At the climate summit in Glasgow, UN Secretary-General António Guterres had a blunt message: “The six years since the Paris Climate Agreement have been the six hottest years on record. Our addiction to fossil fuels is pushing humanity to the brink”.
To stand a chance of limiting global warming to 1.5°C, the goal that international leaders have set to keep the climate crisis in check, countries need to achieve net-zero emissions by 2050. According to the International Energy Agency, this means avoiding developing any new oil and gas fields or installing coal-fired power stations beyond 2021. A recent Nature paper also finds that the 1.5°C goal requires reducing oil and gas production by 3 percent per year globally. But fossil fuel production plans and power expansion plans in Latin America and the Caribbean and around the world are not yet consistent with these targets.
The energy transition poses significant challenges for Latin America the Caribbean’s gas producers and governments. Far from helping with the transition to net-zero, half of the region’s natural gas reserves are at risk of becoming stranded assets, leading to hundreds of billions of dollars in losses in the next fifteen years. To shed light on these issues, the IDB and the University College London have just published a paper on stranded natural gas reserves and fiscal revenues in Latin America and the Caribbean. Here are six highlights.
1. Natural gas is an important source of energy consumption and fiscal 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. While considerably less important than oil in most of the region, natural gas provides several points of GDP in economic rents or fiscal revenues in Bolivia and Trinidad and Tobago.
2. Technology and climate policy put the natural gas industry at risk
Technology is driving energy production away from fossil fuels. Renewable energy is already the cheapest source of electricity in the world and accounts for 90% of investment in power generation worldwide. Electric vehicles are next: there are already 10 million of them globally, and as many as 3 out 4 new cars sold in Norway are now electric. In addition, countries around the world are bound to step up their efforts to implement their climate-neutrality pledges. While the jury is still out on what is the best way to guarantee the security of supply and flexibility, the global energy transition undoubtedly puts the natural gas industry at risk. Producers in the region need to be prepared.
3. Half of the region’s gas reserves could become stranded assets under rapid decarbonization scenarios
The simulations suggest that in scenarios that achieve global warming well below 2°C, the production of natural gas in Latin America and the Caribbean falls 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 expected useful life. In these scenarios, gas is rapidly phased out from power generation and its use in industry and buildings is progressively replaced by electricity. In this case, up to half of proven, probable, and possible reserves remain unused by 2035. Incumbent producers and natural gas associated with oil dominate production, drastically limiting opportunities for new gas projects in the region.
4. Governments should not bet on continued revenues from gas extraction if the objectives of the Paris Agreement are to be met
In a scenario with no global energy transition, ministries of finance from the region could collect up to US$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 consistent with well below 2°C warming, the paper’s results suggest these revenues could dramatically decline to US$42 billion.
5. Exporting more gas from Latin America and the Caribbean is not a long-term solution
To limit global warming to well below 2°C, the paper finds that Europe and others need to embrace decarbonization and phase down their own natural gas consumption. Winter is coming in the northern hemisphere, increasing demand for natural gas in a constrained market, which pushes prices up. But these demand levels cannot be sustained if the objectives of Paris are to be met.
Energy investments should consider middle-term scenarios and anticipate that global consumers will need to shift to electric heat pumps, induction stoves, and renewable power to meet the goals 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.
6. Finance, energy, and environment ministries need help to orchestrate a just and orderly transition
The paper suggests that countries need to diversify their fiscal and energy strategies away from dependency on fossil fuel production, including natural gas. As a growing number of financial institutions stop the financing of fossil fuels and international efforts to reduce methane emissions such as the Global Methane Pledge continues to gain traction, the outlook for gas producers looks increasingly tough. Instead, energy investments could focus on building wind, solar, geothermal, and hydro, using electricity to displace fossil fuels in transportation, buildings, and industry, and preparing sectors where batteries are not practical to the uptake of green hydrogen.
The energy transition is challenging and complex and requires coordination at several levels of government. For instance, finance ministries can design a fiscal strategy that identifies and manages the risks of stranded gas reserves and assets and ensure the financial sector internalizes climate risks in decision-making. Energy ministries can work with environmental ministries to continue aligning energy planning and climate change pledges. Environment ministries can help by coordinating the design of long-term climate strategies that explore the implications of reaching net-zero emissions in all sectors.
None of these are easy tasks. Now more than ever, countries in the region need help to plan ahead and ensure an orderly transition that keeps energy services affordable, reliable, and inclusive.
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