The transition is likely to take longer than expected and rely more heavily on natural gas production and utilisation than many believe, argues Frederick Fromm
The 'green revolution' has meant institutional investors have leaned on energy sector executives to devote less money to expanding fossil fuel production and focus instead on returning capital to shareholders. We believe this could create a potential gap in meeting production needs in the intermediate future.
With the energy transition underway, integrated energy companies aren't sure how much natural gas, petroleum and coal the world will need to ensure reliable supplies, vis-à-vis huge increases in renewable energy capacity and storage systems, particularly with many governments trying to phase out carbon-emitting fuels.
An efficient responsible energy transition approach includes examining all tiers of policy scenarios to inform the required level of future investment. This includes natural gas production and distribution, which can displace coal- and petroleum-fired power generation in the near future.
Such substitutions can provide immediate environmental benefits without putting undue strain on supply chains, since much of the technology has been around for decades and is readily available.
In a world where energy consumption is expected to swell, further investment is required with greater emphasis on natural gas to help reduce dependence on fuels with a bigger carbon footprint.
Existing infrastructure can eventually then play the role of a backup capacity to help solve obstacles such as renewables' intermittency and grid-complexity issues, along with scarcities of source materials we'll likely encounter during an expansive, multidecade transition.
Many integrated energy producers already shifted in this direction, with as much as 50% of their upstream production, now coming from natural gas1.
Tough to quit
Despite the environmental impact, fossil fuels are tough to quit. The average US consumer uses over 20 barrels of oil per year, while most other highly populated countries are seeing a rise from the low single digits amid robust consumption growth trends2.
Per-capita energy consumption growth is forecast to continue expanding at a rapid pace, particularly in Asian countries such as India, while those with smaller populations in sub-Saharan Africa—like Mozambique and Tanzania—are also experiencing improve¬ments in living standards and the higher energy consumption that goes along with it.
These are regions where natural gas power plants are currently being built as energy demand scales up and security of supply becomes a priority.
Small incremental standard-of-living gains can translate into massive upshifts in electricity demand and fossil fuel consumption, particularly when spread across billions of people.
Bridge fuel
Among the traditional energy inputs, we see natural gas as a critical bridge fuel that will likely continue to play a role in baseload electricity generation. Natural gas is the cleanest, burning fossil fuel, one that can be made cleaner through carbon capture technology3.
"To progress these global climate objectives, ongoing investment in natural gas drilling and transportation to areas where local supplies are inadequate—particularly in countries heavily reliant on coal and diesel power generation—is essential"
Technology advancements have also made the development of unconventional natural gas resources economically viable, vastly expanding resource availability.
To progress these global climate objectives, ongoing investment in natural gas drilling and transportation to areas where local supplies are inadequate—particularly in countries heavily reliant on coal and diesel power generation—is essential.
As seen in Exhibit 4, US emissions dropped sharply when natural gas-generated electricity displaced electricity produced from coal.
Above all else, natural gas can cover energy demand lost to shuttered coal-fired plants, while powering numerous industrial and transportation applications that cannot yet be electrified.
"Above all else, natural gas can cover energy demand lost to shuttered coal-fired plants, while powering numerous industrial and transportation applications that cannot yet be electrified"
It will become an integral part of a hybrid system where natural gas, and eventually hydrogen, can be dispatched into combined-cycle gas or hydrogen turbines to produce electricity as needed, which can help avoid capacity shortfalls.
Geographic consideration
It is also not currently practical to send renewable electricity around the world; it tends to stay local due to infrastructure constraints and attrition over longer distances.
We believe the world will require additional natural gas sourcing, and related logistics management, to meet demand during the transition period.
In conclusion, our analysis implies the transition is likely to take longer than expected and rely more heavily on natural gas production and utilisation than many might otherwise surmise.
Natural gas offers myriad benefits as a bridge fuel, and key development projects and supporting logistics are being rolled out across the world. As energy investors, we see opportunity here in natural gas production, infrastructure and transportation as global stakeholders partner to meet consumer demand while working toward societies' climate change goals.
Frederick Fromm is portfolio manager and research analyst at Franklin Equity Group, Franklin Templeton.
- ExxonMobil: "ExxonMobil Announces First-Quarter 2023 results." April 28, 2023; BP: "BP 1Q 2023 Financial Results." May 2, 2023.; Shell: "Shell PLC 1st Quarter 2023 Unaudited Results." May 4, 2023.
- International Energy Agency. World Energy Outlook 2022. November 2022.
- Center for Climate and Energy Solutions. "Natural Gas." July 13, 2020.