Flame in Focus

IN FOCUS

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INTRODUCTION Welcome to Flame in Focus –

Flame in Focus will build on

a publication dedicated to the

this quality, timely content,

key trends in the global gas

made possible by our loyal

industry today. After a hugely

and growing gas community.

successful Flame 2016 in

If you would like to contribute

May, this magazine picks up

please do get in touch.

many of on the developments that were discussed in Amsterdam, plus new and emerging issues within the world of global gas as we look ahead to 2017. As ever, we will delve into the key issues, providing a host of differing ideas and expertise with the depth and breadth of industry knowledge that marks out Flame as a unique forum for the gas industry.

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Heidi Stancliffe & Kathryn Bond Co-Editors-in-Chief, Flame Conference

CONTENT Introduction

The LNG Industry | 10 Challenges Facing Liquid Natural Gas

Gas Pricing | Brexit: UK Gas Prices Hit by Weaker Pound, Higher Uncertainty and Quieter NBP

Gas Demand | Latest Forecasts from National Grid for UK Power Sector

Shape of the Market | Asian LNG Importers Are Enjoying a Buyers’ Market

Oil Price | An Interview with Stephen Larkin, CEO Africa New Energies

Timeline | Key Events in The History of Modern Natural Gas Business

The Future of Power | Is ‘Big Oil’ Morphing into ‘Big Gas’?

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1. In the short term: coping with supply and demand imbalance Global trade in LNG rose by 4.7 MT to reach 244.8MT in 2015 and supplies will rise over the next 4 years as the 140 MTPA of liquefaction capacity is currently under construction, last year’s start-ups in Australia and Indonesia and 620 MTPA of US capacity reach the market.

Simultaneously, demand growth is slowing caused by economic weakness in China, recession in Brazil and increasing financial difficulties in emerging countries.

Japan and South Korea, the world’s largest consumers of LNG, reduced their imports by 7 MT in 2015.

Japanese demand is uncertain, depending on rate of nuclear restarts, energy efficiency measures and use of solar power, whilst South Korea expects 7-8 GW of new coal generation this year. The question facing the industry is “will demand in North East Asian recover?”

2. Low LNG prices The decline in oil prices and increased weakness in demand

THE LNG INDUSTRY

growth led to a fall in LNG prices from an average $15.60/MMBtu in 2014 to $9.77/MMBtu in 2015. Low

10 CHALLENGES FACING LIQUID NATURAL GAS

prices cause buyers to wait and see hoping for even lower prices before signing long term contracts, a gambit that threatens developer’s FID decisions for new large scale LNG projects whilst current suppliers face lower revenues for their noncontracted supplies.

3. Europe: The market of last resort Europe’s role as a key backstop for excess cargoes of LNG is likely to

BY NICHOLAS NEWMAN

increase as other consumers are unable to absorb new supplies and the policy requirement for energy security will probably envisage increased LNG imports for eastern and southern Europe. However, LNG

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suppliers face competition from

8. Educating customers

Gazprom, Europe’s main gas pipeline

Perhaps the greatest market

supplier.

challenge arises from overcoming the knowledge and expectations

4. The challenge of regional trade

gap between experienced project

Whilst LNG is traditionally seen as

developers and government

a global trade, small-scale regional

customers. Educating governments

trades are emerging. For example,

to enable them to make optimal

Alaskan LNG is destined for the

and timely decisions and create

Hawaiian Islands and there are plans

a business friendly financial,

for regional LNG and bunkering hubs

regulatory and legal environment is

to be based in Jamaica, Trinidad

a struggle.

Related US LNG growth will continue Keith Larson of Hogan Lovells on the outlook for US gas projects

CLICK TO WATCH

and Puerto Rica to serve both the Caribbean and Latin American

9. Contract issues

markets. Making small-scale trades

Differences or mismatches along

profitable could prove challenging.

a project’s value chain can bedevil projects. For instance, differing cost

5. Competition from fossil and

recovery systems complicate the

renewable energy

allocation of costs to infrastructure,

In many parts of the world the cost

the LNG liquefaction or regasification

of LNG is uncompetitive with coal.

plant and any separate pipeline

China and India are big consumers

project. Moreover, the extent to

of coal and this will not change any

which downstream infrastructure

time soon. Elsewhere, renewables

costs can be recovered through

are attracting substantial investment

upstream production is often an

and may limit LNG market

issue alongside differing timelines

opportunities.

for licensing, relinquishment and investment have to be worked

6. Money matters

through. These are just a few

For many of the newly proposed

examples of the many issues in

non-OECD LNG liquefaction projects,

contract design.

