The markets are continuing to ascribe better values to fossil-fuel businesses as the world scrambles to buy enough coal and gas to see the northern hemisphere through the winter and to fuel the economic recovery.
On the eve of the United Nations COP 26 climate conference, when world leaders hoped to turn the focus to green energy and a more-rapid transition from fossil fuels, they are instead having to supervise the acquisition of enough primary fossil-fuel energy to power the factories and keep homes warm.
The gas price has shot up several fold. China has abandoned its emission targets, demanded more coal be dug out, and hoovered up liquified natural gas (LNG), coal and any other available fuel on the world market. Russia is rebuilding its gas stocks and holding out the prospect of more contract gas via the new Nord Stream 2 pipeline, if only the European Union would grant it approval – and if Germany can find a government to sign a new agreement.
Gas can’t be ignored in energy mix
Most green governments agreed that gas was to be the transition fuel. It is not possible yet to do without gas to make much of the world’s steel and cement, glass and paper, ceramics and plastic. Gas is still essential for the chemical industry and a fuel for many process industries. Nor has the switch from gas for heating people’s homes got far. The green transition plans assumed coal would be phased out this decade, to be replaced in part by renewable electricity and in part by gas. Gas is cleaner and generates less CO2 than burning coal.
The gas industry assumes a continuing rise in sales in volumes until 2035, with growth of as much as 3.5% a year in LNG-tanker-traded gas. In recent years, there has been an expansion of US shale gas, and some increase from Qatar in the Middle East. The temporary glut of gas last year has soon disappeared, and this year the market is tight with too little supply.
When demand surged thanks to low levels of wind and water for hydro in some countries, and some loss of output in the southern US owing to a hurricane, the world price of gas skyrocketed. Electricity generators were busy using more gas to replace lost renewables, reflecting the phase out and unpopularity of using coal.
Governments are going to have to accept that, for this decade at least, they need to allow more gas exploration and development to see the world through this transition period. Markets are signalling high returns for any company willing to brave the climate against new fossil-fuel investment, to bring more gas on stream to fuel the factories and heat the homes. The price mechanism is certainly sending out a red danger warning to fossil fuel users that they should be looking for an alternative, but it is also a big signal to investors to provide a bit more capital to see us through transition with some more gas.
Oil rallied, but underperforms gas
Oil too has been bid up, though not by as much as gas. Oil is not in such short supply and it is no longer much used for power generation. Aviation demand is still well down – and oil is a minority form of home heating. The market is being kept high by continuing lockdown of some of the Opec capacity at a time when road transport use is rising and when other fuels are scarce.
We should expect markets to correct relative values a bit further as the reality of the continuing need and use of fossil fuels is driven home by visible shortages and problems for fossil-fuel dependent businesses. Gradually supply and demand will come into better balance, unless a severe winter in the north transpires to make the tensions worse. The governments meeting for COP 26 must redouble their efforts to promote and encourage ways of making products that rely more on electricity. They may also propose more hydrogen generation using renewable electricity, to offer a similar fuel to natural gas to power large transports and heat homes.
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Energy stresses mean more gas is required
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Trading update for the three months ended 30 September 2021See more Insights