Natural gas, the crucial factor for the transformation of the European energy system

The EU Energy Council took an important step past June when it released its Energy Roadmap 2050 review, noting that: “natural gas is crucial for the transformation of the energy system”.

The Energy Council also recognized three key levers necessary for a low-carbon 2050 energy system:

  • Renewable sources of energy will have a substantially higher share of the energy mix beyond 2020;
  • Energy efficiency measures will ensure a more competitive energy system while reducing waste; and
  • Smart and flexible infrastructure will support a viable pathway towards 2050.

Natural gas will enable these levers, serving as the backbone of a sustainable energy system – not simply a back-up or transition fuel.

There is a huge task ahead of us if we want to meet the objective of the EU for a competitive, secure and sustainable energy system. Cleaner burning natural gas will be crucial to this and, in fact, is already transforming the system in many areas.

Europe, benefiting from being part of the global gas market

Globally, natural gas supplies are increasingly abundant and diverse, which means greater energy security in using this fuel source. Europe is part of a worldwide energy market that delivers flexible gas supplies to consumers, via direct pipeline or LNG.

The natural gas pipeline network that has grown over the last 50 years to supply customers from The Netherlands to Italy and Poland to Spain, is itself a great technological achievement. In fact, a network of more than 200.000 km of transmission pipelines will deliver more than 500 bcm in 2012. To diversify supplies, the EU also imported about 75 bcm of LNG (in 2011) from all over the world through 21 re-gasification terminals -- about 30% of the total global LNG trade.

As summarized by Commissioner Oettinger this existing infrastructure allows storage for 30 days worth of energy in Europe, as opposed to a few seconds of available electricity storage.

Natural gas will be the backbone not just the back up of the future European energy system

Over the next two decades and beyond, the greater operational flexibility and rapid cycle time of gas fired power will make it the natural complement to the increasing total share of intermittent renewables. Building sufficient levels of gas fueled capacity built into electricity systems may well make more sense than drastically expanding overhead transmission lines to level out supply over long distances.

That course would build on and conserve both our existing gas and electric infrastructures.

Natural gas should continue as the long term backbone of the energy system, and play an even greater role as the crucial factor in its transformation. This backbone is in place, it works and is understood. Built over the last 50 years, its infrastructure is mostly out of sight underground, dependably supplying the dynamic markets that we enjoy today.

This point about the long term value of the gas infrastructure is not often raised. I believe it deserves much more emphasis. Question: are we really considering the role of existing gas infrastructure can play when we take decisions about building new expensive electricity transmission capacity?

For heating and cooling our houses and buildings a widespread belief has emerged that gas and gas infrastructure do no longer matter. The belief is that future residential areas should be “all electric”. I am convinced that this belief is not sufficiently based on proper analysis of available technologies, direct costs and indirect costs for grids and infrastructure. The role of gas in the form of micro CHP or fuel cells, in combination with efficiency and decentralized renewables, is underestimated. More work needs to be done here. A first study is done by the European Gas Advocacy Forum. EGaF demonstrated that in the residential sector, cost savings in the order of €100-120bn can be obtained compared to a higher electrification pathway by 2030, using a more diverse technology mix that include gas fuelled heat pumps, gas-fired district Heating and combined Heat and Power (CHP).

I always come back to the need to choose cost effective pathways to achieve the transformation of the energy system. The existing -and still developing- gas infrastructure offers very cost effective solutions for transportation and storage of energy.

Examples of actual transformation

Since we are in The Hague, let me start with The Netherlands, I think that we can all agree that the discovery of the Groningen gas field some 50 years ago changed the country in a profound way.

Starting with the residential sector, then industrial users, and growing into the power sector; natural gas led to a shift away from coal to gas for power generation, created a natural gas hub for Western Europe, and fostered an industry service sector that has enable The Netherlands to export its expertise throughout the world.

