Natural Gas: taking a realistic view on global energy policy

Yes, we could of course theoretically move quickly to a world where all our electricity needs were provided by wind, hydro and solar electricity, supported by large amounts of battery storage to provide power when there is little wind or sun. Aside from the small problem of simply finding the six trillion dollars in investment it would need to replace 3,000 GW in global fossil fuel based power plants with renewables (and an additional trillion dollars or three for storage capacity), consumer electricity prices would be sky high and many more people globally would be pushed into fuel poverty, which would in turn undermine public support for making a transition of any kind. There are already rising concerns in political circles about the likely public backlash towards the low carbon agenda in the UK when the cost of building offshore wind and new nuclear is factored into bills over the next 10 years. Achieving decarbonisation of the electricity sector is a highly complicated task, but major (and more affordable) steps can be made by steadily growing the contribution of renewables while using gas to phase out oil and coal based generation.

The massive shift to a low carbon energy system needs to be achieved with a steady mix shift towards true low emission energy technologies (wind, solar, nuclear, hydro), but complemented by the most efficient and flexible fossil fuel based generation, which is gas based. Modern gas power plants can ramp up and down much more quickly than coal, oil, or nuclear power plants, making them the best complement to intermittent renewables. The marginal cost of producing wind power is actually close to zero and as such will always be the first power source to be dispatched onto the system. Gas power merely allows us to deal with peak demand and (with sufficient capacity allowances for the capital cost) is complimentary to renewables in the mitigation period. Gas is certainly not the ultimate solution unless it is ultimately implemented with Carbon Capture. However this can be done in time, or alternatively gas can be phased out further in the future.

The point is also made that cheap gas based power reduces the incentive to build renewables. However in most parts of the world gas is expensive, much more expensive than coal in fact, and hence actually provides an incentive to deploy renewables. It is only in the US where abundant shale gas supply has led to rock bottom prices. Incidentally, while undermining renewables, the cheap US gas prices have led to massive coal to gas switching, which we should welcome as many of these coal based plants will not come back online again, leading to a cleaner overall system when gas prices do normalise. This fuel switching has also led to the first major non recession induced declines in US greenhouse gas emissions, which is after all the objective here.

That shale gas leads to plentiful fugitive emissions while being extracted is another issue often raised. This is a red herring, however, as there is no reason why with the right care, regulation and technology these fugitive emissions cannot be minimised. Well-managed shale gas operations do not waste gas if they can help it, and the data in North America does not support material wasteful fugitive emissions.

So in our view gas should clearly be the fossil fuel of choice, where necessary, in the next 20 years. Gas growth should come at the expense of coal and oil, not renewables, and it is easy enough for regulators to provide the necessary framework and incentives to ensure this happens. The real issue when valuing gas companies like BG is to decide whether towards the end of that 20 year timeframe the world really will get serious about moving to a truly low carbon economy and start phasing out gas, or investing to capture its emissions, another expensive endeavour.

The reality is that if climate change is to be successfully mitigated, the global carbon budget (total allowable greenhouse gas emissions through 2050) implies that equity markets are vastly overcapitalising the reserves and resources of the whole fossil fuel industry. Of course it is quite likely that with the depressingly large ability of democratic policymakers to prioritise the short term we will get nowhere close to moving away from fossil fuels to the necessary extent. In which case, investors should spend a lot more time thinking about the consequences of climate change on long lived assets than they do today. Either way, gas is a good relative investment within the energy infrastructure we need to meet sustainable development goals.