What prospects for gas?

But before we jump to any conclusions about what this could mean for Gazprom, or for Russia, we need to look more closely at the analysis in this exhaustive 700-page survey of energy trends to 2030, and in particular at the underlying assumptions. The essential point is that the IEA is not making predictions about what it believes will actually happen, but is presenting two possible scenarios based on two different hypotheses: one – the “baseline scenario” – is that there will be no change to the energy and climate change policies currently in place across the world; the other is that a specific set of actions will be taken to halt the growth in greenhouse gas emissions by 2020, and to reduce them below 2007 levels by 2030 – the “low-carbon” scenario. In view of the number of assumptions which have to be made in an exercise of this kind, it is fair to say that the chances of either of the scenarios actually coming about are remote.

Marsel Salikhov has worked at Russia´s Institute for Energy and Finance since it was established in 2005. He is the co-ordinator and head of economic projects. His interests cover a large scope, from real development issues for the world economy, global trade and financial markets, to problems related to the Russian financial sector. Salikhov and IEF President Leonid Grigoriev publish regular reports on the Russian economy as part of their collaboration with GlobalSource Partners (US).

Under the baseline scenario, world primary energy demand grows at an average annual rate of 1.5 per cent over the next 20 years, and world demand for gas grows at much the same rate. Natural gas’s share in the world energy balance therefore remains more or less steady, at about 21 per cent in both 2007 and 2030. This projection contrasts with the IEA’s estimate from 2006 that the average annual rate of gas demand growth until 2030 would be 2.0 per cent, within an overall 1.6 per cent demand increase for energy as a whole – meaning that gas’s share in the world energy balance should increase steadily. In fact this is the trend we have seen in recent decades, with gas’s share growing while oil’s has been shrinking (Chart 1). In other words, the IEA’s most recent projection contradicts what has been happening in the real world, with gas increasing its share basically due to its use in electric power generation. Whatever else the difference between the two projections demonstrates, it shows how sensitive they are to adjustments in assumptions about the effects of policies and prices.

Secondly, in the low-carbon scenario, it turns out that oil and gas prices are lower than in the baseline scenario, instead of being higher as it would be reasonable to assume in order to reduce demand (Chart 2). The IEA’s explanation is that this is the result of the high cost of CO₂ emissions: a very high price for carbon emissions in a world-wide carbon trading scheme is one of the key assumptions in this scenario. With high charges for emissions, the final energy price for consumers is higher, due to the inclusion of the emission cost in the consumer price. This reduces demand for energy and as a result fossil fuel prices for energy suppliers collapse: the consumer pays more, the producer receives less and the margin is directed to the reduction of CO₂ emissions. Such a scenario raises the gigantic issue of whether it is realistic to expect a massive voluntary reallocation of financial resources – at least tens of billions of dollars annually – from one set of participants in the market to others. There are no precedents for this level of co-operation amongst countries, certainly not at the global level needed for a scheme of this kind to work. The low-carbon scenario is the IEA’s dream outcome, engendering both low emissions and lower primary energy prices. It is very difficult to imagine this in reality.

Another surprising feature of the low-carbon scenario is that world gas consumption in 2030 should be 17.4 per cent lower than in the baseline scenario, and even the relative share of gas in 2030 should be slightly less (20.4 per cent against 21.2 per cent). This seems perverse: the struggle against emissions should result in a shift to cleaner sources of energy – from coal and oil to gas, nuclear power and renewable sources. However, in its low-carbon scenario, the IEA assumes such high prices for CO₂ emissions that gas actually turns out to be uncompetitive in comparison with other low-carbon alternatives – nuclear and renewables. A small insert in the report explains these subtleties. It shows that if the prices for emissions were not so high (ie, less than the $50 per ton by 2020, as assumed by the IEA), there would be a strong shift towards gas. The demand structure turns out to be strongly sensitive to the price of emissions. In the real world, a lower price for carbon seems a much more probable outcome – with a corresponding increase in gas’s share of the world energy balance.

Throughout the survey the IEA repeatedly mentions the uncertainty of long-term forecasts of the rate of growth in energy demand. This partly reflects the difficulty of knowing how quickly the world will recover from the economic crisis, and partly the absence of clear and binding decisions on climate change and carbon emissions after 2012. It seems highly probable that in this situation most energy companies will adhere to tried and tested strategies and avoid taking on excessive risks. For generating companies faced with uncertain conditions, it is easier and more reliable to build gas-powered combined-cycle plants, where initial investment is several times lower and the technology is proven and reliable. This is what has been happening for the past 20 years in the European Union, and there are grounds to consider that the trend will continue. The huge capital costs of constructing nuclear power stations or “clean” coal plants compare badly with gas-fired plants (Table 1).

Table 1. Power station investment parameters, 2008-2015

Finally, taking into account all the disclaimers and assumptions (which prompt a raft of questions), what does the IEA foresee for Russian gas? It turns out that in the baseline scenario the share of Russian gas in the European market remains stable during the whole forecast period until 2030. The extraction of Russian gas increases from 657 billion cubic metres in 2008 to 760 billion cubic metres in 2030 (though the basic growth of extraction falls for the period after 2015). Exports to Europe grow from184 billion cubic metres to 210 billion cubic metres by 2020. Thus, in the long-term perspective, Russian gas would continue to meet about one-third of European demand until at least 2020.

Chart 1: The share of main fossil fuels in the world energy balance, 1971-2030, by per cent

Vertical axis: Per cent of the primary world’s energy consumption

Horizontal axis: Oil, gas, coal

SOURCE: WORLD ENERGY OUTLOOK 2009, CALCULATIONS OF THE IEF

Marsel Salikhov, deputy head of the department of economics at the Institute for Energy and Finance