Currently the gas transmission system operator (Gasunie) owns more than 15.500 km of gas pipelines in The Netherlands and North of Germany. The gas sector accounts for 75.000 direct jobs, nearly 20.000 indirect jobs, and over 15.000 induced jobs. The activity around the gas industry is worth at about €30 billion (5% of Dutch GDP).

In the United States -- with an estimated 70 trillion cubic metres of domestic reserves -- the tight and shale gas revolution of the past decade is spurring reemergence of an industrial base. Advances in production technologies and a national gas pipeline infrastructure of more than 500.000 km and growing, mean natural gas can easily move from production regions to consumer markets. The abundance of natural gas is also allowing industry to find new ways to use the gas, including gas for transport, electrical power generation displacing coal and a resurgent chemical manufacturing sector. According to the IEA US emissions have now fallen by 430 Mt (7.7%) since 2006, the largest reduction of all countries or regions. This development has arisen from lower oil use in the transport sector (linked to efficiency improvements) and a substantial shift from coal to gas in the power sector. CO2 emissions in the EU in 2011 were lower by 69 Mt, or 1.9%, as sluggish economic growth cut industrial production and a relatively warm winter reduced heating needs. So, the country that does not really have a climate policy is showing drastic reductions in CO2-emissions. The US does recognize a good deal when it sees one!

Another transformation is in the making in China. The country is very eager to develop more domestic gas, together with LNG, to be able to slow down the breathtaking growth of coal consumption in power generation. The city of Beijing has now decided to close down all coal fired power generation in Beijing and replace this capacity with gas fired power generation. Other Chinese cities, which have the same concerns around air quality, will undoubtedly consider a similar policy. Gas, both from import and domestic production, is clearly a major part of the Chinese long term energy strategy.

Europe has started its journey towards a low-carbon future, but is it headed in the right direction?

Also for Europe, on top of supply diversity, natural gas also offers a well understood carbon benefit. Gas-fired generators produce about half of the C0₂ of coal-fired power plants. Further, gas fired generators can be switched on and off much more quickly than other power sources – such as coal or nuclear -- when the wind doesn’t blow or the sun doesn’t shine. And then there’s the cost: natural gas capacity is quicker and less costly to build than any other large power source. But Europe is moving in a different direction ... .

European gas consumption for the first half of 2012 has been slightly lower than in 2011. For North-West Europe, the actual H1 2012 demand is 1.4% lower than H1 2011, but after correcting for temperature, the fundamental demand is 8.7% lower – mostly due to significantly lower levels of gas consumption for power generation.

Natural gas is being squeezed out of the power mix by a combination of factors, including: the strong growth of renewable energy sources as a percentage of the total mix, a decrease in the space for flexible power sources in electricity demand, and a reemergence of coal.

Instead of embracing cleaner burning gas to support the transformation of the energy system we are moving backwards.

Getting Europe back on track

At Shell we believe in taking a coordinated, “blueprint” approach (as we call it) of government policies and markets working together for a sustainable energy future. We call the other, less attractive option “a scramble approach:” where policy and investment decisions, taken in a vacuum, lead to a haphazard patch work of stop-gap energy and emissions control initiatives that don’t support one another.

The European Commission and national governments have to rethink European energy policy. We see stalled investments in power generation. More and more coal is being burned. The actual pathway followed by Europe is “coal + renewables”, whereby coal is driven by the price differential between coal and gas, and renewables are driven by subsidies, that will be coming down. What does that leave us with? In the mean time carbon leakage (de-industrialisation of Europe) continues.

The Commission needs to seize the initiative and works towards a level playing field:

  • Make regulation more coherent.

Europe should move towards a single CO2 target for 2030 and not have separate targets for renewables and energy efficiency (as is the case for 2020).

  • Costs effectiveness should be central.

