Natural Gas & Climate Change: Part of the Solution
Keynote addresses at the World Gas Conference in Paris, France from the top leadership of two of the world's biggest international oil companies emphasized the benefits, among others, of increased natural gas usage in light of the threat of global climate change. Citing their companies' respective accomplishments in the natural gas segment, they also highlighted the success of the US shale gas revolution and offered it as a virtuous and prosperous path into the future.
In his speech, Mr. John Watson, Chairman of the Board and CEO, Chevron, said that going forward the world will require all forms of energy – natural gas, crude oil, coal renewables and nuclear – to meet global energy demand. However, he offered that the broader context is the world's need for affordable and reliable energy to drive both economic growth and improve living standards.
He recalled, “Over the last 150 years we've seen the greatest advancements in living standards in recorded history: light, heat, mobility, mechanized agriculture, modern communication, as well as other benefits to billions of people around the world.”
All of those advancements, he said, have been brought about by affordable energy, upon which the global economy is relying to drive economic prosperity and provide goods and services the world needs, according to Mr. Watson.
“As the world looks to further advance living standards, and improve the quality of life for people everywhere in the years ahead, global energy demand will rise,” he explained. “In fact, the US Energy Information Administration projects global energy demand will increase up to 40% by 2035, as incomes rise and the middle class grows.”
Mr. Watson noted that the world had seen three-quarters of a billion people join the middle class, but 1.4 billion people still have no access to electricity, while 1 billion more only have access to unreliable eletricity. “Then there are 2.5 billion people who still burn solid fuels such as wood, crop residue and dung to cook their food and heat their homes,” he remarked.
By 2035, he said, demand for energy will only get bigger. “The global middle class is expected to double to nearly 5 billion people, which means twice as many people will need commercial fuels for heating, cooling, mobility and manufacturing.”
To address this, the industry is working to build supplies, “particularly natural gas. It's an abundant, cleaner burning fossil fuel, economic to produce, scalable, complementary to intermittent renewables such as solar and wind, and increasingly being used in transportation.”
He reported that this year Chevron will start up its Gorgon LNG project in northwestern Australia, one of the biggest projects the company has ever undertaken. Gorgon will be followed by the Wheatstone LNG project in 2016. Mr. Watson commented: “The $90 billion investment in these two Australian natural gas projects, in addition to the planned completion this year of our first sour gas processing plant in China, Chuandongbei, underlie Chevron's commitment to the fuel source.”
Natural gas, he said, had increased to about 40% of Chevron's portfolio, up from 35% 10 years ago, but it will require more, as Woods McKenzie projects global demand will nearly double by 2025, reaching approx. 440 million tons. Gorgon, he said, will supply just over 15 million tons/year.
“So the world will need more than a Gorgon-sized project each year for nearly 10 years to meet projected demand,” he offered, adding that the industry will have to move forward on multiple, geographically diverse projects to ensure sufficient supply in the future.
With many countries and companies focused on the US and its tremendous growth in natural gas supplies, primarily from shale and other tight resources. “It won't be long before we see some of these supplies exported as LNG,” he observed. “Industry is in the process of converting LNG import terminals, built on expectations of a shortfall, to export terminals. These projects have many advantages over greenfield projects – access to a low cost resource, existing pipelines as well as tanks and jetties that are already built.”
He stated that around 50 million tons/annum of LNG brownfield export capacity is under construction in the US, “and is essentially a 'done deal'.
“On top of that, it's likely that an additional 20 million tons/year of capacity could be built in the US.” He added that 80 million tons of LNG capacity is under construction outside the US.
“But that still leaves another 70 million tons of additional LNG capacity to meet expected demand,” he explained. “We've got to start thinking about where that supply will come from.”
Mr. Watson admitted that the US energy renaissance will not be easily duplicated.
“It was more than just technological advancements that enabled the US to crack the code to develop an economic supplies from shale and other tight resources,” he recalled. “The conditions were right for a US shale revolution: the US geology was well understood, the innovation and expertise to develop shale was available, the supporting infrastructure was very well developed, the regulatory system was conducive. Property owners personally benefit from royalties, and a very liquid physical and paper market allowed producers and sellers to come together on price efficiency and transparency.
