TOTAL DECARBONIZATION OF THE GLOBAL ECONOMY
GAZPROM - Speech by Alexey Miller at "Gas as an Effective Tool for Achieving the Environmental Targets of the Global Economy" Panel Session held as part of St. Petersburg International Economic Forum
Welcome to the Panel Session. Thank you for expressing such keen interest in the topic of today's discussion, "Gas as an Effective Tool for Achieving the Environmental Targets of the Global Economy."
Indeed, there is an ever-growing need for energy in the global economy, since economic growth entails an increase in energy consumption above all else. Over the past 20 years, global consumption rates have grown by almost 1.5 times for primary energy sources in general and by nearly 80 per cent for electricity specifically. If we look at today's global energy mix, we will see that as much as 80 per cent of the global mix is made up of conventional fossil fuels – oil, coal, and gas. Solar and wind power add up to a meager 3 per cent.
As a matter of fact, the growth in primary energy consumption – by almost 1.5 times – has been achieved through the use of fossil fuels by 85 per cent. Natural gas accounts for 25 per cent of that amount, a substantial contribution. As for renewables, their role in the absolute growth over the last 20 years has been less impressive with just 8 per cent. We can therefore attest to the fact that, if we consider their share in the energy mix and their role in the growing energy consumption worldwide, renewables neither dominate nor make a decisive contribution to the global energy balance.
One should add that the 1.5-fold increase in the consumption of primary energy has been accompanied by a similar increase – by 1.5 times – in CO2 emissions. Speaking of renewables, let's keep in mind that 40 per cent of the Earth's population still cooks with wood. And the sources that rank first among renewables are the good old hydropower and the good old fuelwood. The share of solar and wind power is actually quite small for now. Even though the last 10 years have seen an enormous amount of money – USD 2.5 trillion – invested into solar and wind energy, the installed capacity in that segment added 700 GW. A total of 770 GW of solar and wind capacities produce 5 per cent of the world's electricity.
One should note, however, that the CO2 targets have yet to be achieved. The global energy balance remains unaltered, since it is apparently quite steady. The correlation between growing energy consumption and rising CO2 emissions has been stable and unchanging over the past decades.
It seems that putting renewables ahead of everything else doesn't accomplish anything in today's world. And striving for a total decarbonization of the global economy is downright quixotic. One should understand that fossil fuels will continue to play an essential role in the next 20 years. Crucially, one should understand that fossil fuels in particular will be affected the most by the rising production and consumption of natural gas and the subsequent expansion of the share of natural gas in the global energy mix.
Today, natural gas accounts for some 22 per cent of the global energy mix. Gas falls behind both oil and coal. As we know, oil is the chief source of energy.
What should we expect by 2035? At the very least, the share of natural gas in the global energy mix will become as large as that of oil. Thinking optimistically, we believe that the results will be even better. In any case, the goal for the period up to 2035 – same share as oil – is absolutely achievable. Most important, the current dynamics of the global energy markets show that this outcome is highly likely.
As for renewables – noting again the enormous investments into solar and wind energy – it should be said that the power output in this segment has definitely increased. However, this has given rise to new, unforeseen difficulties related to energy security. It means, for instance, that solar and wind energy require nearly full back-up by conventional fuels, with the conventional capacities and logistical schemes preserved. This is the first issue. Those are brand-new challenges in terms of energy security. Do you want wind and solar? Have at it, invest and build all you want, but don't forget that you also need nearly full back-up.
The second issue, which is crucial and stems from the first one, is the competitiveness of this kind of model, when renewables – solar and wind – are developed while full back-up is made. Besides, we are all acutely aware that such schemes and approaches are basically examples of subsidizing businesses at the expense of end consumers. This brings into question the competitiveness of such economic models. So far, the results have been underwhelming. The models are not so much cost-effective as vastly ineffective.
As far as natural gas is concerned, we know without a doubt that gas has very important competitive advantages. Gas is the cleanest fossil fuel. Gas reserves are abundant and available. Crucially, we have highly advanced technologies for gas production, transportation and storage. And the gas business is highly profitable.
