Over the past decade, natural gas has accounted for nearly one-third of global energy demand growth, making it the fasting growing hydrocarbon fuel.i The energy transition will likely continue to reshape natural gas demand, particularly as net-zero target dates draw near and policy attention and investment capital focus on the low carbon future. For example, renewables are expected to account for 95% of the net increase in global power capacity between now and 2025, potentially slowing power sector demand growth for natural gas in some regions.ii As electric vehicle sales share increases, doubling to 10% in Europe in 2020, followed by China at 5.7%, demand for natural gas in transportation will likely decline.iii And the chemical industry, among others, is expected to continue to experiment with alternative feedstocks and alternative fuels (such as low- or no-carbon hydrogen).
How might these trends shape natural gas demand? The answer may lie in the ability of natural gas to become a lower carbon alternative while remaining cost competitive with alternative fuels. This is likely a patchwork picture, regionally differentiated and characterized by disparate policy and regulatory approaches. For example, though emissions trading mechanisms are in effect in various countries, no single comprehensive system yet exists to create a common value for avoided emissions. In addition, increasingly frequent severe weather events can continue to create market volatility. In Q1 2020, before the pandemic lockdowns, unusually mild weather in Europe, North America, and Asia led to a 2.6% overall decline in gas demand year on year.iv But in 2021 cold weather in Northern Asia created LNG price spikes.v And five months later, due to extreme heat and drought, the Henry Hub spot price averaged its highest level during any summer month since 2014.vi
Amid these uncertainties, the following factors may help natural gas remain a critical part of the energy mix for the longer term:
Coal to gas switching in the power sector: In the US alone, carbon emissions fell nearly 3 percent in 2019 due largely to the replacement of coal plants with gas.vii In China as well, coal to gas switching has been underway, with natural gas generation increasing by 2% in 2020 at the expense of coal.viii The next phase of decarbonization will include switching from gas to renewables, as the levelized cost of energy (LCOE) of renewable generation is in some cases already less than that of new gas peaking plants.ix
Leveraging existing infrastructure: There is a growing focus on using the existing natural gas pipeline infrastructure to transport a natural gas/hydrogen blend. The acceptable blend depends on at least two factors: the age and condition of the current pipeline network; and the ability of end-use equipment to accept a blended stream, usually up to 15% hydrogen.x Projects in Europe are already leveraging the existing infrastructure for a lower carbon blend.xi
Carbon capture: Carbon capture technologies could be a partial solution as industrial users abate emissions even before retrofitting facilities for lower carbon feedstocks and fuels. Moreover, carbon capture as part of blue hydrogen production from steam methane reforming could also maintain industrial natural gas demand. The costs of carbon capture technologies are still high, and concerns about storage persist. However, projects like the Porthos project in the Netherlands may help make CCS more viable and economically competitive.xii And Qatar is expanding its LNG production with the North Field East project and is continuing its focus on decarbonizing LNG through the increased use of CCS.xiii
For natural gas to contribute fully to the energy transition, two conditions should be met. First, producers should continue to decarbonize by further reducing flaring and curtailing operational carbon emissions. Second, natural gas should remain cost-competitive with alternative fuels. Currently, green hydrogen can be more than five times as costly to produce as natural gasxiv, and the important calculus is the point where those cost curves cross when emissions abatement is priced in. If natural gas can become greener and remain cost-competitive, the gas industry could continue to be a critical partner in the energy transition.
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i IEA “Gas”
ii IEA, “Renewables 2020 – Overview”
iii IEA, “Global EV Outlook 2021”
iv IEA, “Gas”
v IEA, “Gas Market Report: Q1-2021”
vi US Energy Information Administration, “Natural Gas”
vii Deloitte Insights, “Navigating the energy transition from disruption to growth”, May 2020
viii IEA, “Gas Market Report: Q1-2021”
ix Deloitte Insights, "Utility decarbonization strategies", September 2020
x National Renewable Energy Laboratory, “Blending Hydrogen into Gas Pipeline Networks: A Review of Key Issues”, March 2013
xi NortH2, "About NortH2"
xii Porthos, "Project"
xiii Qatar Petroleum, "Qatar Petroleum has received offers for double the equity available in the North Field East project (NFE)", June 2021
xiv Deloitte analysis; Office of Fossil Energy and Carbon Management, "Hydrogen Strategy Enabling a Low-Carbon Economy", July 2020