How can natural gas put public finances at risk?

natural gas risks public finances

At the climate summit in Glasgow, UN Secretary General António Guterres had a strong message: “The six years since the Paris Climate Agreement have been the hottest six years on record. Our addiction to fossil fuels is taking humanity to the brink. “

To limit global warming to 1.5 ° C, the goal that international leaders have set to keep the climate crisis under control, countries must achieve net zero emissions by 2050. According to the International Energy Agency, this means avoiding the development of any new oil and gas fields or installation of coal-fired power plants after 2021. An article in Nature also finds that the 1.5 ° C target requires reducing oil and gas production by 3% per year to world level. But fossil fuel production plans and energy expansion plans in Latin America and the Caribbean, and around the world, are still not consistent with these goals.

The energy transition poses significant challenges for governments and gas producers in the region. Far from helping with the transition to carbon neutrality, half of the region’s natural gas reserves are at risk of becoming stranded assets, resulting in losses of hundreds of billions of dollars over the next 15 years. To analyze these issues, the IDB and the University College of London have just published a study on stranded natural gas reserves and tax revenues in Latin America and the Caribbean. In this blog we highlight six of their results.

Table of Contents

1. Natural gas is an important source of energy consumption and tax revenue

Natural gas accounted for 25% of energy consumption in the region in 2019. Key producers include Argentina, Mexico, Brazil, Bolivia, Trinidad and Tobago, and Venezuela. Although considerably less important than oil in most of the region, natural gas provides several points of GDP in economic rents or tax revenues in Bolivia and Trinidad and Tobago.

2. Technology and climate policy put the natural gas industry at risk

New technologies are replacing fossil fuels as an energy source. Renewable energy is already the cheapest source of electricity, accounting for 90% of investment in power generation worldwide. Electric vehicles are the next step: there are already 10 million of them worldwide, and 3 out of 4 new cars sold in Norway are now electric.

In addition, countries around the world are stepping up their efforts to deliver on their promises to achieve climate neutrality. While the debate is not over on how best to ensure security of supply and flexibility of the electricity grid, the global energy transition certainly puts the natural gas industry at risk. Producers in the region must be prepared.

3. Half of the region’s gas reserves could become stranded assets in rapid decarbonization scenarios

Our simulations suggest that in scenarios that achieve global warming well below 2 ° C, natural gas production in Latin America and the Caribbean would fall to 32-45% below 2018 levels. These gas reserves and the Related infrastructure would become stranded assets, having been devalued or retired before the end of their useful life. In these scenarios, gas is rapidly removed from power generation, and its use in industry and buildings is progressively replaced by electricity. In this case, up to half of the proven, probable and possible reserves remain unused in 2035. Established producers and natural gas associated with oil dominate production, dramatically limiting opportunities for new gas projects in the region. .

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4. Governments should not gamble on sustained revenue from gas extraction if the Paris Agreement targets are to be met

In a scenario without a global energy transition, the region’s finance ministries could collect up to $ 200 billion in taxes and royalties associated with gas extraction by 2035. But in a world shaped by the transition to renewable electricity and net zero emissions targets to keep global warming well below 2 ° C, these revenues could drop to $ 42 billion.

5. Exporting more gas from Latin America and the Caribbean is not a long-term solution

To limit global warming to below 2 ° C, the study finds that Europe and other countries need to adopt decarbonization and gradually reduce their own consumption of natural gas. These days, winter is approaching in the Northern Hemisphere, and demand for natural gas is increasing, driving prices up in a tight market. But these levels of demand cannot be sustained if the Paris targets are to be met.

Investments in energy must consider medium-term scenarios and anticipate that global consumers are likely to switch to electric heat pumps, induction stoves and renewable energy to take advantage of new technologies and meet the objectives of the Paris Agreement. Our simulations also do not support the idea that exporting natural gas to the rest of the world can help reduce emissions in other countries by displacing coal generation.

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6. Finance, energy and environment ministries need help to ensure a just and orderly transition

The study suggests that countries should diversify their fiscal and energy strategies to stop relying on the production of fossil fuels, including natural gas. As a growing number of financial institutions stop financing fossil fuels and international efforts to reduce methane emissions, such as the Global Methane Pledge, continue to gain ground, the outlook for gas producers looks increasingly difficult.

Instead, energy investments could focus on building wind, solar, geothermal and hydraulic power, using electricity to displace fossil fuels in transportation, buildings and industry, and preparing sectors where batteries are impractical for the green hydrogen.

The energy transition is challenging, complex, and requires coordination at various levels of government. For example, finance ministries can design a fiscal strategy that identifies and manages the risks that gas reserves and infrastructure become stranded assets and ensures that the financial sector internalizes climate risks in decision-making. Energy ministries can work with environment ministries to further align energy planning and climate change goals. Environment ministries can help coordinate the design of long-term climate strategies that explore the implications of achieving net zero emissions in all sectors.

None of these are easy tasks. Now more than ever, countries in the region need help planning for the future and ensuring an orderly transition that keeps energy services affordable, reliable and inclusive.

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