When we talk about the growing role of gas in the global energy mix, as well as its increasing share, we mean that this growth will stem primarily from power generation and transport. And when it comes to the advantages of natural gas as a fossil fuel, it should be clear that gas has its own strengths in each of these sectors.
As regards power generation, it is of course a cleaner and safer type of energy, one that is attractive to investors. It offers a cost-effective and viable alternative. The internal rate of return for combined-cycle projects averages 14 to 15 per cent. Next, combined-cycle units at gas-fired power plants can be set up extremely quickly. It only takes a few minutes to switch them to another operation mode. At coal-fired power plants, on the other hand, it takes hours. With nuclear power plants, we're talking days.
Indeed, the operational flexibility of gas-fired power plants is a strong competitive advantage for gas in the electric power industry. And not only in the electric power industry, because cogeneration also provides benefits in thermal power generation. If we take a look at Germany, natural gas in Germany accounts for 50 per cent of thermal generation for the residential sector.
The competitive advantages of gas in transport are associated with considerable savings for the consumer thanks to reduced costs. In the European market, compressed natural gas (CNG) is 48 per cent cheaper than gasoline and 31 per cent cheaper than diesel. With EUR 10 worth of CNG, you will travel 2.4 times farther than with EUR 10 worth of gasoline and 1.7 times farther than with diesel. Besides, the carbon footprint of natural gas-powered transport is about 20–30 per cent lower than that of transport powered by conventional fuels.
This is why in absolute terms natural gas consumption will grow in the global energy mix until 2035. Its share will expand, allowing it to catch up with oil or even overtake it. This will occur primarily in the power generation and transport sectors.
In this way, natural gas will be a strategic growth driver for the Russian Federation in the coming decades. Of course, our gas industry will be chiefly influenced by the proximity of the two largest and most dynamic markets, Europe and China.
In the European market, we see a 5 per cent increase in natural gas demand. There is also a very important European trend that boosts the region’s demand for Russian gas – the decline in domestic production. Over the last decade, indigenous production in Europe has fallen by 37 per cent, with a 71 per cent drop in Germany. Today, Germany covers only 7 per cent of its gas consumption with its own resources.
As for the absolute volumes of gas reserves, Europe’s proven reserves have decreased by 1.5 trillion cubic meters since 2006, and the remaining reserves stand at only 1.3 trillion cubic meters. What does it mean? It means that there is another niche for gas imports, a niche for new supplies of Russian gas to the European market. By 2035, domestic production in Europe will drop by half again, and the additional opportunities for gas supplies will be around 200 billion cubic meters. A significant share of those 200 billion will be undoubtedly taken by Russian gas. Because, as you know, we can give Europe as much gas as needed.
In the Chinese market, the demand grew by over 15 per cent in 2017, showing the highest numbers in the last few years. Gas imports added almost 30 per cent. In 2017, China consumed 237 billion cubic meters of natural gas. At the same time, this country has come to grips with its acute ecological problems. The goals set by China for 2020 look quite realistic: to raise gas consumption to 360 billion cubic meters and to increase its share in the country's energy mix from 7 to 10 per cent.
Last winter, it was so cold in China that the orange level of gas shortage had to be announced. In light of that situation, it is important for China to maintain parity in the imports of pipeline gas and liquefied natural gas. The parity should be about 50/50 or somewhere in that neighborhood. At the same time, pipeline gas from reliable suppliers is essential during the autumn/winter peaks. This suggests that in the medium term, somewhere by 2035, there will be a niche for additional pipeline gas supplies to China, about 180–200 billion cubic meters. We believe that Russian pipeline gas will cover 80–100 billion cubic meters of that amount.
LNG accounts for the other half of Chinese imports. Given China's economic growth and the increase in consumption, the demand for LNG will rise as well. Our estimates by 2035: 150–180 billion cubic meters for gas and 110–130 million tons for LNG. It means that China will account for some 30 per cent of the global LNG market growth.
Of course, our plans take all of these trends into account. I'm talking primarily about major infrastructure projects. On December 20 next year, we will start supplying gas to China via the Power of Siberia gas pipeline. Speaking of the European market, as you know, we have already completed building the first string in the offshore section of the TurkStream project and we are ready to commence the construction of the Nord Stream 2 gas pipeline.
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