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Energy and power

Are gas pipelines still a good investment?

Pipeline infrastructure is a conduit for foreign direct investment flows globally, but changing environmental attitudes mean natural gas is no longer the sure bet it once was.

TAP-gas-investment
Albanian Prime Minister Edi Rama signs a pipeline during the arrival ceremony of the first Trans-Adriatic Pipeline pipes in Spitalle in 2016. In spite of this project going ahead, investment in gas pipelines in Europe has slowed. (Photo by Gent Shkullaku/AFP via Getty Images)

After four years of construction, the Trans-Adriatic Pipeline (TAP) is almost operational. The pipe will carry gas from the Shah Deniz field in Azerbaijan 878km across northern Greece and Albania, and then under the Adriatic Sea, before landing ashore in southern Italy.

The project owners are companies based in Azerbaijan, Belgium, Italy, Spain, Switzerland and the UK. These companies have invested about €5bn to develop the pipeline.

Part of the European Commission’s Southern Gas Corridor initiative, TAP is an essential component of Europe’s energy security plans. Yet projects such as this are becoming rarer across the continent.

Senior gas writer for S&P Global Platts Stuart Elliot says: “It is pretty unlikely you will see any new multi-billion-euro pipeline projects because there is just no need. With the uncertain future of gas, you won’t see anything like that again.”

Gas production is still expected to expand over the next decade and new pipelines will be required to deliver that gas around the world. The latest figures from GlobalData show that 100 new gas pipelines are expected to come online globally in 2021, compared with just 65 in 2020.

Yet the role of gas as a bridge fuel in the energy transition is being challenged by some, making gas pipelines less of a sure investment than they once were.

Is gas still a transition fuel?

Global gas prices have dropped along with demand due to the Covid-19 pandemic. In August, the International Gas Union predicted demand would fall by 4% in 2020.

This is only likely to be a minor setback, however. DNV GL, which acts as a technical adviser in the oil and gas sector, predicts global gas demand rising 20% from its 2018 level of 154 exajoules (EJ) to peak in the mid-2030s at 185EJ. It expects demand to fall after this point, but it also predicts that natural gas will be the world’s largest energy source in 2050.

In the International Energy Agency’s latest World Energy Outlook, natural gas supply is still predicted to be rising globally by 2040 based on stated policies by governments. Even in its scenario where governments adopt policies enabling a major transformation of the global energy system to meet the UN’s Sustainable Development Goals, global gas supply will continue to rise until the middle of this decade before beginning to decline.

Most countries’ plans to decarbonise their economies place a heavy emphasis on the use of natural gas, which emits far less carbon when burnt than oil or coal. Gas has long been seen as a medium-term solution until renewable energy sources are cheap enough, reliable enough and developed to a scale where they can meet all demand.

Global lead for low-carbon solutions at DNV GL Oil &Gas Jørg Aarnes says: “The world has started down the path to much greater use of renewables and battery storage, which will enable further electrification of sectors such as transport, manufacturing and heat in the home. However, natural gas will still be the world’s largest energy source at mid-century, and technologies to decarbonise it are yet to take off.”

Aarnes predicts decarbonising technologies such as blending gas with hydrogen, as well as carbon capture and storage, will start to make a major impact after 2035. That may not be soon enough for some.

Gas pipeline companies have been coming under increasing criticism for the methane that leaks from their infrastructure. Even in the US, where most of the new pipelines have been announced in recent years, regulators are pushing for stricter limits on methane emissions.

Although methane has a shorter atmospheric lifetime than carbon dioxide, it is a more damaging greenhouse gas per unit and its global emissions are on the rise.

Pipelines are still attracting investors

Despite growing environmental concerns, the underlying business case for pipelines remains robust. Pipeline operators typically benefit from fixed contracts that provide revenue certainty.

Stephen Jennings, head of energy and natural resources for Europe, the Middle East and Africa at Japanese bank MUFG, says: “The fact that gas pipeline financings don’t carry price risk is very helpful to investors, and from an ESG perspective gas is well-recognised as fundamental to the energy transition over the next few decades.”

MUFG was involved in the financing of TAP and Jennings say this and other recent deals, such as the $20.7bn acquisition of the pipeline subsidiary of Abu Dhabi National Oil Company, “demonstrate that appetite remains incredibly strong for these types of assets”.

The perception that gas is part of the solution rather than part of the problem when it comes to carbon emissions is starting to be challenged though, particularly in Europe.

Elliot says: “I think there is some nervousness around the investment community about investing in gas, although there are certainly private bankers I have spoken to in the past six months who still think gas is a bankable investment to make. Europe is very well-supplied with gas and has ample LNG import capacity.”

The European Investment Bank, which was an investor in TAP, will cease all funding to fossil fuel projects, including gas, by the end of 2021.

New pipelines won’t be in Europe

That abundance of gas combined with sagging demand in Europe have reduced the immediate need for Europe’s most controversial pipeline, Nord Stream 2, which has been halted by international sanctions and, most recently, legal challenges by Poland.

The under-construction pipe between Germany and Russia demonstrates how much political risk pipeline projects are exposed to. The US is strongly opposed to Nord Stream 2, which it believes will increase Europe’s dependence on Russian gas.

Given dampened demand, environmental challenges and geopolitical tensions, it is not surprising that few new pipelines have been announced in Europe in recent years.

“Even as recently as three years ago, people were still thinking about investment in new gas pipelines in Europe as a sensible thing to do in terms of security of supply,” says Elliot. “Now things look a little bit different… There is more uncertainty than ever before about whether gas has a long-term future in Europe unless it is decarbonised.”

While projects are still being announced in the US, opposition there is growing too. In July 2020, Dominion and Duke Energy announced that they were cancelling their Atlantic Coast Pipeline, a $8bn natural gas project that had faced six years of legal challenges and protests.

Mountain Valley Pipeline, a 480km pipe carrying gas through West Virginia and Virginia, has also recently faced legal challenges linked to environmental concerns.

None of this means pipelines will not continue to be invested in and constructed, or that forecasts for increasing gas over the next 15 years will be proved to be wrong.

But over a longer horizon, gas pipelines may be beginning to look like less of a sure bet.

To read more on similar topics to those found in this article, visit our sister site Energy Monitor.