Gas could become a stranded asset amid decarbonisation

The world spends a lot of time discussing the need to rapidly scale up renewables. On the other hand, gas is a more uncomfortable topic owing to it being a fossil fuel, albeit cleaner than coal.

Yet it is at risk of becoming a stranded asset amid decarbonisation, is expensive, and is geopolitically complex due to the recent energy insecurity arising from Russia’s poor behaviour.

However, in all scenario modelling the International Energy Agency cannot come up with a situation where Africa’s population has universal energy access before 2030 without gas in the mix. About 590-million people in Sub-Saharan Africa

— about 1.8 times the population of the US — lack access to electricity. If renewable energy is scaled up eightfold by 2030 on the continent, it would provide just 27% of the total required.

There are complex supply and demand dynamics amid decarbonisation, to prevent an apocalyptic ending. Let’s unpack some of this. Gas is capital-intensive. Terminals cost $10bn-$15bn and can take two to four years to build. Financiers are rightly wary of stranded assets. Coal is a prime example of this. The Massachusetts Institute of Technology has estimated that the global net present value of stranded assets in coal power generation by 2050 is $1.3trillion to $2.3-trillion.

In addition, amid volatile prices countries across the income spectrum have reconsidered their position on gas and opted to prioritise renewables. Vietnam is aiming to substitute gas with offshore wind, and Thailand is following a similar trajectory. In Southeast Asia renewable energy is set to increase by 56%, or 51GW, by 2027.

Geopolitics has thrown a spanner in the works. In 2015 former Bank of England governor Mark Carney called out hydrocarbons as a risk to investors, noting that coal, oil and gas could be “literally unburnable”. But he, like the rest of us, could not have foreseen Russia’s undermining of global energy security, which drove gas development in the US, Middle East and Africa.

The concurrent hesitancy and push to shore up gas supply is reflective of a complex set of considerations. Gas prices have declined since the start of the year, reducing the risk appetite of investors, who are looking at potential stranded assets.

In Europe, though prices doubled between Q2 and Q3 of 2022, Q1 this year saw a 44% decline on a year-onyear basis, owing to a warmer winter, subdued industrial demand due to slowing economic activity, and conservation measures such as temperature controls in German state buildings. Gas prices are tied to the cost of extraction and transportation, unlike oil which typically sells at a uniform price.

There are also some upside benefits to gas. Solar and wind power is inherently unpredictable due to their dependency on weather conditions. The UK saw a power shortage in 2021 that was partially a result of still weather that slowed wind turbines. Gas can also provide energy security amid increasing global conflict.

Is there a medium ground? Maybe. Gas can be an important transitional energy source as we scale up renewables to meet global demand. This is where I sit. For now, at least. A loss of energy security is devastating for developing countries. Food inflation has spiralled in Africa as high gas prices have affected the price of key inputs such as nitrogenous fertilisers, transportation and refrigeration. It has worsened drought challenges in the Horn of Africa. In 2023 food security issues caused 43,000 deaths, including more than 1,000 children, in Somalia.

At some point it is possible that gas may be used as a form of aid to developing countries that are worst affected by high energy prices. Energy insecurity can erode decades of developmental gains in the areas of nutrition, health and education. The potential benefits of gas in Africa are marked, but likely highly inequitable. Africa was home to 40% of the world’s gas discoveries in 2010-20. It can be an important source of export revenues for African countries with reserves.

Algeria and Egypt have already become beneficiaries. Mozambique, Congo, Angola, Senegal and Mauritania have seen an acceleration in their project development. SA has also recently found exploitable gas reserves. But export earnings typically line the pockets of the elite and the benefits rarely trickle down to the rest of the population, unless it is as a source of domestic energy.

Above all, emissions from gas can accelerate the climate shocks that are leaving millions displaced and hungry. Did I mention that the trade-off between energy security and the need for decarbonisation is complex?