Biography

raising capital and securing long term buyers is the major challenge.

10. In the long term: climate change

Project developers need buyers’

and the effect of the COP21 Paris

contracts for most of their output

Agreement

in order to reach a final investment

If, when, and by how much,

decision

countries actually implement the commitments they made in Paris to

7. Controlling construction costs

reduce dependence on fossil fuels

An era of low LNG prices

creates long term market uncertainty

necessitates industry-wide cost

for an industry which, is itself

reduction and efficiencies. One

thinking 30 years ahead.

project, the Magnolia LNG Lake Charles, Louisiana, LNG export development has reduced costs from an average of $800-900 to just $500 per metric tonne of LNG production.

Developers elsewhere need to follow suit.

Nicholas Newman is an Oxford based freelance energy journalist and copywriter who writes, researches, analyses and comments about the global energy business.

Nicholas has authored numerous reports on shale gas and more recently on African gas to power prospects.

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GAS PRICING

BREXIT: UK GAS PRICES HIT BY WEAKER POUND, HIGHER UNCERTAINTY AND QUIETER NBP

BY JEREMY BOWDEN

The UK’s decision to leave the EU

anticipated returns, although it would

traded for the first time last year,

has produced a number of early

also cut local costs. Some North Sea

although has dipped since. TTP

effects that could impact gas prices,

projects will get a boost from this fall

avoids exchange rate volatility issues

notably from exchange rate moves.

in UK costs, especially if their income

for continental traders, as well as

Sterling-quoted UK gas prices (along

is mostly in dollars from oil sales. For

uncertainty over possible divergence

with power prices) have already

example, Premier said development

in rules.

seen a number of increases as the

costs at its Catcher project have

pound has fallen against the dollar

fallen by US$100 million.

The uncertainty is related to whether

and Euro, although these have been

any agreement to leave will be

moderated a little along the forward

aimed at maintaining maximum

curve due to weaker anticipated

cooperation and policy alignment

demand (also related to Brexit).

with EU energy and climate policy,

“The value of the pound definitely has an impact on the wholesale market as the pound is a major factor in gas we’re importing.” said Tom Edwards, Energy Analyst at Cornwall Energy. A rise in gas prices could hit

This uncertainty over policy has left investors in limbo.

or not. There had been concern that the UK might diverge from EU environmental policy post-Brexit, but that was laid to rest after Amber Rudd announced emissions targets tighter than those of the EU on June 29th.

demand, but the fall in the pound also makes power imports more

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Post-Brexit options include the half-

expensive, so any consequent cut in

There are also a number of

way house of the European Economic

power imports could mean higher

uncertainties that arise as a result

Area (EEA) – the Norwegian model.

gas burn in the UK, balancing out the

of Brexit related to gas and power

This would involve more or less

downside.

market operation, interconnector

automatic acceptance of all the

trade, and clean energy policies, that

energy rules decided in Brussels.

Longer term, companies that sell

may impact prices on either side

Another alternative is the Swiss

into the domestic gas market may

of the Channel. This uncertainty

model, which would exempt the UK

be less able to fund investment in

could mean the NBP loses out to

from EU competition law and state

the North Sea, shale acreage or the

gas trading at the Netherlands

aid rules, leaving the UK free to

power sector, unless local prices rise.

TTP, as European producers and

expand capacity market or nuclear

For example, French giants, Total

transmission system operators

subsidies. There are also the goods-

and GdF have a significant presence

seek to avoid risks associated with

focused Turkish Customs Union

in the UK’s onshore shale sector,

pricing against NBP post-Brexit.

and yet-to-be approved Canadian

where a lower pound may reduce

TTP outpaced the NBP by volume

Comprehensive Economic and Trade

Related Agreement (CETA) – which, once

of lower economic growth and the

Europe’s gas market flexibility

approved, will remove 98% of the

possible further break-up of the EU

gives it price competitiveness

tariffs between Canada and the EU.

or UK, which could hit demand and

Klaus Schäfer, CEO of Uniper,

Or the UK could manage to negotiate

investment, both up and downstream

a unique arrangement unlike any of

– although at this stage it is unclear

the above.

