Asia and Europe's strategic shift to coal scripts end of the gas bubble

Pratim Ranjan Bose

The news has escaped the attention of Indian media that is generally a keen follower of the gas sector, having little or no significance in power generation!

On July 23, Japan issued a strong rebuttal to the US policy to discourage the developing world to set up coal-fired power stations, so as to fight global warming. 

Source: Japan Times

Backed by the environment lobby, the Barack Obama administration is trying to convince the developed world to stop funding in “overseas” coal-fired power stations. The US Export-Import Bank already adopted a policy in this regard in December 2013.

The move suits the US, as it would not clamp down on the country’s large pool of coal-based power stations - contributing 39 per cent of the electricity generated – but will put fresh hurdles before the emerging world in harnessing cheap energy sources.

According to The Wall Street Journal, Tokyo pointed out that the developing nations would have to use coal whether others liked it or not and the developed world should better facilitate use of efficient coal technologies to minimise carbon emission.

Fukushima and the gas bubble

The development coincided with Japan’s policy shift in favour of the ‘dirty-energy’.

In April this year, the Japanese cabinet declared coal and nuclear energy as important long-term electricity source. The aim was to safeguard the domestic economy from post-Fukushima volatility in natural gas prices. On July 23, an energy panel put its seal behind the strategy.

Once a coal-driven economy, Japan added significant natural gas (27.4 per cent) and oil-based (8.8 per cent) generation capacities, over the last few decades.

This coupled with nuclear (26 per cent), coal (27.4 per cent) and hydro electric (7.4 per cent), created a diversified electricity portfolio, Tokyo thought.  

But Fukushima Daiichi disaster in March 2011 had upset the calculation. 

Following the accident Japan phased out the nuclear facilities. The gap was filled by imported liquefied natural gas or LNG.

Gas producers across the world saw opportunity. Australia – the largest natural gas exporter to Japan - announced huge investments in liquefaction to produce world’s costliest LNG expected in 2018.

From approximately $ 10-11 per mmBtu (million metric British thermal unit) in early 2011, the spot-LNG prices in Japan nearly doubled to approximately $ 19-20 per mmBtu in January-February 2014.

This was nearly double the highest price paid by any European nation for natural gas and five-times the average price in USA. 

Japan was most affected. But the ripple effect was felt, in many ways than one, by every nation dependent on imports to meet the energy demand.

Russia, that meets nearly one-third of European demand, didn’t lose the opportunity to escalate natural gas prices and exert political pressure on EU.

In India gas producers are expecting double or triple the price (GSPC demanded $ 13/ mmBtu for KG offshore gas and, ONGC expect $ 12/mmbtu for Mahanadi offshore). Mozambique is developing a large LNG project to capitalise on the opportunity.

Strikingly gas price was firming up while price of other energy commodities especially coal remained soft, due to economic slowdown. 

The bubble is now about to burst.

In January this year, Japan – the world’s third largest energy consuming nation – imported 12 per cent more coal.

South Korea too decided to step up share of coal (44 per cent) in electricity generation and is setting up more plants 

The changing consumption pattern started reflecting on Asian LNG prices.

From as high as $ 20 a mmBtu in February this year; natural gas is now imported in Japan at a little over $ 10 per mmBtu - the lowest in last three years. 

Coal is king

The love for coal is more evident in Europe which is now trying to revive its economic fortune riding on cheap energy sources. 

Gone are the days when it took a high moral position on environment issues. European countries are replacing the costly gas-based power by cheaper coal-fired electricity. 

According to a Bloomberg report, Germany and UK - the two biggest proponents of clean energy and carbon emission norms – increased coal consumption by 13 and 22 per cent respectively in last four years.

Europe’s strongest economy, Germany, is also the continent’s largest consumer of ‘dirty-energy’. Poland, the fastest growing economy of the former Soviet block, however, doesn’t suffer from dual standards and is pushing coal as the energy of the future and an effective strategic tool to counter Russia’s energy threats. 

The changing energy-use pattern, made green lobbies apprehensive about the future of EU air pollution rules that promises to close down most of the coal-fired plants by 2020. One such analysis by Sandbag, an environment protection group, indicates Europe’s love affair with coal is likely to continue. 

The politics of energy

The most interesting shift took place in the US, in 2013.

A mere $ 1 per mmBtu increase in gas (mostly shale gas) prices saw share of coal in electricity generation moving up from 37 per cent (2012) to 39 per cent. Gas came a distant second at 27 per cent. Renewable sources (excluding hydro electricity) accounted for a mere 6 per cent of the total basket. 

The US is probably one of the most price sensitive (if not inefficient too) energy markets in the world.

The country shells out huge indirect subsidies (by sacrificing taxes) to keep petrol prices low - so much so that an average American spends a mere 2.5 per cent of the daily income in buying a gallon of petrol (gasoline). 

The price sensitivity is also evident in electricity generation. Till about 2008, the US was generating nearly half of its electricity from coal, because it was the cheapest locally available energy source.

The situation changed with shale gas revolution. With rising domestic production and falling gas prices, the share of coal in power generation started declining rapidly from 2009.

The switchover has hit a roadblock recently due to lower than anticipated growth in Shale gas production. And, according to the latest US Energy Information Administration (EIA) report, it will take another two decades for the share of gas to equal coal (34 per cent each in 2035).

Yet, there is little doubt that shale gas added both depth and diversity in the American energy basket. The US wants to build on this advantage and revive the manufacturing sector that had left for Asia over the last one and half decades.

But, the changing energy use pattern of the world may upset its game plan.

Fall in LNG prices should offer wider energy options to the large coal economies of India (72 per cent) and China (80 per cent).

Japan and Korea which had already taken over the American auto market may become more competitive with access to cheaper energy sources. And, the anaemic Europe will not miss this opportunity to ensure energy security.

Naturally, Obama’s move move against coal fired power stations did not find much support in Europe. Of the top 10 EU economies only Sweden, stood by the American President. Others wanted him to share the benefits of shale gas revolution in USA.

Obama reportedly advised Europe to develop its own energy. “You cannot just relyon other people's energy,” he said. 

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