All you need to know about the Natural Gas energy crisis

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Many climate negotiators are currently working on the concept of “net-zero carbon emissions”. We can do this by increasing the share of natural gas as it is the cleanest fossil fuel among the available fossil fuels as it emits the least amount of carbon dioxide into the air when burned.

Natural Gas demand is increasing “quite rapidly” as countries attempt to shift away from coal and oil. Globally, the switch to natural gas has had commendable results. It provides secure and affordable energy to everyone without degrading the environment.

Natural gas primarily consists of methane. It is used to generate electricity, cook in domestic households, and as a vehicle fuel and is delivered via pipelines, just like water from a tap. There is no need to keep cylinders in the kitchen and thus save space. 

What has led to the Natural Gas energy crisis ? 

Analysts attribute the rise in global energy prices to a number of factors.

1. Europe went into the winter season with low natural gas stocks, which is used to heat homes and generate electricity.
2. The search for natural gas is spreading to Asia’s developing economies, with India and Indonesia contributing to global demand pressure. Overall demand from Europe has increased, causing prices to reach new highs. Meanwhile, supply remains constrained as a result of underinvestment in new projects.
3. Consumer demand has recovered as economic activity resumes following the pandemic scare. But, as a result of supply chain disruptions caused by the Covid-19, production has taken longer to recover. When growth continued this year, particularly in Asian economies, demand skyrocketed, and energy producers struggled to meet the increased demand, driving up prices.
4. It is believed that the aggressive push toward renewable energy adoption has caused investors to underinvest in traditional energy sources, resulting in insufficient supplies to meet rising demand.
5. During winters renewable sources of energy such as solar and wind energy turn out to be unreliable resulting in increased prices for natural gas.
6. Energy geopolitics – As prices shot up amid growing worldwide demand and falling production in Europe, supplies from Russia via a pipeline that passes through Ukraine and Poland also shrank, which made the situation worse. Russia has built another gas pipeline, Nord Stream 2, which will take Russian gas directly to Germany, bypassing Ukraine and Poland. But supplies to Europe through Nord Stream 2 are yet to start as the pipeline is awaiting approval from European authorities. Several European countries and the United States remain opposed to the pipeline, which they claim will give Russia more influence by allowing Russia to economically punish Ukraine and Poland (Russia no longer has to pay transit charges to send gas via Ukraine). It has fueled speculation that Russia is exploiting Europe’s energy crisis to get EU permission for the Nord Stream 2 pipeline. When Russia is threatening to attack Ukraine, this is an unpleasant situation. If the United States retaliates with sanctions against Russia, Europe will bear the brunt of the consequences.

Implementing the change

The pricing of natural gas is a complex task. It is based on multiple factors like gas produced from domestic fields by the public sector companies or gas produced by private companies. Similarly, pricing for production from deep waters offshore under high temperature etc.

The second is how to tax the end-users. It means that customers located at a distance from the gas source pay a higher price than those closer to the source. The result is a decrease in demand.

Completion of a pipeline grid gets affected over issues like land acquisition, pipeline routing, and royalty payments.

Moreover, to boost the gas economy, what is necessary is deregulation of pricing, i.e., market-determined and affordable pricing will boost industrial growth and economic competitiveness.

Take the example of India. India’s 80% electricity comes from burning coal, oil and biomass. It is now trying to venture into natural gas fossil fuel. GAIL (India) Limited (formerly known as Gas Authority of India Ltd.) is a government-owned natural gas corporation. GAIL has a presence in almost every aspect of the industry. It is involved in gas production, transportation, and marketing, allowing it to use its leverage of the majority of gas pipelines to prevent competitors from accessing the market. Despite the fact that the policy requires all marketers to have guaranteed and common access, GAIL can nevertheless use the regulation to its benefit without breaking it.  

Like other developed countries, who have solved this issue, India and countries similar to India need to tackle this conflict-of-interest situation by separating the upstream (production/import) and downstream (marketing) interests from transportation. e.g. GAIL’s activities should be limited to pipeline construction and transportation.

The transition to natural gas, therefore, requires policy reforms. It should cover things from production (domestic and international) to transportation (pipeline and LNG), markets (current and emerging), commerce (pricing, taxation) and regulatory issues. At the same time, dependence on coal and oil needs to be reduced, and natural gas has to be replaced as much as possible.

Consequences 

In the short term, the most pressing concerns are the winter power outage, the impact of record-high gas and electricity prices on end-user energy bills. In the future, there may be a backlash against renewable energy as more people realise the economic cost of meeting emission targets.

Currently, at least two schools of thought are emerging from the current situation: one that sees this episode as further proof that the world needs to quickly abandon fossil fuels, even natural gas, and another school of thought says it’s proof that more gas is needed in the immediate future to meet growing global energy demand.