Brexit will lead to this.

This uncertainty over policy has

* www.vivideconomics.com/ publications/the-impact-of-brexiton-the-uk-energy-sector

left investors in limbo. In March

discusses the future of the European gas market.

2016, Vivid Economics* looked at potential impacts beyond departure from the Internal Energy Market. It found that the increase in the cost

CLICK TO WATCH

of investment due to the uncertainty arising from Brexit negotiations could be a significant cost, given that the UK is undertaking a historic

Biography

level of investment in energy infrastructure – not least more gasfired generation capacity.

“From an investor’s perspective, higher returns are required to compensate them for the risk of less favourable post-Brexit arrangements.

This puts upwards pressure on the cost of financing, raising the cost of investment in the UK energy sector,” it said.

Any cut in gas-fired capacity expansion could reduce demand for gas, putting downward pressure on local prices. Looking more widely, other negative gas market sentiment could come from fears

Jeremy Bowden currently works as a freelance journalist and energy analyst. His experience spans over twenty years in the energy, specialist energy media and utility sectors in a variety of positions in both Europe and Asia, including five years at IHS in Singapore as Midstream Manager for the Asian region, followed by a short spell as IHS-CERA Associate Director, Emerging Markets.

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GAS DEMAND

LATEST FORECASTS FROM NATIONAL GRID FOR UK POWER SECTOR The UK’s National Grid released its latest annual Future Energy Scenario (FES) on July 5th. Jeremy Bowden takes a closer look at some of its predictions related to gas imports.

What could the impact of Brexit be on UK gas imports?

The UK may have to import 93 per cent of its gas by 2040 if Brexit results in weak economic growth and a shortfall in domestic gas investment, as some analysts are predicting. Britain currently imports about half of its gas, but this figure is expected to rise over the next few years as North Sea output rises following heavy investment in 2012-2015. The forecast comes under our National Grid “Slow Progression” scenario, one of four potential outcomes detailed in our annual outlook. Under our “Gone Green” scenario – where policies and investments in the power sector are tailored towards long-term environmental goals – gas imports are expected to rise to 90 per cent of supply by 2040.

Alternatively, under our business as usual, “No progression” scenario

imports would rise to 75%, and a further 7GW of new large-scale combined cycle gas turbines (CCGTs) would be needed to maintain security of supply by 2022. The required levels of new CCGTs will mean the network should be prepared for a potential dash for gas.

Are there any scenarios in which gas import demand falls?

Yes, in our fourth scenario, dubbed “Consumer Power”, there would be a reduction in gas imports to 30 per cent by 2040. Under this scenario, government policies would focus on improving the availability of domestic supplies and easing the path for unconventional methods of gas extraction such as shale.

This means that, under this scenario, shale gas production in the country could begin in 2021, and provide as much as 32 billion cubic meters a year of gas by 2031. In contrast, under our “Gone Green” scenario government policy fails to build on the country’s shale potential, and no shale gas is extracted by 2040. In reality it is likely to be somewhere in between.

Do the National Grid forecasts assume the government will meet its environmental commitments?

Yes, but not all of them. Under all scenarios we expect the government to stick to its pledge to close coal-fired gas power stations by 2025, unless they are fitted with technology to capture and store emissions. However, only the “Gone Green” scenario is based on the government meeting its legally binding target to reduce emissions by 80 per cent by 2050 compared with 1990 levels.

Under each of the scenarios, including “Gone Green” the country

will miss its 2020 target to meet 15 per cent of energy demand from renewable sources. This is based on the Britain’s former Secretary of State for Energy and Climate Change, Amber Rudd, statement last year that it was unlikely the country would meet the 15 per cent 2020 target due to a lack of progress in the heat and transport sectors.

We (National Grid) also anticipate a large rise in electricity storage technology over the next few decades, which could see capacity rise to approximately 18GW by 2040 in an optimum-case scenario.

This would allow up to 89GW of distributed generation – capacity not connected to the main transmission network – which would contribute 49 percent of total generation capacity from solar generation and storage, and some wind generation.

Which scenario is likely to play out in the end?

