energy essay eco3012- rhiannon busby
TRANSCRIPT
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FACULTY OF ARTS & SOCIAL SCIENCES
ECONOMICS COURSEWORK COVERSHEET
Coursework Details
Module Name and Code ECO3012
Coursework Title Energy economics
Deadline 08/12/15 Word Count 4977
Student Details
Student URN
(7 digit number on Uni
card)
6210217 Student Name
Rhiannon Busby
Programme Energy Economics
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Natural gas is often seen as a bridging fuel towards the ultimate goal of generating clean energy.
Discuss with reference to the international gas markets.
Rhiannon Busby
6210217
Sou
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Eco
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Introduction
Like oil and coal, gas is a fossil fuel, however its properties are significantly different, which have led
it to be sought after as a bridging fuel. A bridging fuel in this context is a lower-carbon alternative fuel
used in transition between use of high carbon emission fuels and low/zero carbon emission fuels. This
essay will look into the benefits and drawbacks of using natural gas as an intermittent fuel whilst
low/zero carbon fuels are further developed.
History of gas
The first commercialised gas was used in Britain around 1785 to light streets (American Public Gas
Association, no date). In 2013 around 3500bn cubic meters were demanded globally and gas accounted
for 21% of the global primary energy mix (IEA, no date). Prior to the 20th century gas was used locally
as there was no method of transporting large quantities of gas over long distances, the industrial
revolution was mainly powered by oil and coal. Further improvements to the technologies transporting
gas allowed it to become more popular however impracticalities prevented it from becoming a real
contender. Oil has a higher energy density when compared to gas and coal, the high costs of
transportation, as well as the difficulty of extracting gas from the ground allowed oil to flourish within
the energy market. This was until technology improved in hydraulic fracking and LNG (liquid natural
gas). These technologies allowed more gas to be extracted from the wells but also made it commercially
viable to transport over long distances. Following these improvements in technology, gas became a
much bigger player in the market.
There are many reasons as to why gas is becoming so popular, there are large reserves spread across
the world leading to improvements in energy security of many countries, it is a far cleaner fuel when
burnt than coal or oil, following on from the improvements in technology its price is becoming more
competitive and it doesn’t present issues such as safety issues (as does nuclear power) or intermittency
issues (as do renewables).
The US was particularly interested in increasing its use of natural gas because it has such large reserves,
(proven gas reserves in 2014 were at 388 trillion cubic feet), a new record (U.S. Energy Information
Administration, 2015a). Having such large reserves allowed them to increase their energy security as
they would be less dependent on countries such as Russia to provide them with their energy. It also
meant that they could become less reliant on imports. In the latest annual energy outlook, the US expects
to become a net exporter of natural gas by 2017 (EIA, 2015f). Another benefit of gas is that plants used
to create energy have very short start up and shut down times, this allows them to be used as intermittent
sources of energy in conjunction with renewables and in the past has been used as a back-up fuel. For
example following the 2011 Fukushima disaster, Japan’s consumption of liquid natural gas (LNG)
increased by 20%-30% year on year (Miyamoto, Ishiguro & Nakamura 2012). The European gas market
is different. The US have the upper hand of gas fields being in workable geographical locations whereas
countries in Europe are more densely populated which makes receiving permission to dig more
complicated and less likely. Therefore the European market is more likely to import gas supplies
(Rogers, 2015). LNG prices differ dramatically worldwide, the Asian LNG market shows the highest
prices (IEA, 2014). Most of the natural gas in Asia is imported as LNG and in the past has been traded
on a spot and short term basis and hence has followed the oil prices (EIA, 2015e). Having said this,
Asia is now developing trading hubs in order to align natural gas prices to the natural gas market. Given
Europe’s uncertain demand, North America’s dramatic decrease in dependence of imports, the growing
Asian demand and high prices, many suppliers are looking here to supply. Demand for gas within the
Asian market has increased by an annual average of 6.3% between 1995 and 2014 (Rogers 2015b).
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Why is gas better than oil?
