Power April 2022 Intl - 24

GAS POWER
Gas Power Outlook:
Volatility and Viability
Natural gas generation's future hinges on a precarious and exceptionally volatile
set of issues that the conflict in Ukraine intensified. Experts from the full natural gas
chain shed light on how that uncertainty could play out for the fossil gas sector as
decarbonization gains momentum, and countries reprioritize energy security and
affordability.
Sonal Patel
I
n late February, as Russia began its
large-scale invasion of Ukraine, the energy
world flew into high alert, bracing
for major disruptions to energy markets
that remain highly dependent on Russian
oil and gas. The fallback was swift,
prompting an unprecedented volatility
that has reverberated across the world.
While Russia-the world's secondlargest
producer of natural gas and
third-largest producer of oil-threatened
to restrict energy exports, as of March
11, the energy giant continued to send
natural gas through its gas pipeline infrastructure
to feed 30% of European gas
demand (Figure 1). But in Europe, which
has long been stalked by the risk of a
flow interruption and supply squeeze,
countries have moved urgently to look
for new gas supply sources as part of
international penalties aiming to isolate
Moscow. Following Germany's decisive
certification halt of the Nord Stream 2
Baltic Sea gas pipeline project-an $11
billion project completed in September
that was slated to double the flow of
Russian gas to Germany-the U.S. has
so far announced a complete ban on
Russian oil, gas, and coal imports, and
the European Union (EU) issued an urgent
roadmap to make Europe independent
of Russian fossil fuels by 2030 (see
the sidebar " Europe Scrambles to Cut
Dependency on Russian Gas " ).
The recent shock is compounding tension
that had been building in gas markets
over the past year. Since September
2021, Europe has fielded an acute postpandemic
energy crisis stemming from
a " perfect storm " of factors, including
a sharp rebound of Asian demand (particularly
in China) for liquefied natural gas
(LNG), various supply constraints (including
a fire at a major Siberian processing
plant), and climate-conscious cuts to upstream
investments.
By October, as global climate talks
24
at the United Nations Climate Change
Conference (COP26) renewed scrutiny
of the natural gas industry's role
in reducing anthropogenic methane
emissions, discussions were underlaid
by pleas for pragmatism, with reliability
and affordability suddenly agleam in
sustainability strategies. And as winter
cold spells triggered a spike in demand
in Europe, Asia, and North America,
prices have trundled upward. In January,
high gas prices in Europe, which
relies on natural gas for 20% of its total
generation, sent average wholesale
prices soaring to more than four times
their 2015-2020 average. In the U.S.,
Henry Hub natural gas prices more than
doubled compared to their 2020 average
of $4.60/MMBtu in the second half
of 2021-their highest level since 2008.
And in Japan and South Korea, while oilindexed
LNG prices rose less strongly
than in other regions, surging coal
prices and renewable supply chains'
sluggishness are bolstering natural gas
power's competitive position.
The Volatility of Gas Supply
At least in the short term, most analysts
agree that global power prices in
2022 will continue to reflect the ongoing
tightness and volatility of the global gas
market. According to IHS Markit, the dynamics
that led to the 2021 energy supply
crunch " are not expected to moderate
in 2022. " The firm, which became part of
intelligence firm S&P Global days before
it's annual international energy-focused
CERAweek conference in Houston (now
known as CERAWeek by S&P Global),
said that though slowing economic and
electricity demand growth in China, the
U.S, and other large economies could
" reduce pressure on the demand-side, "
it may not be enough to ease ongoing
market tightness.
Given the blowback against Russia,
a prominent winner may be the LNG
www.powermag.com
industry because its key contribution is
flexibility, Michael Smith, chairman, CEO,
and founder of Freeport LNG, suggested
at CERAweek in March. While traditionally
a seasonal commodity, the last two
years have been exceptionally volatile,
swinging from oversupply in early 2020
to surging demand and high prices at
the end of 2021, he noted. " Every LNG
terminal in the world has been running
flat out, and we found out that we do
not have any excess LNG in the system, "
Smith said. A recent wave of supply
agreements span China and other parts
of Asia, but the sector's ongoing mitigation
of Europe's energy crisis has highlighted
new value for the fuel. " The idea
behind U.S. LNG is there's no destination
restrictions-it's completely flexible, "
said Smith.
However, the LNG sector faces material
risks, including a possible supply deficit
by 2024. New capacity, however, is
1. While pipeline imports of natural gas into
Europe come from Russia, Norway, North
Africa, and Azerbaijan, imports originating in
Russia-the largest supplier in the region-
grew from about 11 billion cubic feet per day
(Bcf/d) in 2010 to more than 13 Bcf/d in 2020,
which was a low-consumption year owing to
the pandemic. Despite construction of new
pipelines, imports from Norway averaged
around 9 Bcf/d between 2010 and 2020.
Growing volumes of flexible liquefied natural
gas (LNG) imports, which made up about
26% of all natural gas imports into Europe in
2020, primarily from the U.S. contributed to
the notable increases in LNG imports to Europe
from 2019 to 2021. Source: U.S. Energy
Information Administration
POWER | April 2022
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Power April 2022 Intl

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