Natural gas faces an "unsettling and unpredictable" future following last December's landmark agreement in Paris on climate change, and the outlook for oil isn't much better, according to an analysis published by London-based Chatham House.
In a 54-pagereport, "Paris Mismatches: The Impact of the COP21 Climate Change Negotiations on the Oil and Gas Industries," researchers John Mitchell and Beth Mitchell argue that while a mix of countries made promises at Paris to mitigate climate change (see Daily GPI, Dec. 14, 2015), their collective policies won't meet the goal of limiting the global average temperature increase to under 2 degrees Celsius.
Instead, the authors project the global average temperature will rise 2.7 degrees Celsius between 2020 and 2030, and will rise from 2.2-3.4 degrees Celsius by the end of the century. By comparison, the global average temperature is forecast to increase 3.7 degrees Celsius without any mitigation efforts.
"This means that additional, and more stringent, measures are likely in the future," the authors wrote for Chatham House, a non-governmental organization (NGO) also known as the Royal Institute of International Affairs. "The Paris agreement provides for this to happen through a five-year review cycle in which parties will submit progressively more ambitious contributions. As a result, the impact on the oil and gas sector will intensify...
"Credible policies are also needed to send a strong signal to those who consume and produce carbon-based fuels so that their investment plans can be amended to reflect the shape of a lower carbon economy. Without credible policies, investment in consumption and production in fossil fuels will continue and oil and gas companies will make risky investments to meet unsustainable demand."
Although natural gas is primarily used for power generation, and many countries and gas producers envision greater use of gas at the expense of coal, those plans could be squeezed out by renewables such as wind and solar. They add that it could be even harder for natural gas to gain acceptance in developing countries because gas producers will need to persuade such foreign governments to embrace gas instead of very cheap coal.
"Prospects for gas depend on the policy intentions for the power market in different countries," the authors said. "In some countries, these are reasonably clear but only as a residual of policies (which may change) for promoting renewables, limiting coal, and promoting or banning nuclear power.
"In these countries, the restrictions imposed by government interventions in the market have upset the profitability of many sections of the power industry and their ability to fund future restructuring (e.g., smart grids or cleaner generation). Whether the gas industry can coordinate with governments to gain a better than residual position in the power sector remains to be seen."
Oil faces a grim future, too. The authors project global demand for oil may peak and begin to decline sometime between 2020 and 2030. The biggest factor to either slow or accelerate that decline will be the emergence of various technologies, including the development of batteries for electric vehicles.
"The oil industry needs to adjust to the increasing impact of existing negative trends on demand, especially in the longer term when tougher policies, cheap electricity and battery technology, and potential use of [natural] gas in vehicles, could have a very significant impact," the authors said. "This has implications for investment needs and capital returns to shareholders."
Researchers who have studied climate change are divided on the future of natural gas.
Last November, before the COP21 meetings, the International Energy Agency projected that the global natural gas trade should increase rapidly over the next 25 years (see Daily GPI, Nov. 11, 2015). Analysts with ClearView Energy Partners LLC also expressed doubt that the climate change agreement would have a meaningful impact on energy markets (see Daily GPI, Dec. 14, 2015).
But in a report published this week, an energy expert from Rice University quipped "climate's gain is the industry's loss and vice versa" as the oil and gas industry faces growing pressure from shareholders, activists and others to reduce carbon emissions (see Daily GPI,Aug. 15).