Coal’s future looks dark as gas lifts energy hopes
BP coined the slogan “Beyond Petroleum”. The new industry mantra might be “Beyond Oil and Into Gas”. Oh, and while we’re at it, “Down With Coal”.
Consider Royal Dutch Shell’s $70-billion (about R840-billion) acquisition of BG Group — clearly a huge bet that natural gas will prove to be its cash cow of the future.
The petroleum industry’s move towards gas is hardly new — the hydraulic fracturing shale revolution is in its second decade, after all.
Still, Shell’s move is an emphatic confirmation that some among the Big Oil family believe gas will play a growing role in meeting the energy demand of emerging countries such as China and India, which are trying to move away from dirtier coal.
“Gas will likely overtake coal as the world’s second fuel by the late 2020s,” said Jonathan Stern, head of the natural gas programme at the Oxford Institute for Energy Studies.
Gas is emerging as a preferred fuel around the world because it is cleaner to burn than coal and oil, prompting the International Energy Agency to say in 2011 that the world was entering into the “golden age of gas”.
In a highly symbolic move, China announced last month that it would convert the last of four major coal- fired power plants around Beijing to gas next year.
In September last year, in a petroleum industry meeting timed to a UN session on global warming, some of the world’s leading producers argued that gas gave them a huge advantage over coal in the climatechange battle, according to the website Responding to Climate Change.
“One of our most important contributions is producing natural gas and replacing coal in electricity production,” said Helge Lund, then CEO of Statoil ASA.
Until recently, coal was the world’s fastest-growing major energy source, averaging a 5% annual rate. The Paris-based IEA forecast the rate would slow to 1% from 2012 to 2020, and decelerate further to 0.3% in the 2020s as China and other emerging countries battle pollution.
Shell CEO Ben van Beurden said in February that “a shift from coal to natural gas” was needed to battle climate change. “When burnt for power, gas produces half the CO² coal does,” he told an industry audience.
For Shell, this is the second gasfocused deal in so many years. Early last year, it bought the liquefied natural gas business of Spain’s Repsol for $4.1-billion.
The Anglo-Dutch group is not alone in betting on gas: Chevron, BP, Total and Exxon Mobil are spending heavily on the fuel. Trevor Sikorski, head of natural gas, coal and carbon for consultant Energy Aspects, said companies were “starting to recognise” a trend in emerging markets in favour of gas and against coal. “This deal potentially kicks off acquisitions of other gas-focused companies the size of BG or maybe smaller,” he said.
Among the potential candidates, analysts are looking at Woodside Petroleum and Santos of Australia, US-based Devon Energy and Noble Energy.
The bet on gas has been extremely profitable so far for Shell. The company reported underlying earnings of $10.4-billion in 2014 from gas, up 470% in five years. But it has its risk.
First, liquefied natural gas prices have dropped about a quarter from the torrid levels reached after Japan bought large quantities of the fuel following the 2011 nuclear crisis of Fukushima. At the same time, coal prices have fallen to levels not seen since the global financial crisis, giving cost-sensitive countries, including India, a strong reason to keep buying. BP CEO Bob Dudley warned last year that with coal prices falling, the commodity was “extending its competitive edge in power generation” over gas.
Second, the shift from coal into gas depends in great part on climate change negotiations of uncertain outcome. And third, analysts worry that energy companies would struggle to keep construction costs under control, jeopardising the future of the liquefied natural gas sector.
If Big Oil is successful in its push towards gas at the expense of coal, those most at risk will likely be global mining groups including Glencore, Anglo American and Rio Tinto — all with billions of dollars in coal deposits in South Africa, Australia and Colombia.