The actual outcome is expected to be somewhere between the four scenarios. So far, although the UK government has recognised the importance of new gas-fired plant replacing old coal-fired plants over the next decade, capacity market auctions held to date have secured just one new 2GW CCGT before 2020.

This would certainly see the initial UK trajectory at the bottom end of our potential gas demand growth forecast, although if another 10GW of proposed new gas-fired capacity then comes on-stream before 2022 (as earlier planned), then this would be pushed back up. The outcome will very much depend on the direction of new government policy and the result of Brexit negotiations. www2.nationalgrid.com/uk/ industry-information/future-of energy/future-energy-scenarios

Related

CLICK TO WATCH

The changing face of EU & Russian gas Discussing the huge disruption in the gas, oil, coal and LNG industries, Vladimir Debentsov, Head of Russia & CIS Economics, BP talks to Sasha Twining, Flame Correspondent, about Russia and Gazprom’s future landscape.

CLICK TO WATCH

The Tariff Network code today Tom Maes, Vice-Chairman, Gas Working Group, CEER talks to Sasha Twining, Flame Conference Correspondent about how the dramatic changes in the industry have influenced the Tariff Network Code.

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In July 2016, the first US consignment of Liquefied Natural Gas (LNG) headed from Cheniere Energy’s Sabine Pass terminal in Louisiana to East Asia, the industry’s most lucrative market and one that imports the commodity more than any other region.

Furthermore, Sabine Pass terminal has also dispatched cargoes to Kuwait, United Arab Emirates and India, expanding its emerging markets reach. It was almost inevitable that proceeds of the US shale gas bonanza would find their way to Asia, with Europe and Latin America already benefiting since February.

Behind the historic moves, it is the buyers and not the sellers who are calling the shots these days.

Spot market prices have plummeted to as low as $6.25/mmBtu in Japan at the time of writing; a third of the price level recorded in July 2012, according to Platts. Over the past year alone, natural gas prices are down 30.5% on an annualised basis

SHAPE OF THE MARKET

and arbitrage between gas prices in the Pacific Basin and the Atlantic Basin has narrowed from around

ASIAN LNG IMPORTERS ARE ENJOYING A BUYERS’ MARKET

BY GAURAV SHARMA

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$5.50 in 2014 to about 65 cents.

The Fukushima switch-off sent Japanese utilities into the LNG market in panic buying mode, evoking emergency clauses to ensure the lights were kept on, often at a premium.

The reason is intense competition

“Japanese [and South Korean] buyers

between traditional gas exporters, led

are not aiming at eradicate the JCC.

by Qatar, Australia and Russia, and

They want to achieve a balance

upcoming ones, i.e. the US, which has

between the two. I’d say that would

tilted the market in buyers’ favour.

be around 60/40 - JCC/Henry Hub for

Most long-term contracts around

Japanese importers and some say

the time of the Fukushima tragedy

50/50 for their Korean counterparts,”

and nuclear power switch-off in

Hung adds.

Related The bleak picture of the global gas industry

2011 were linked to the JCC Index, or Japan Customs-cleared Crude.

At a pan-global level Qatargas, the

Often nick-named the ‘Japanese

world’s leading natural gas exporter,

Crude cocktail’, it made gas prices

seems amenable to the new realities

in Japan, and by extension in South

of the market, and even Russia’s

Korea and Taiwan, pricier and kept

Gazprom is ditching its traditional

the tradition connection with oil

insistence on linking natural gas

prices going.

contracts to oil prices.

However, an abundance of gas with

Europe is reaping reward too, says

Australia and US alone tipped to

Stephen Trauber, Citigroup’s global

add 60 million tonnes of natural gas

head of energy. “Qatari and US gas

per annum, and around 50 new LNG

exports will not replace Russian

projects in the pipeline, not only

exports to Europe in meaningful

are we witnessing a buyers’ market

volumes any time soon. But

but gas contracts are also being

increased competition would lead

universally redrawn.

to better European pricing over the

Anne Hung, a Tokyo-based partner

medium-term as sellers move in to

at international law firm Baker &

seal supply contracts and buyers

McKenzie, says the Fukushima

seek security of supply.”

