that there’s also a way for renewables to contribute to, in a way, to support gas. I’m talking here about various projects on decarbonizing gas production. So for example, the examples of LNG projects, where power production is being connected to the grid where power is sourced from renewable sources, rather than producing power for this LNG plant at the site itself. So kind of renewables can also contribute to a way to decarbonize production from certain gas plants. And this could also, in turn, provide some support to customers.
Markham Hislop: That’s actually something I hadn’t thought of. And it is an issue in Canada and that’s the carbon intensity of the natural gas that goes into that’s the feedstock for LNG. And in Canada, in some of the provinces, we have a big problem with methane emissions. Is carbon intensity of the natural gas going to play a role in – especially with expansion of carbon pricing markets – is it going to play a role in determining which LNG projects go ahead?
Kateryna Filippenko: It is definitely gaining a bigger importance in the thinking of buyers and the producers thinking as well. And we also see Europe considering carbon border adjustment tax. It’s still quite early in the day, but it is something that can potentially shift the cost landscape when it comes to different input sources into Europe, for example. But yes, absolutely it’s going to get more and more attention. And in fact, we are right now looking closely at the carbon emissions from the different gas productions and different options, how gas projects can decarbonize and secure their space in the market.