Natural gas is a mixture of many different hydrocarbons, it is mainly made up of methane (between
70% and 90%) but also contains other hydrocarbons, carbon dioxide, nitrogen and hydrogen sulphide
(IEA, no date). “Natural gas is the lowest-carbon hydrocarbon, odourless, colourless and non-toxic”
(Shell, no date). The largest producers of natural gas are the US, Russia, Canada, Qatar and Iran, the
largest consumers of natural gas are the US, Russia, China and Iran (IEA, no date).
Even though oil production has been growing, gas production has been growing at a fast rate.
Source data: BP statistical review, 2015
Gas is a resource in its own right, it is separate from oil (although can be found within the same wells)
and thus has its own reserves and is not dependent on crude oil, it has its own market and own prices.
Unlike oil, there are no depth limits to where you can find it, gas can therefore act as a substitute for oil
which is important if it were to be used as a bridging fuel (Bhattacharyya 2011). Arguably the US is the
biggest success story for natural gas, however lots of other counties have made progress towards natural
gas explorations. Canada already produces tight gas1, CBM2 and small amount of shale, Australia has
shown good CBM potential as well as China, India and Indonesia having produced small amounts of
unconventional natural gas (IEA, no date). OECD sights North America3, Australia, East Africa and
Russia as having potential to supply significant volumes of LNG over the next ten years (OECD 2014).
“Conventional recoverable resources are equivalent to more than 120 years of current global
consumption, while total recoverable resources could sustain today’s production for over 205 years. All
major regions have recoverable resources equal to at least 75 years of current consumption” (IEA,
2011). There has also been a large increase in unconventional natural gas resources which are estimated
to be as large as conventional resources (IEA, 2011). However even if a country does carry the
resources, it does depend on whether permission is granted as to whether these supplies can be used.
Recently there has been a large increase in the production of shale gas (a type of natural gas), largely
from the United States. The advances in horizontal drilling and hydraulic fracturing have allowed
energy companies to increase their production of shale gas so that is now the world’s largest producer
1 Tight gas is gas that is produced from reservoirs with low permeability- it requires strong hydraulic fracturing
in order to produce the gas economically 2 CBM gas is gas produced from coal bed methane as opposed to shale (shale gas) 3 North America here includes North America and Canada
0
50
100
150
200
250
300
350
400
Gas and Oil ProductionIndex, 1970=100
Gas Production Oil Production
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of natural gas (EIA, 2015c). Now that the US has surpassed Russia to become the world’s largest
producer of natural gas, as well as other countries also producing increasing amounts, countries can
diversify their reliance on producers, improving their energy security.
The geological conditions for gas are much less severe than they are for oil. As a result the cost of
producing gas is pushed down. Oil can only be found at certain depths which means that gas is much
more abundant than oil (Rogner, 1989). The domestic success of the US in the LNG market, caused a
significant drop in imported gas, combined with the general drop in global demand following the 2008
financial crisis a sudden decrease in demand for imports occurred (mostly from Qatar), causing a glut,
consequently prices fell in the US and Europe. Since 2010 global demand has recovered substantially
however as the US and Canada are proceeding to export LNG, they are no longer attractive markets.
(IEA, no date).
Natural gas can be used as a bridging fuel as it produces less green-house gas emissions compared with
oil and carbon. Oil emits 73.3 tCO2 per TJ, whilst gas emits 56.1 tCO2 per TJ which is 30% less CO2
emissions than oil (Bhattacharyya 2011). It is a far cleaner fuel to use between now and when we are
fully reliant on renewable clean energy resources. 2°C is the maximum increase in global surface
temperature that the world has agreed we cannot surpass (FT, no date). The move to renewable energy
is ongoing and therefore if we are to simply wait for renewable energies to become mainstream and
reliable, we would likely surpass this 2°C maximum temperature increase. By switching to gas, we are
able to decrease our CO2 emissions whilst we wait for non-carbon substitutes to become viable.
Why gas is a good bridging fuel?
