Analysis: Climate bill mounts as dash for gas speeds up

LONDON/DUESSELDORF, Germany (Reuters) - The accelerating dash for natural gas risks a bitter backlash as the environmental cost of exploiting new shale deposits and of transporting it in liquid form spoil its credentials as the greenest fossil fuel.

Gas was long regarded as a "bridging fuel" for use in relatively easily-to-build, gas-fired power plants, until enough renewable or low-emission nuclear power could be achieved.

Following the nuclear disaster in Japan and the economic crisis that has set back investment in new renewable energy, gas has the status of a "destination fuel," meaning it will be used in parallel with renewable sources to supply long-term energy needs.

Japan's tsunami and series of earthquakes that caused a catastrophic nuclear leak have led Germany and Switzerland to say they will exit nuclear power. Others are reviewing safety standards or delaying and cancelling existing projects.

At the same time, extracting natural gas from shale, as well as transporting it in the form of liquefied natural gas (LNG), has helped to increase availability to well beyond 200 years, according to the International Energy Agency (IEA).

But these methods have undermined the reputation of natural gas for being relatively green.

The IEA has warned that unless tight regulation of water and chemical consumption in the hydraulic fracturing or fracking process for extracting gas from shale rock is implemented, public resistance could prevent the sector from expanding.

Fracking can pollute water supplies and release methane, which research shows can be 72 times more potent a greenhouse gas than carbon dioxide.

"Regardless of what the switch will be from nuclear, toward more coal or toward gas, the carbon implications are significant," said Tenke Zoltani, investment manager at Islan Asset Management in Geneva.

She estimated conventional gas was 50 percent more carbon efficient than coal and shale gas 20 percent more carbon efficient after extraction costs are considered, making shale gas "the lesser of two evils."

However, taking account of the water and methane problems raised by shale gas, Zoltani argued coal would be better.

EU AMBITIONS STALL

Another polluting factor in the gas supply chain is LNG, increasingly valued over pipeline gas for its flexibility.

Analysts say the liquefaction and regasification procedures are energy intensive and this is often ignored when measuring the environmental impact of gas.

"The inclusion of emissions associated with LNG liquefaction and transportation can materially increase the emissions intensity of gas-fired power," said David Stokes of Timera Energy.

"Focusing only on emissions from power plant combustion can be misleading as it ignores emissions produced over the fuel 'life-cycle' including extraction, processing and transportation."

Pressure within the European Union to contain the potential problems of modern gas technologies and aim for more ambitious environmental targets is likely to have stalled now Poland has taken over as president of the 27-member bloc for the next half year.

Custodian of Europe's largest shale gas reserves, Poland sees them as vital if it is to cut its reliance on imports from Russia.

It would almost certainly challenge any proposals to extend a French ban on shale gas extraction or to include methane in Europe's Emissions Trading System, analysts say.

In any case, for some the argument for including methane is not clear.

"Whilst it is true that methane is a far more powerful greenhouse gas than carbon dioxide, it has a 10-fold shorter residence in the atmosphere," said Kash Burchett of IHS Global Insight.

"What this means is that on a short time scale methane is much worse, but on a long run time scale is less significant," he said, adding that was particularly relevant when considering gas as a destination fuel.

If including methane is open to debate, many analysts see a strong argument for increasing the number of EU Emission Allowances (EUAs) utilities need to buy to cover the carbon cost of generating from natural gas and also for the nuclear power it could be replacing.

Currently, the ETS only considers emissions from generation or industrial use and excludes those from other parts of the process.

Nuclear generation is considered to be carbon free, meaning utilities do not have to buy EUAs when using it to produce power.

However, this ignores the carbon emitted during the process of building nuclear plants and the problem of decommissioning and disposing of nuclear waste.

"Increasing the scope of the ETS to cover fuel life-cycle processes would provide more efficient incentives for carbon emissions reduction," said Timera's Stokes.

"However, the complex regulatory challenges from the implementation of such a scheme suggest that this is some way off."

Even taking into account life-cycle emissions, coal was still the most carbon intense fossil fuel, he said.

(Editing by Anthony Barker)