CLICK TO WATCH

Biography

switch-off sent Japanese utilities into the LNG market in panic buying

Competition within the LNG market

mode, evoking emergency clauses to

is only going to intensify. As Sabine

Gaurav Sharma is a London,

ensure the lights were kept on, often

Pass terminal moves on from being

UK-based energy market analyst

at a premium.

a flag bearer of the new age US gas exports to one of the many terminals

“These days, traditional buyers are

expected to come onstream, the

and news editor. At present, he writes regularly for Forbes and International Business

looking for ways to offload their

Energy Information Administration

Times, alongside his industry

overcommitted LNG, with a diversion

expects US LNG production capacity

blog ‘Oilholics Synonymous’.

clause being a standard feature

to expand to 9.2bcf/day by 2020.

Gaurav is also a regular and

in natural gas supply contracts.

lively commentator on oil and

Furthermore, we are also seeing

Such levels would make the US the

gas markets at industry forums,

more short-term contracts. I can

world’s third-largest LNG producer

academic events, trading portals,

safely say Japan and the Far East

after Australia and Qatar. All the

OPEC conference streams, and

now resembles a buyers’ market.”

while, Australia is gearing up to

for various broadcasting outlets

overtake Qatar by tripling its LNG

including CNBC, BBC Radio

Japanese, and by extension other

production capacity. A shake-up

and TipTV. While the oil and

Asian buyers, are asserting their

in the exporters’ pecking order will

gas futures market remains

dominance, but the regional

most likely delight importers seeking

connection between gas pricing and the JCC benchmark is not going to go away any time soon.

even better terms.

Gaurav’s core area of expertise, he has also extensively covered energy project finance, emerging industry technologies and process efficiencies in the past.

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OIL PRICE

OIL PRICE INTERVIEW WITH STEPHEN LARKIN, CEO AFRICA NEW ENERGIES

BY NICHOLAS NEWMAN

South African born Stephen Larkin,

Supply Drivers

replacing diesel in South African

is CEO of Africa New Energies, a

Larkin asserts that the largely

mines, and on rail networks across

small but highly innovative oil and

unexpected and dramatic increase

Europe and he expects that in the

gas exploration company focused

in US oil production (it doubled in

next ten years hybrid and electric

on Namibia. With two oil and gas

eight years), as well as the planned

cars will further reduce demand

blocks, extending over an area of

increases in production of newer

for oil within the transport sector.

5 million acres (the size of Wales),

oil producers such as Angola and

In addition, the traditional link

the company is employing the

the recovery of Iraqi supplies are

between increasing oil demand

very latest proprietary sensing

largely responsible for the current

and GDP growth seems to have

technology in its quest for new oil

supply glut. Despite the on- going

been broken, as many countries

and gas. It also plans to supply gas

civil war, Iraq has steadily expanded

have adopted progressively more

to the nearby power grid to boost

oil production and with recent

rigorous fuel-efficiency measures

electricity supplies in this energy-

discoveries in Kurdistan claims to

and begun the switch from oil to

hungry but underpopulated country.

have 40% more oil reserves than

natural gas and to renewables.

The oil price has fallen from $110

previously thought. The wild card

Indeed, the availability of gas and its

in June 2014 to under $40 in Spring

is Iran which, since the ending of

uncoupling from the oil price, has

2016, recovering to $52 in June

sanctions, is seeking to double its

underpinned a shift towards gas for

before retreating to $43 a barrel

production, a goal which Larkin

power generation at the expense

currently. Asked about the prospects

believes is achievable, since

of oil especially in the USA, Mexico

for oil prices, Larkin maintains that

drilling for oil in Iran is much

and Hawaii. He notes the change

you have to look at long run trends

more productive than in Texas. He

of seasonal demand patterns in

rather than short-term oscillations.

maintains that it is much easier to

the oil prices in America. In the

For example, the average price of a

drill a 60,000 barrel a day new well in

past, the US oil price would spike in

barrel of oil between 1861 and 2014

Iran, when compared to Texas, where

winter, due to demand for heating

was $33 rising to an average $55

a typical well will average a few

oil on the East Coast, while summer

between 1973 and 2014. Therefore,

hundred barrels. Not surprisingly, the

demand for oil has increased every

historically, a $100 a barrel is a rare

prospect of rising Iranian oil exports

summer since 9/11 as Americans

occurrence. Larkin agrees with the

is influencing price expectations.

have returned to the road to reach

prevailing view that the oil price, just

their holiday resorts rather than

like other commodities, is largely

Demand Drivers

flying in what is now termed “the

determined by supply and demand

Larkin points to the slowdown of

American Driving Season�. This

and inventory levels.