Gas is the best fuel to use because it provides a cost effective fuel towards a low carbon future. As we
have explained above, natural gas is not restricted by unforgiving geographical barriers. Liquid oil can
be found up to a certain depth (Bhattacharyya 2011). Gas does not have these barriers, which means it
is in large abundance. Second to this, due to the properties of gas4, producers are able to extract it at
relatively low cost filtering through to cheaper prices (MIT, 2011). The properties also allow gas to be
economically extracted from unfavourable subsurface environments5 whereas there are many oil wells
that are not economically viable. Because gas has become more cost effective, it is able to enter the
market and compete with oil. This is particularly good in essence as a bridging fuel because it allows
the market to improve upon the externalities it has created, allowing the government to focus solely on
the improvement and integration of renewables within the market. “Of the mean projection,
approximately 9,000 tcf could be developed economically with a natural gas price at or below $4/
Million British thermal units (MMBtu) at the export point” (MIT, 2011). This will allow, for the US
economy, gas to be used as a relatively low cost fuel and in the process reduce CO2 emissions.
Natural gas has favourable qualities when compared it to oil or coal. It has the lowest carbon intensity
of all fossil fuels (emitting less CO2 per unit of energy generated than other fossil fuel (MIT, 2011)
therefore when burnt to produce electricity, it does so cleanly. MIT (2011) found “that increased
utilization of existing natural gas … power plants provides a relatively, low cost short-term opportunity
to reduce U.S. CO2 emissions by up to 20% in the electric power sector, or 8% overall, with minimal
additional capital investment in generation and no new technology requirements”. Gas requires much
less processing than oil- this further increases the argument for gas as a bridging fuel as both the
generation of electricity and the processing of the fuel are less carbon emitting for gas than they are for
oil (MIT 2011). This limited processing, has allowed gas to enter numerous markets, including domestic
heating, cooking, fuel for vehicles and many other ventures. This increasing range of uses allows gas
4 The properties of gas include high compressibility and low viscosity 5 Two key subsurface drivers of well cost are depth and well pressure (IEA 2012)
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to be a bridge between our current energy mix and renewable energy sources. For an energy to be
implemented into a market, you need it to supply the demand for the energy source you are trying to
remove. The fact that the increase in gas has been driven by the market and not by government policy
shows that it has strong potential to replace oil and thus be used as a bridging fuel (SEI 2015).
As explained before, one of the issues with renewable energy is that they are intermittent. This means
that it is not always possible to produce the energy demanded. For example, electricity cannot be stored,
therefore electricity demand needs to be met immediately with supply. A fossil fuel such as solar, can
only be used in the hours of sunlight, as well as this, there are specific angles at which the solar panels
have to tilt to be able to maximise the amount of sunlight absorbed. Tidal power has only four points
within the day that it can generate energy. Even if surplus electricity was generated, you could not store
the excess. Natural gas plants can be used in conjunction with intermittent sources of energy such as
these. This is because to start up and shut down a gas-fired plant is very quick, thus can be used when
the energy sources such as solar drop out. This ability of natural gas to be used as an intermittent has
allowed gas to penetrate the US electricity power sector by 30% (MIT 2011). This in itself is a benefit
of using natural gas as a bridging fuel because whilst renewables are being developed gas can act as the
accompanying fuel to meet peak demand and back up renewable energy sources.
Looking forward, this is one of the issues that renewable energies face, and one of the reasons that we
cannot fully move towards renewables now. If we were to use natural gas as a bridging fuel, not only
would it allow us to reduce carbon emissions but it would provide us time to continue to develop and
increase our use of renewables whilst research is undergone into more viable and long term solutions
(whether they be renewables, CCS6 etc.).
As we have seen, gas can act as a bridging fuel, but it also has unintended positive consequences. Given
the reliance on energy within developed countries, energy security is important to countries as failures
in supply7 could cause major problems to an economy. There are three main indicators of dependence:
import dependence; energy mix and stocks of critical fuels. By increasing the consumption of gas, and
reducing reliance on other fuels, both your energy mix (assuming you start with a lower relative
consumption of gas than other fuels) and for most countries, your import dependency, improve. By
improving on these two factors you are bettering your energy security which is an added benefit to
moving away from fuels such as oil. In the future, renewables could also provide countries with these
benefits. We could move away from an energy market with historically unpredictable and volatile
prices. This would allow for the planning of the energy market to improve as better forecasts to returns
of investments could be made.
