Gas Line, Q2 2021

Gas Line is a quarterly publication that looks at major news stories in global gas—ranging from project development to markets and geopolitics. My goal is not to cover every story but to draw connections between stories across time and space in order to shed light on the major themes that will drive global gas markets in the years ahead. My main takeaways from this quarter:

Natural Gas in a Net Zero World

The bottom line: The role of natural gas in a deeply decarbonized world remains difficult to forecast. But a roadmap developed by the International Energy Agency (IEA) provides one of the most complete and comprehensive looks at natural gas in 2050 if the world achieves its net-zero targets. It is a world where gas demand and trade are cut sharply. But gas also serves different ends, removed from final consumers and used largely in industrial centers, either directly or to produce hydrogen. It is a very different map from what we see today.

The backstory: In May 2021, the IEA released its long-awaited roadmap for a net-zero world by 2050. Several conclusions made headlines, including the observation that, in a net-zero trajectory, there would be no need for investment in new oil and gas supply (investment to sustain production in existing fields would still be needed). By 2050, global demand for natural gas would shrink by 55 percent (compared to 2020 and shown in Figure 3.2 in the report). Exports of liquefied natural gas (LNG) rise through 2025 but then fall; by 2050, the LNG market is 62 percent smaller than in 2020 (Figure 4.17).

The gas system changes dramatically in a net-zero world (Figure 2.7). Gas use in buildings all but disappears: less than 1 exajoule (EJ) is consumed in buildings in 2050, from around 32 EJ in 2018. Gas makes no inroads in transportation, and demand is less than a tenth of an EJ. More than half of the gas used in 2050 is for “energy production,” meaning hydrogen, paired with carbon capture utilization and storage (CCUS). There is some gas use in industry and as a feedstock, while 11 percent goes to electricity, where gas plays a modest role in balancing the system (Figure 4.18).

The grid evolves too. By 2050, the grid carries as much hydrogen to final consumers as it does natural gas. Biomethane and synthetic methane grow to 12 EJ (Table A.2), a fraction of the 67 EJ of natural gas transported in 2020. But the grid also serves different end markets. Gaseous fuels, including hydrogen and biomethane, meet just 7 percent of the demand for energy in buildings, down from 22 percent for natural gas in 2020. Electricity replaces gas. Gaseous fuels, mostly hydrogen, meet 19 percent of the demand for transportation, a market where gaseous fuels are marginal today. Gas retains a role in industry, meeting around 18 percent of total demand (with CCUS).

By 2050, in other words, the consumer no longer interfaces with natural gas—gas is not used for space or water heating or for cooking. Natural gas becomes an industrial fuel: around 70 percent of the gas used in 2050 is combined with CCUS, while another 13 percent is used as feedstock (Figure 2.7). For the most part, the world uses natural gas in 2050 to produce hydrogen and for the applications where alternatives are not competitive. The hydrogen is then carried, together with biomethane and synthetic methane, to industrial centers, to power generation facilities, and to transportation re-fueling hubs. But gas rarely goes into homes or commercial businesses directly—and thus, by 2050, most of us are unlikely to come into contact with gas on a daily basis. However, there will still be byproducts of gas use in hydrogen in the industrial and agricultural sectors and in the power systems.

Clearer Signals on U.S. Gas Demand

The bottom line: As the Biden administration advances its climate agenda, the role of gas in the U.S. economy begins to emerge more clearly. At this stage, the pressure is greatest on gas use in power, where the president’s plan to double the share of carbon-free electricity is bound to affect gas use. But the power sector consumed just 38 percent of the country’s gas in 2020—the strategy to decarbonize industry and buildings is far less developed so far, and thus the pressure on gas is far lower.

The backstory: In April, the Biden administration pledged to cut greenhouse gas emissions in 2030 by 50 to 52 percent relative to 2005 levels. The initial plan did not articulate which sectors or fuels would adjust and by how much. But together with the American Jobs Plan, released in late March, and subsequent deliberations, some of the specifics are starting to become clearer.

In the power sector, the Biden administration wants to implement a Clean Electricity Standard (CES) to regulate emissions. The CES will be paired with other initiatives: an extension to investment or production credits for low-carbon electricity; additional money for transmission projects to unlock investment in renewables; a new Grid Authority to expedite permitting for transmission; and technology-specific pushes, like the ones for offshore wind, solar, geothermal, advanced nuclear, and others. All these are aimed to meet the president’s goal for the country to generate 80 percent of its electricity from carbon-free sources in 2030 (from 40 percent in 2020).

Given that gas produced 40 percent of the country’s electricity in 2020, meeting the 80 percent target would involve a sharp curtailment in gas use. Even if gas provides all the carbon-based electricity in 2030—which would mean a complete phaseout of coal and oil from electricity—the impact on demand would be significant, as gas goes from 40 percent to 20 percent (with demand, however, being higher due to increased electrification). The power sector has accounted for two-thirds of the growth in gas demand between 2005 and 2020. That run must now come to an end.

Even in 2020, however, only 38 percent of the country’s gas consumption was in electricity—the rest was in industry and buildings. In industry, there is bipartisan support to accelerate CCUS and to expand the credits to help make this business viable—moves that are generally supported by private industry. Hydrogen has been elevated too, but the ambitious target for lowering the cost of hydrogen set by the Department of Energy was for “clean hydrogen.” At the same time, the strategy for industrial decarbonization is largely carrots and no sticks; there is still little appetite for a carbon price or other regulations to affect big industrial users. The pressure on gas is small in industry.

In buildings, there is even less pressure on gas. There is, of course, an ever-present push to improve energy efficiency, but most of the initiatives articulated in the American Jobs Plan relate to public and government buildings, while there is a passing reference to the need for more heat pumps. The administration has also shied away from commenting on local initiatives that seek to ban gas use from new buildings or state efforts that seek to stop these local bans from being enacted. In other words, a clearly articulated strategy is yet to be seen for around 140 million housing units or the 97 billion square feet of commercial real estate that exist in this country. Therefore, it is hard to understand what the impacts might be on gas use going forward.

Some Further Reading

Nikos Tsafos is interim director and senior fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Nikos Tsafos