demand in Europe, the US and China

trend is further intensified as the

and the substitution of electricity

Northern-hemisphere increase in

for oil in many industrial tasks. For

summer demand, caused by the

example, electricity is gradually

adoption of air-conditioning has

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Related been accompanied by increases in

Oil: How low can it go?

emergency power supplied by stand-

The experts at Flame Conference

by oil fuelled generators particularly

2016 reveal the industry’s inner-

in cities, such as Lagos and Nairobi,

most beliefs and forecasting for

along with dramatic increases in

the oil market.

demand from emergency diesel based electricity suppliers such as Aggreko.

Unlikely to see a return to $100 per barrel soon!

Larkin maintains that it is unrealistic to expect a return to oil at $100 plus

CLICK TO WATCH

a barrel any time soon. In fact, he expects a further fall in oil prices

US shale and the oil market

over the next six to nine months,

Aaron Gill, Vice President of

testing the $25 per barrel floor. He

Maritime Sales, Genscape

maintains that to survive in an era

discusses the future of US shale

of low oil prices, companies must

and the oil market in light of the

be able to make a profit when oil is

current landscape.

priced at just $40 a barrel. It is not surprising therefore that the high cost wells in the North Sea are in trouble and expensive-to-exploit projects, in the Arctic and Brazil’s Dos Santos Basin, are being put on hold.

CLICK TO WATCH

13

KEY EVENTS IN THE HISTORY OF MODERN NATURAL GAS BUSINESS

BY GAURAV SHARMA

1785 UK becomes the first country to

1960

commercialise the

Organization of

1964

Petroleum Exporting

Colony shale project

Countries founded in

begins in Colorado,

Baghdad by major oil

US to probe shale

and gas producers Saudi

rock (shut by Exxon

Arabia, Venezuela,

in 1982).

1950

use of natural gas for street lighting in London.

1800

Kuwait, Iraq, and Iran.

1978 1816 Manufacturing for by the Gas Light

Natural Gas Policy

OPEC countries begin

the US providing

Act passed in

nationalising oil and

1821

industrial use started

1971

incentives for

gas assets.

certain types

First commercial

Company of

of gas deemed

natural gas

Baltimore, US.

to be high cost

production and

including ‘Tight

1979

usage takes place in Fredonia, New

Gas’.

First major coal bed methane

York, US when

drilling is started by Amoco

William Aaron Hart

1981

in San Juan Basin, US.

drills well to 27

George Mitchell

feet and pipes gas

begins quest for

via hollow logs to

commercially

adjacent houses.

viable shale gas

1984

1850

1900

extraction at the

Qatargas, currently

Barnett Shale

the world’s largest

in Fort Worth,

LNG exporter,

Texas, US.

founded in Doha, Qatar.

1859 Edwin Drake achieves natural gas drilling depth of 69 feet in

1885

Titusville, Pennsylvania, US.

Robert Bunsen invents burner for natural gas to be safely used for cooking and heating, subsequently named the Bunsen burner.

14

1989 Russia’s natural gas behemoth Gazprom founded in Moscow.

2016 US exports first ever LNG consignment from its lower

2003 Sour gas blow-out

2000

48 states, dispatched by Cheniere Energy from Sabine

in Chongqing,

2005

SouthWestern

NYMEX natural

country is expected to join

China kills 234

gas contract hits

Qatar and Australia among

people marking

a record high of

the top three global LNG

the industry’s

$15.65/mmbtu in

exporters by 2020.

biggest tragedy.

the US.

Pass terminal in Texas. The

2015 Royal Dutch Shell announces

1997

agreement to acquire BG

2007

Group for $52bn; deemed a

Gas Exporting Countries

major play on the future of

George Mitchell

Forum – a group of

natural gas.

unveils

producers led by Russia

commercially

convenes in Qatar with

viable hydraulic

plans to ‘strengthen ties

fracturing or

towards cooperation and

‘fracking’ process

stability in natural gas

for the extraction

markets.’

2012 Packers Plus reports completing a well in the US Marcellus Shale with 60

of US shale gas,

fracking stages along a 3600’

a move that

lateral; a new technological

transforms the industry stateside.

breakthrough.