Issues with gas as a bridging fuel
Even though there is a strong case for using gas as a bridging fuel, there are still issues associated with
the use of the fuel as an intermediary, as well as with the production itself.
The significant increase in shale production over the past few years have caused some environmental
concerns to be voiced. Many of these concerns stem from hydraulic fracturing and the risks of toxic
fracture liquids finding their way into public water supplies. Following on from these concerns
restrictions in potentially productive areas within the US have been implemented, this is whilst the US
Environmental Protection Agency is conducting an extensive review of hydraulic fracturing as well as
introducing legislation into responsibility and awareness of chemicals (FRAC) Act in the 09-10
6 Carbon capture storage is a technology that allows the capture of carbon dioxide emissions into a container that
can be buried instead of releasing the emissions into the atmosphere 7 Examples of failures in supply could be by means of political friction, failure of a supply technology, or
breakdown of supply infrastructure
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congress (MIT 2011). In order for gas to be a successful transition fuel, clear rules and regulations would
have to be put into place. There are also calls for governments to subsidise the research and development
into technologies that will counter negative impacts fracking has on the environment. (SEI 2015).
Second to this issue, is the possibility of methane gas leakages from the production and transportation
of natural gas. Even though methane has a much shorter lifespan in the atmosphere than carbon dioxide
does, it has a higher global warming potential, 34 times the rate of CO2 over a time horizon of 100 years
(Myhre et al. 2013). As explained above methane is the primary component of natural gas and leakages
can occur at all stages of production and distribution. (Newell & Raimi 2014) noted that methane
emissions from natural gas production accounted for roughly 10% of all natural gas related green-house
gas emissions. They find that “most evidence indicates that natural gas as a substitute for coal in
electricity production, gasoline in transport, and electricity in buildings decreases greenhouse gases,
although as an electricity substitute depends on the electricity mix displace”. The report concluded that
shale gas development has had a net positive effect so far on US greenhouse gas emissions however the
effects of methane leakages still needs more research undertaken. The report also suggested that policies
incentivising the switch to better technologies such as renewables and CCS’ need to be formed and for
these policies to improve the cost-competitiveness of the technologies.
Aside from this however, the issues are drawn from the use of gas as a bridging fuel. Firstly the increase
in demand for gas must be met with a decrease in demand for oil and coal, gas must act as a substitute
not a compliment. In order for gas to be used as a bridging fuel, for all the above reasons, it needs to
replace what is harming the environment now. If the increase in demand was secondary to the use of
oil and coal, you would only be ruining the environment further and the benefits from gas as a bridging
fuel would be dampened, if present at all. The purpose of using gas in this way is to reduce carbon
emissions in order to buy us time to further research and develop the renewable energies we have now,
and will have in the future. By not moving the demand away from oil and coal, towards gas you do not
buy yourself any time for these improvements to take place, and the risk of the global temperature
change increasing over 2°C is greater.
Whether gas can decrease carbon emissions depends on how much coal is replaced by gas, and also by
how much renewable energy and nuclear power is replaced by gas. Gas has the lowest carbon-intensity
of all fossil fuels (MIT, 2011) so switching to it will reduce emissions however the effect is dampened
if gas is used to substitute away from renewables or nuclear. I will discuss the replacement of nuclear
and renewable energy later on, at this moment I will outline the benefits and drawbacks to using gas
depending on what it substitutes. As a rule of thumb (Newell and Raimi, 2014) concluded that if the
amount of coal energy displaced is greater than the amount of renewables and nuclear displaced, there
will be an overall reduction in carbon dioxide emissions. Following from this, depending on what sector
gas is used as a substitute, gives different levels of net benefit.