While it took a few years, he said that overnight America had become an “improbably energy superpower,” and it's renaissance has generated jobs and economic growth, taxes and government revenues, as well as reviving manufacturing and other industries.
“On top of that, it lowered CO2 emissions as industry replaced coal with natural gas in power generation,” he added.
According to him, the advancing US market has helped develop the global LNG market, “Connecting, for the first time, the large and liquid gas markets in North America and Europe with growing demand in Asia. The forces for convergence in LNG markets will increase as the US export facilities come online,” he observed.
He offered that gas markets like the one in the US become more efficient and transparent because they have the right ingredients: many buyers and sellers, a deep and fluid futures market, flexible infrastructure and storage.
“The good news is there are natural gas resources on almost every continent,” he said. “Globally, the EIA reports that there are more than 15,000 TCF of technically recoverable conventional gas and over 7,000 TCF of technically recoverable shale gas resources. That's equivalent to about 180 years of the world's current natural gas demand.”
Still, he admitted that not every country can or will choose to develop its gas resources, many turning to LNG imports to meet their needs.
Mr. Watson noted the above and below ground barriers to developing gas, particularly unconventional gas, outside North America. “These barriers may be overcome. Countries like China aren't going to give up; they understand the many benefits of domestic production: jobs, government revenues, trade, increased energy security, a boost to manufacturing, and so on.”
He reported that Chevron is working with Argentina to develop its shale supplies.
Meanwhile, the US, he said, may be involved in developing the current and future waves of LNG, because of the cost advantages of its resource and infrastructure. Still, a number of greenfield LNG projects are slowing, or even being put on hold, according to Mr. Watson, as the new US brownfield projects have set a new price bar for competitors.
He commented, “This has put at risk projects that once seemed certain to go forward in some resource-risk countries. The implications of this are easy to overlook, because in today's operating environment, marked by ample supplies and lower prices, it's tempting to defer the investments necessary to ensure affordable and reliable energy supplies in the future. But it's critical that we not lose sight of the long-term, and we work now to enable that next wave of LNG.”
It would be challenging, he said, because such greenfield projects can't compete at low Henry Hub pricing. Making such projects competitive, he explained, required some creativity and new models.
As an example, he said that Chevron had invited LNG buyers to take upstream ownership in the Gorgon and Wheatstone greenfield projects; Wheatstone was the first LNG project in Australia to have two separate upstream joint venture groups, sharing the pipeline and planned infrastructure development on an equal basis. “This lowered the cost to both groups,” he explained, “and enabled the development of the resource in support of the Australian government objectives, and at a time when customer demand for long-term supply was strong.”
He said such an example could be a model for the future, “Because as LNG markets converge, it's going to be all that much more important to be competitive. New LNG projects, whether from Canada, East Africa, Australia or elsewhere, won't get past the planning stage unless they're economically competitive for buyers and sellers, while also providing benefits to host governments.”
He opined that LNG can only be sourced if host governments enable the development through fair financial, social and environmental terms and condition – key criteria for ranking investment opportunities, as the best resources could be uneconomic with uncompetitive terms.
Investors have choice in such matters, he noted.
Mr. Watson said that there will continue to be challenges to developing and delivering sufficient supplies of natural gas in the years ahead. “But Chevron has made a commitment to do both: to do our part to put the world on a pathway to prosperity.”
The company, he said, is the number one producer in Thailand and Bangladesh, and is active in almost every corner of the world. With oncoming projects like Gorgon and Wheatstone, as well as existing ones, Chevron expects to become one of the top LNG producers in the world in the next 5 years.
“But no one country, nor company, can do it alone,” concluded Mr. Watson. “It's going to take all of us working together on innovative solutions to safely and reliably develop affordable energy the world needs, to maintain our living standards and grow those in developing nations.”
Rex Tillerson noted that far reaching changes have sweeped energy markets since the WGC last met like the expansion of the global market for natural gas expand, increasing efficiency and flexibilty of international trade. “We've seen the extraordinary and ongoing development of US shale, creating the potential for North America to be a net energy exporter,” he observed.