This is the linking pin between various objectives: climate change, affordability and competitiveness. Therefore market based solutions have to be reinforced, to start with the ETS that has to be reformed. The carbon price should support the shift from coal to gas. I am puzzled by the paradox that we have an explicit CO2 price of about 8 euro’s, but seem to think that we can afford all kind of mandates and targets that define specific outcomes, but come at a cost of usually 200 or 300 euro’s per ton CO2 abated. The Commission needs to spend more time on ETS-reform. It is encouraging to see that Commissioner Hedegaard has started the discussion on back loading ETS allowances.

Re-direct public support for innovation to supporting R&D and early deployment, and away from lifelong exploitation subsidies.

Industry will support an approach that is European, coherent, market based and with a focus on technology development.

This policy re-design will take time. Where necessary complementary measures should be considered. The Netherlands, for example, have withdrawn a coal tax exemption for coal fired power plants. That is perhaps not a pretty measure, but it contributes to a level playing field when the CO2 price is where it currently is.

The Industry is implementing transformations

Industry has a major role to play in this transformation process. At Shell we have taken proactive steps to find new and innovative ways to use natural gas around the world, specifically in the field of gas for transport.

You may have heard that yesterday Shell will charter the building of two LNG fuelled barges. These new barges will be Shell’s first to be fuelled solely by LNG and an industry first. They will be built at Peters shipyard in the Netherlands. These LNG powered barges will be brand new additions to the existing Shell Rhine fleet and will operate in the Netherlands, Switzerland and Germany. The barges will carry enough LNG to sail for up to seven days, from Rotterdam to Basel and back without refueling.

In western Canada, we are creating a “Green Corridor” project to provide LNG fuel for heavy transport. It will take natural gas produced in the region and create direct economic and environmental benefits to local communities. As most of Canada is dependent on heavy trucks to transport goods over long distances, a project that utilized LNG to fuel these trucks was a perfect fit. Starting later this year, Shell will provide the LNG at truck fueling stations between Calgary and Edmonton. Plans call for the corridor to eventually extend from Fort McMurray in northern Alberta to Vancouver on Canada’s west coast -- a “corridor” of over 2.000 KM offering dependable supplies of transport LNG. LNG will provide consumers a cost-competitive fuel option.

The transport sector is one example of the innovation that is taking place in the gas value chain. As I said closer attention should be paid to the potential of new small scale gas solutions in the residential sector.

The long term role of gas is underpinned by technology developments that will contribute to the decarbonisation of gas:

  • Over the pasts years we have talked about the benefits that Carbon Capture and Storage (CCS) will bring to the European energy sector, including: the potential to deliver 20% of the CO2 emission reductions required by 2050 and according to the IEA, at a 70% cost saving compared to a world without CCS.
    For CCS to help meet emissions goals, it must be commercially deployable by 2030 to significantly decarbonise the energy sector by 2050. Commercial deployment means the technology is proven and reliable, publicly accepted and cost competitive.
    It falls to both industry and the government to ensure that society benefits from CCS by demonstrating the technology, then rolling it out. Demonstrating will require a number of large-scale integrated projects to drive down costs, mitigate risks and reassure the public so commercial widespread deployment can start about 2030.
  • The emergence of bio-gas is another example of innovation that underpins the long term role of gas in a low carbon economy. In The Netherlands, Germany and other countries you see projects being developed.
  • Other technologies like “power to gas” could store excess wind power by injecting hydrogen into the gas infrastructure. Shell has recently joined the “Gas Inject Project” : a feasibility study to assess the technical, financial and operational feasibility of injecting hydrogen gas, generated from electrolysis fed from excess renewables, into the UK gas networks.

Closing remarks

I realize that I have covered a lot of ground today, so I want to highlight a couple of key points.

Gas and gas infrastructure can provide the backbone of the transformation of the energy system. With this concept we can move beyond the debate whether gas is a transition or a destination fuel.

Europe is not heading in the right direction and has to rethink its energy and climate policy. There is no level playing field for gas when a robust CO2 price is lacking. A more coherent approach is required.

The “gas revolution” that is taking place across the world fuels innovation throughout the gas value chain: from LNG in transport to low carbon gas.