There may be a risk that gas displaces some non-carbon energies such as solar and nuclear because it
can be produced at a lower cost, many studies refer to the displacement of nuclear power and renewables
by gas because of both consumer demand favours cheaper options and hence the switch of investment
away from low/zero carbon options (Newell & Raimi, 2014). This could change following more
research into improving the efficiency of renewables however it will be difficult to move consumers
away from a cheap source of energy to a dearer option. Newell and Raimi (2014) explore the effects of
substitutions away from current energy supplies towards gas, and show how the net effect of this
substitution may not necessarily be positive. As explained above if gas prices were to fall, the additional
savings and the lower price in itself would cause an increase in overall energy demand, thus increasing
green-house gas emissions. But second to this, people would start to substitute away from other energies
towards gas. If people were to substitute away from energies like coal and oil, this would likely lead to
an overall drop in emissions, however if people were to substitute away from zero carbon fuels such as
nuclear and solar, this would lead to an overall increase in emissions.
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As we can see from this figure, when used as a transport fuel gas offers a small to negative benefit to
the overall emissions impact8. By contrast using gas as a substitute for heat applications the relative
emissions benefit from gas is 14% when compared to oil and 23% when compared to coal (SEI, 2015).
However we know that gas is a very flexible fuel therefore it could be possible to use gas as a substitute
in the sectors that provide the best benefits to the environment. But to do this, you would have to make
sure that where it doesn’t provide a benefit, it is not used. For this to be possible it is likely policies
would have to be implemented to make sure gas replaces the correct fuels under the correct
circumstances. For example, are vehicles available that use gas as a fuel and not oil? How expensive is
the local price of gas relative to other fuels? (SEI, 2015). Gas used as a substitute for energy sources
such as nuclear and renewables will clearly provide negative benefits. We will explore this idea later.
This is why if gas were to be used as a bridging fuel, it would require policies that incentivised further
research and development into renewables in order to make them more price competitive and broadly
available and policies against these high emission fuels once the appropriate substitutes were available.
The rebound effect should also be considered. For those areas that gas would be cheaper than oil,
because of local supplies, subsidies and tariffs etc. the cheaper price of energy could increase our
consumption. The rebound effect is split into three categories.
1) The direct rebound effect- this says that a decrease in price of energy, causes us to increase our
consumption9.
2) Indirect rebound effect- this states that the savings the consumers receive from a lower price
causes an income effect, increasing their consumption of other goods which requires more
energy.
3) Tertiary effect, this is where aggregate demand picks up, increasing activity within the
economy.
8Using gas as a transport fuel offers greater emissions when substituting for gasoline in passenger light duty
vehicles whereas for diesel in heavy duty truck operations it offers less benefits- however the literature does
disagree to some extent (Newell & Raimi 2014) 9 A decrease in price causes the consumer to move down the demand curve towards an equilibrium output that is
greater than it was prior to the price change
-60%
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These effects show that unit by unit gas may be able to provide efficiencies however if the overall
consumption of energy increases as a result of lower prices, the benefits of using gas as a substitute
could be offset.
Will gas replace oil?
There are mixed reviews regarding whether gas can actually replace oil as our main source of fuel. This
stems from many opinions from how gas can be transported, where it can be used, how cheap it would
be on the market and therefore how much competition it would impose towards oil. Some believe that
gas simply doesn’t form any kind of competition from oil (Rogers, 2015) but that it will be able to
substitute for coal (EIA, 2015b).
The replacement of coal by gas is more widely accepted. For example at the same time, in the US the
share of coal in the power sector is expected to drop 5 % points by 2040 whilst natural gas’ share is
expected to increase by 4 % points to 31% (EIA, 2015d). The replacement of oil energy supplies in
favour of natural gas is more difficult for the UK. We expect that the UK would have to drill 700 shale
gas wells for the next 10 years to cover 10% of the energy demanded (Rogers, 2015). Whether gas can
take over from oil depends on how easy it is to switch. For a country that would need to import gas, the
cost would rise due to the cost of transporting gas over long distances. There are two ways of doing
this. One is to expose gas to high speeds and pressure and distribute it through long distance pipelines.
