As governments across the world continue in their energy transition endeavors, efforts rely largely on a move away from fossil fuels, including natural gas. Climate scenarios developed by the IEA and the IPCC indicate a need to move almost entirely away from fossil fuels in the coming decades, in order to achieve carbon neutrality by 2050.
In Europe, bold energy transition initiatives such as Fit for 55 and RepowerEU are fueling the development of substitutes for natural gas in the form of low-carbon energy sources or feedstock in industry, transport, and building (electricity, low-carbon gases such as biogas, hydrogen, and its derivatives- ammonia and e-fuels) as well as technologies to accompany the nearly full phase out from fossil fuels, such as CCUS (carbon capture storage and utilization).
Thus, amidst these intensifying initiatives being employed and policies being evoked to address the transition, gas infrastructure operators across the Euro zone face the impending potential of asset stranding.
Thibaut Cuillière, Head of Real Assets / sector research; Joel Hancock, Oil & Gas commodities analyst, and Ivan Pavlovic, Energy transition specialist, discuss the potential impact and timeline of such a transition.
European energy crisis accelerates implied gas demand reduction
Net zero scenarios all embed substantial reduction in gas consumption – the IEA’s latest Net Zero Roadmap modelled a 75% reduction in demand by 2050, for example. As part of this scenario gas demand would peak in the late 2020s, with the commodity losing its prior role as a bridge fuel between more carbon-intensive fossil fuels and a fully renewable future.
Clearly, the IEA Net Zero scenarios are not forecasts, instead reflecting potential (optimistic) pathways to reach a net zero global economy by 2050. However, with the energy crisis driving significant shifts in Europe’s energy economy (renewable capacity increases, reducing requirements for gas-to-power generation and a structural reduction in gas-intensive industrial output), aggressive demand reduction scenarios appear more achievable than pre-crisis, particularly in Europe.
Across the six-major gas consuming economies in Europe, we track gas consumption across all segments down 5.4bcm year-on-year over H1-24, and down 24bcm relative to 2021. In the power sector, strong non-thermal baseload (relative to the lows recorded in 2022) combined with surging solar output is reducing gas-to-power demand at the margin. We track injection season-to date gas burn around 4.3bcm across the EU, compared to 6.4bcm last year and 8.1bcm over the equivalent period in 2021. Reviewing the industrial sector, we view 20-30% of the demand loss through the crisis as structural, unlikely to recover given uncompetitive input costs. Whilst implied demand reduction under Net Zero pathways once appeared optimistic, Europe’s policy and economic response to the energy crisis has catalysed the transition.
However, beyond the immediate declines in gas demand as a result of the crisis, the behaviour of demand beyond 2030 remains uncertain. Natural gas still has a critical role to play in the energy system, providing grid flexibility in the power sector and high temperature process heat for industrial processes. The transition pathways for these residual demand niches are less clear cut and harder to model.
Europe's energy crisis has led to a structural reduction in natural gas demand capacity in the region, putting the EU on an accelerated energy transition pathway.
Joel Hancock
That said, beyond 2030, it is difficult to define the exact decline in gas demand, as transition pathways remain somewhat unclear.
Assessing the Extent of Asset Stranding
Uncertainty in how rapid of a decline we might expect to see in gas use, then, presents its own challenge in gauging the stranding risk for associated infrastructure. That said, we do know the risk is present, and eventually, could be considerable.
Ivan Pavlovic
All is not lost - various options are emerging along the value chain for gas asset operators to repurpose their assets. Transition is not a one-way street.
But all is not lost. While moving away from their traditional bread and butter, energy transition is not a one-way threat for gas asset operators. There are various transition options emerging along the value chain. Emerging low-carbon gases, such as low carbon hydrogen or biogas, could potentially offer a net-zero aligned second life to some infrastructure assets. A significant uptake of CCUS could also reduce the extent of gas demand contraction, while also offering some gas infrastructure assets a transition option – retrofitted mainland & offshore gas networks could transport captured CO2 from industrial facilities to end storage facilities or shipment hubs, which would help stabilize gas demand in the medium term, in particular for industrial uses.
Despite these “future proofing” options for existing infrastructure assets, implementation of these options, nonetheless, each have their own unique limitations will raise specific challenges.
For example, in most cases, the production of and end-uses for low-carbon hydrogen are costly, and the value chain is still in its infancy. Development of biogas as a direct substitute for natural gas faces numerous limitations too, including a significant cost premium, and more importantly, limited availability of feedstock as part of a full substitution of biogases for natural gas.
The development of CCUS in Europe, meanwhile, is likely to face a series of challenges, not least the low availability of CO2 due to high capture costs from power generation and heavy industries outside of chemicals and petrochemicals production, competition of various decarbonization options in activities such as steel production, and a limited scope of potentially concerned assets.
There is no “one size fits all” solution that can be deployed. Thus, stranding risk mitigation is likely to rely on a combination of options rather than the focus on one single option.
Diverse Solutions for Diverse Situations
Across Europe, transmission, and regasification (LNG terminals) assets are best placed to enjoy the largest breadth of transition options to tackle asset stranding, notably accompanying the uptake of both hydrogen and CCUS.
Hydrogen uptake will likely materialize first in port environments, forming energy and industry hubs, in combination with CCUS for multiple uses (decarbonizing heavy industries, producing e-fuels…). By 2040, retrofitted gas transport networks could be instrumental in developing a pan-European hydrogen backbone. Retrofit gas pipelines could make up 50% of this hydrogen infrastructure by 2030, and 60% by 2040 – they would, however, only account for a fraction (34,290 km or c.17%) of EU’s existing transport pipelines (>200,000 km).
Upon retrofit, existing transport pipelines can be instrumental in the emergence of systemic decarbonization clusters and, gradually, in the emergence of pan-European networks for hydrogen transport.
Ivan Pavlovic
At present, both hydrogen and CCUS strategies differ vastly from one country to another and are in varying stages of development. While the UK, Germany, the Netherlands and, to a lesser extent, France have already designed or are in the process of designing ambitious joint hydrogen / CCUS strategies, Italy and Spain seem less advanced in supporting CCUS uptake. For its part, Spain nonetheless aims to develop a renewable hydrogen production and export hub to Europe and ultimately a transport corridor potentially linking Morocco to Germany.
All in all, from an asset stranding perspective, transport networks and regasification assets (generally operated by the same company in a given territory) look better set to weather the transition compared to distribution networks, given the greater variety of options to support the energy transition and eventually secure a Net Zero-aligned second life.
