Gas’s future looks cloudy as demand and prices tumble

Two vast shipping tankers stocked with liquefied natural gas (LNG) will glide up the Milford Haven Waterway this week to unload their cargo at the South Hook gas terminal in west Wales.

As the Wilpride and Stiklestad – arriving from the US and Norway respectively – dock, energy industry leaders will meet 200 miles away in London, at a crucial juncture for the gas sector.

The annual International Energy Week conference will see bosses gather at a hotel in Mayfair amid a tense debate over the pace of oil and gas firms’ transition to low-carbon energy. Last year, then BP boss Bernard Looney (since defenestrated) defended its fossil fuel spending over the sound of noisy protests outside. Activists later let off a smoke bomb at a black-tie dinner, forcing executives on to the street in front of protesters.

Speakers will include the chief economists of BP and Shell, and the bosses of France’s Engie, the UK’s Octopus Energy and oil trader Vitol, as well as Ed Miliband, the shadow energy secretary, representing a Labour party under scrutiny for watering down funding for its green policies.

A significant talking point at the conference will be the role of gas in the energy transition – and the impact of falling wholesale prices. In recent weeks, European natural gas prices have fallen to levels not seen since before Russia’s invasion of Ukraine in February 2022, which intensified an already escalating energy crisis. Gas has been trading at €23 a megawatt hour, the lowest since May 2021 – and down from highs of €319/MWh in August 2022.

A multitude of factors have contributed. “European demand remains very low with the second mild winter on the trot,” says Tom Marzec-Manser, head of global gas analytics at consultancy ICIS. “A lot of gas is normally used for heating homes and businesses across Europe, and it hasn’t been used this year.” Warmer, windier weather has also reduced the need for gas-fired power stations to generate electricity, with the under-pressure windfarm industry stepping in. As a result, storage levels in Europe’s gas facilities remain high.

A return to near-normal levels of nuclear generation after reactor outages in France has also reduced gas demand. Recession fears in gas-hungry Germany and a hit to manufacturers during the cost of living crisis have also played a part. Disruption in the Red Sea has not caused the price spike some had feared, in part because the Qatari gas which reaches Europe via that route is typically shipped later in the year.

The UK industry regulator, Ofgem, confirmed last week that the ease-off in wholesale prices had fed through to household bills. From April, its quarterly price cap will fall by £238 to £1,690 and is expected to fall further from July before rising at the end of the year.

The sharp drop in prices has stoked debate over the future of global gas stores, terminals and pipes. In Britain, a long-term switch away from gas-fired power stations has led bigger players to exit that sector, leaving it held by a clutch of smaller, privately owned entities. A commitment from the government to decarbonise the electricity grid by 2035 (and by 2030 from Labour) has led to fears over a gap in supply to meet an explosion in electricity demand. Industry sources argue that realism will trump targets, and a number of gas-fired plants will almost certainly be kept on hand well into the 2030s to ensure the lights stay on.

Analysis by consultancy DNV found that most British homes will still rely on boilers which burn natural gas by 2050, despite the target to hit net zero by that point. Hydrogen has been proposed as an alternative by the powerful gas infrastructure lobby, but condemned by the National Infrastructure Commission.

In the US, where a spate of fossil fuel mega-mergers is taking place, Joe Biden has paused LNG exports as its impact on the environment and economy is examined. In Europe, Russia’s cut to piped gas supplies in 2022 sparked a rush to build more infrastructure to bring in shipped LNG. Further huge floating terminals are being built in Germany.

“The investment case is still there,” says Marzec-Manser. “The EU has committed to weaning itself off Russian gas, so that’s a significant wedge that will be replaced by LNG.”

The floating terminals being constructed can be “unplugged” and shifted to other parts of the world if they become unprofitable in future, Marzec-Manser adds.

A squeeze could emerge when a five-year transit deal by Russia’s Gazprom to pipe gas through Ukraine concludes at the end of 2024.

At the conference, an eye-catching discussion on the future of natural gas will examine methane emissions reduction and prospects for low-carbon alternatives. Green campaigners will hope it is more than just hot air.