2009 Dispute between Russia

1991

and Ukraine halts gas

2012

exports via pipelines

North American natural gas

Soviet Union

through the latter.

prices fall below $2/mmbtu

collapses; state-

to the lowest level since 2002

backed Gazprom

driven by rising shale gas

and Rosneft emerge

production.

as dominant

2011

Russian energy

US Energy Information

companies in

Administration estimates

2012

subsequent years.

growth in the country’s

UK removes ban on hydraulic

gas production of 6% or

fracturing, imposed after an

66.2bcf per day; breaking a

earlier fracking experiment

previous record dating back

was thought to have caused

to 1973.

a minor earthquake in Northwest England.

1989 Australia’s North West Shelf LNG Venture begins shipping cargoes. It now produces up to 16.3m tonnes per annum of LNG.

2011 Chevron approves $29bn Wheatstone LNG project in Western Australia, cementing Australia’s rise as the world’s second-largest natural gas exporter.

15

Royal Dutch Shell’s $52bn takeover of BG Group in 2015, recently cleared by regulators and approved by both sets of shareholders, certainly impressed Wall Street and the City of London with its mammoth deal valuation in troubling times for the oil and gas sector.

Consolidation within the industry is inevitable, but for energy sector purists the Anglo-Dutch oil giant has literally taken a ‘BG Group sized’ gamble on the natural gas market in buying and delisting its fellow FTSE 100 rival.

It is not that Shell lacks pedigree in the natural gas business. Rather, the incorporation of BG Group’s signature gas plays from Australia to Egypt, US to Kazakhstan, into its corporate fold would mean that over 50% of Shell’s energy generation portfolio would come from gas and not oil within a matter of two to three years, if not sooner.

Speaking in Houston, Texas earlier this year, Shell’s Chief Executive Ben

FUTURE OF GAS/POWER

IS ‘BIG OIL’ MORPHING TO ‘BIG GAS’?

van Beurden admitted just as much:

We’re more a gas company than an oil company now. If you have to place bets, which we have to, I’d rather place them there

BY GAURAV SHARMA While the exact percentages are not yet known, by some industry projections Shell is likely to end up with 22-25% of the global LNG market by 2017-18. If the projections are reflected in actual data, the said

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market share would be more than

Among big IOCs, BP remains the

double that of the International Oil

only exception where the company’s

Company (IOC) that is next in line –

exposure to natural gas is not higher

Maria Moraeus Hanssen, CEO

ExxonMobil.

than it was a decade ago. Even in its

of E&P, argues that oil and gas

Related Is oil and gas restructuring?

case, natural gas as a share of BP’s

companies will use their M&A

However, if turning in a return

energy generation mix is largely

dollars for strategic purposes,

on investment is the name of the

stable at around 40%.

like switching to renewables.

game, then such a massive gamble on natural gas can be described as

The state of play seemingly banks

puzzling at best. Liquefied Natural

on natural gas’ credentials as a

Gas (LNG) delivery prices to East

low-carbon alternative to coal, and a

Asia, hitherto the most lucrative

bridge between global transition over

market, are down 30.5% on an

the medium term from coal-fired

annualised basis at the time of

power generation to a renewable

writing.

energy-led future.

In some ways, Shell’s signature move

That changeover is likely to take

with BG Group appears as unique as

several decades, and ‘Big Oil’ is

ConocoPhillips’ decision to spin off

hoping ‘Big Gas’ will help bolster

its refining and marketing assets

corporate bottom lines in the interim,

into a separate market-listed entity

even if it does not become the

in the shape on Phillips 66 in May

revenue mainstay. By that argument,

2012. The market was similarly abuzz

Shell’s move for BG Group deserves

with commentators wondering at

its place in the natural gas history

the time whether other integrated oil

books.

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and gas companies would go down a similar path.

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Yet, rather than being a harbinger of things to come, Philips 66 turned out to be a one-off. Big question is will the market see more consolidation via natural gas-slanted mergers and acquisitions in an era where oil and gas prices are likely to stay lower for longer.

The evidence remains mixed, but all the while natural gas is unquestionably accounting for a larger share of the energy generation portfolio of the majors.

An aggregation of Bloomberg, Reuters and company financial data increasingly points to the likes of Chevron, Total, ConocoPhillips and Eni, joining Shell in increasing the share of natural gas in their energy mix.

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#FlameConf 18