Jun-2022

The enduring role of natural gas

Conflict, energy independence goals, and the onus on diversifying the energy industry value chain rely on natural gas to serve as a stable platform during the long transition to zero carbon.

Bryan Mandelbaum and Carina Winters
Black & Veatch

Article Summary

Following Russia's invasion of Ukraine and subsequent actions to ban or reduce demand for Russian oil and gas exports, global oil and gas markets have been thrown into disarray. The invasion and ongoing instability in other key oil-producing regions of the world are raising pressure on the U.S. and Europe to accelerate efforts to achieve true energy independence as well as shore up global oil and gas markets.

In early March, U.S. President Biden banned the import of all Russian crude oil and certain petroleum products, liquefied natural gas (LNG) and coal to the U.S. This step was announced as part of an effort to deprive the Russian economy of resources necessary to continue the war against Ukraine.

Europe, in a more difficult position than the U.S. due to its higher overall reliance on Russian oil and natural gas, announced in mid-March it would draft a proposal to eliminate the European Union's use of Russian energy products by 2027. As of late March, the EU even considered a full embargo of Russian oil as a method of hardening the West's response to the war on Ukraine, further complicating the global oil and gas market and spurring a spike in prices.

While many nations have been steadfast in their choices to ban or wean themselves off Russian oil and gas products, the global market is feeling the squeeze at every level. At the end of December 2021, the price of brent crude stood at about USD$78 per barrel. By early March, it had skyrocketed to $128. In the same time frame, the price of natural gas jumped from $3.73 per MMbtu to $4.53 per MMbtu.

Long-term solution
The U.S. is adapting to the shift in several ways, starting with the release of 50 million barrels of oil from the Strategic Petroleum Reserve to help lower prices and address the mismatch in supply and demand. Though helpful, this is not a long-term solution, as history shows that each time we access the reserve, gas prices ease for only two-to-three weeks.

The U.S. is also working with other oil producing countries in different capacities, hoping to position them as potential suppliers of oil and gas. Such efforts are being replicated by nations across the world, but they speak to the larger question countries are asking themselves: What can be done to safeguard national oil, gas and energy systems against similar, future global crises?

To many, the answer seems simple: increase reliance on domestic renewable assets and decrease the use of oil and gas. While this is a potential solution, its simplicity fails to account for the interconnection between the burgeoning renewables market and the established natural gas market.

While stabilizing energy and fuel prices relies on lowering dependence on the global oil and gas market, this move will, in some part, rely on natural gas. The cyclical nature can be dizzying to say the least but suffice to say, the two will work together to modernize and insulate domestic energy markets.

Energy Independence
For several nations, the elusive 'energy independence' has been a goal for decades, though this term can mean different things to different audiences. In the U.S., the term came into public conversation in 1973, when President Nixon created Project Independence to work toward self-reliance in the energy sector, although it was ultimately unsuccessful.

Since then, every president through President Obama has implemented some goal around domestic 'energy independence' This expanded during the Trump Administration where the terminology centered on 'energy dominance' although the goal was similar. Though the U.S. is now in a position where it produces more natural gas than it consumes, considered by some to be a marker of energy independence, much of this product enters the global market rather than staying in the U.S.

This global market is, generally, the deciding factor in domestic oil and gas prices, which to some extent dictate energy prices. In the eyes of many, true energy independence is achieved only when a nation's energy prices are protected from the volatility of global markets, a position the U.S. has yet to achieve.

While many countries covet this status, few have accomplished it. Some countries can insulate their prices from shock because the government treats their oil and gas industry as a national security matter, maintaining a certain amount of spare drilling capacity that can be turned on and off as needed.

In the U.S., where oil and gas production is privately owned, the government has no way to quickly ramp up or slow down production, leaving the nation more vulnerable to global market spikes. Complicating matters further is the fact that almost all oil is produced via hydraulic fracturing or “fracking,” which takes months to move from drilling to market, meaning it cannot be quickly put into action.

Natural gas: clean energy transition
So, what's the solution? How can countries achieve energy independence? The seemingly obvious answer would be to charge ahead on renewable energy buildout; however, technological shortcomings, particularly around intermittency and long-term storage, continue to limit this as the only solution. The more realistic solution lies in pairing clean energy generation with natural gas. This solution will help support, and even accelerate, the net-zero transition for decades to come.

Though some argue that a clean energy landscape requires the elimination of all fossil fuels (including natural gas), clean energy without the help of natural gas won't allow the world to hit its decarbonizing targets in the timeframe laid out.

Of course, reaching a status of full net-zero emissions is the goal, but to keep society running at the energy intensity with which it currently operates, the only realistic pathway to a decarbonized world must involve natural gas as part of the solution.

Bankability of decarbonized projects adds to the allure of natural gas. For most countries, it is simply not feasible to direct adequate resources to fully transition to renewable energy on a timeline quick enough to provide benefit in the medium term. But many areas are gifted with natural gas reserves that can be responsibly leveraged locally or regionally to help lower emissions across the energy and fuel landscapes.