The other, which is becoming ever popular, is to cool the gas down to -162°C to turn it into a liquid,
and transport it under atmospheric pressure, this however is expensive (Rogers, 2015). Having said this
the BG group reported the start-up of 6 new LNG terminals in 2014 (BG group 2015) showing that
contrary to the high cost, demand is increasing.
Progress in renewables
So far I have discussed some causes for and against the use of gas as a bridging fuel. However one
cannot create a functional bridge without two objects to connect it to. Gas cannot be used as a bridging
fuel, without a renewable future to bridge to. The future for renewable energy is uncertain. We now
have the technology to produce energy from sources such as wind and solar however making these
viable for day-to-day use is another stepping stone that needs to be overcome before we are able to step
off that bridge to the other side.
Solar power in the UK for example can only generate electricity if the sun is out, if you were to use
solar power to provide electricity you could only do so at certain times considering there is no way to
store electricity. Wind farms face a similar problem but also are often argued against because they are
‘unsightly’. To correct this one can build offshore wind farms however this is considerably more costly
than onshore.
The government up until now have been subsidising the renewable sector however some would disagree
as to how well managed this system has become. For example a policy was introduced that provided
households with solar panels dependent on certain conditions10. These solar panels could either provide
you with electricity or heat your house. Second to this, part of the scheme allowed you to make money
from generating electricity from these solar panels by selling back electricity to the national grid. Of
course at face value this seems like a good idea, allowing individual households to learn the benefits
from using renewable technologies such as lower household bills and improving the environment in the
process. However by doing this, the UK government spent money on providing a technology that
10 Conditions could be for example the direction your house faced, and the energy certificate your house has
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arguably isn’t viable yet, instead of using this money to better the technology and make it more
competitive within the market without having to incentivise people to switch.
Many papers reference that more research and development is needed within the renewables sector,
(MIT 2011), (Roberto F., Roberto 2011). However it seems that the UK has taken a U turn on its
subsidies for renewable energy ahead of the Paris energy summit 2015 (Pilita Clark 2015). The most
important factor in improving our environment and preventing further global warming is to improve
upon zero carbon emission fuels, otherwise there will be a point at which even gas with its lower carbon
emissions will start contributing significantly to global warming because of the growth in population
and thus an increased use of energy. Therefore for gas to be used as a bridging fuel, technologies must
be developed further to provide a non-carbon emitting form of energy that we can move onto.
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Conclusion
Gas has improved through better technologies allowing it to be used effectively as a source of energy
in many markets from electricity, heating and transport. Throughout this essay we have seen arguments
for the use of gas as a low carbon intermediary however we have also seen strong evidence against it.
We have seen it emits less carbon dioxide, however this does depend on where in the industry it is used.
We have seen that provides an alternative to oil that is not overly expensive however this does differ
geographically due to available resources and costly transport. With some policy adjustments, gas could
be used as a short term alternative which covers the first criteria of a bridging fuel. We have also seen
that it can act as an intermittent when renewables drop out, however there is a risk that renewables will
be replaced by gas. This is especially worrying when you look at the issues with the progress in
renewables. Even though we have had the Paris 2015 summit very recently, the formal implementation
of the agreement will only be implemented in 2021. Therefore the second criterion of a transition fuel,
whether a long term substitute will be available, is less definite.
Overall I believe that it is beneficial to use natural gas as a bridging fuel as the most important factor
we need to consider is reducing the impact of global warming and gas gives us the best opportunity to
do this quickly and without too much market intervention. However there are issues that are known
which should be taken into account. Policies need to be implemented to minimise the amount of
methane leakages that are permitted. In conjunction with using natural gas as a bridging fuel, we must
increase our research and development into renewables and nuclear in order to make sure that gas is
used as a bridging fuel and not a long term solution. We also need to better the education so that once
renewables are ready to be used internationally as a primary source of energy people are more accepting
of having to pay higher prices for this energy, which seems to be a likely outcome of renewables.
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(Accessed 01/12/15)
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