“And, since we last met, the world has come to a greater appreciation for how our industry's technological advancements spur not only economic growth but can also deliver significant environmental benefits. In light of these achievements, we can say with growing confidence that natural gas will be essential in the decades ahead, especially as leaders of government, industry, and NGOs continue to explore the options for how best to manage the risk of greenhouse gas emissions.”
He noted that WGC was well timed to contribute to the ongoing global dialogue on carbon policy, given the global climate change talks to take place in Paris in late 2015.
Mr. Tillerson offered: “In order to address the risk of climate change and secure a brighter future, the world will need to put in place sound energy policies now – policies that support access to natural gas resources, that enable innovation and development, and promote trade in natural gas in the decades ahead.”
The natural gas industry, he explained, must communicate the “moral imperative driving the demand in the quest for energy. “Energy is the gateway to economic development and advancement. In the decades ahead, the world will need reliable and affordable supplies of energy on an unprecedented scale. Expanded economic output, and roughly 2 billion additional consumers over the next 25 years, will mean that global energy demand will likely grow by about 35%.”
That increase, he explained, is like adding the energy demand of Russia, India, all nations in Africa, Latin America, the Middle East and the Caspian region combined. Increasing supplies, added Mr. Tillerson, is also crucial because of the “tragic divide” between countries with access to energy and those without that access. “About one in seven human beings still have no access to electricity,” he remarked. Meanwhile, he added that two out of five people still rely on biomass for cooking and heating.
Natural gas, he said, can help bridge the divide and offer a better life for hundreds of millions of people. “Gas is increasingly recognized as a reliable and affordable fuel with a wide variety of uses. For these reasons, we project that the demand for natural gas will rise by 65% over the next 25 years, the largest volume growth for any energy source.”
According to Mr. Tillerson, around 2025 gas should overtake coal as the second most significant contributor to meeting global energy needs (behind oil). By 2040, natural gas supplies from conventional resources will remain the majority of production. He added, “Nevertheless, because of new technologies unconventional gas supplies are likely to grow by 300%.”
Recognizing the boost gas had given to the US economy in the midst of the crisis years, he noted the vast new supplies to the market, which have provided greater energy diversity, reliability and flexibility in the global energy portfolio.
He commented, “This increase in energy security is also helping to promote stability and peace during periods of international controversy or geopolitical upheaval.”
Meanwhile, other like Qatar have contributed to the increase of trade in gas.
“Through vision and sustained investment, Qatar has spearheaded the development of the global LNG industry,” he explained, “bringing untold benefits of energy and energy security to Europe and Eurasia.”
The technologies used by the natural gas sector, said Mr. Tillerson, have also introduced tremendous environmental benefits.
He offered, “Because natural gas emits 60% carbon dioxide than coal when used in power generation, natural gas from shale has been instrumental in reducing US CO2 emissions to levels not seen the 1990s. Remarkably, these environmental gains have come even as the US economy has grown 60% and we've added 50 million more consumers of energy than we had in the 1990s.”
According to him, these gains have come despite the fact that the US has no comprehensive cost-of-carbon policy.
The industry's commitment to environmental stewardship can also be seen, he said, in its approach to methane emissions, as the Environmental Protection Agency finds that methane emissions have fallen by 15% since 1990. “That drop is impressive, not only because of the past 25 years of economic growth; it is impressive in light of the fact that natural gas production has soared.”
Since 2010, he said it has risen from 60 BCF/day to 75 BCM/day, while overall methane emissions have declined, due to the industry's investments in technology and ongoing operational improvements.
“In the months and years ahead we must engage the public and policymakers to emphasize how the energy sector leads many of the most promising efforts to pioneer technologies and techniques. We must communicate that sustainable technologies require sustainable investment, which requires sound and sustainable policies.”
Sound decisions will be necessary in every region, he opined, especially as the world looks to expand energy supplies in a safe, secure and environmentally responsible ways.
Mr. Tillerson offered, “Governments can be confident in opening up access to energy resources, knowing that we will work to ensure that our footprint is minimized and the environment is protected.”
Regarding the unconventional gas potential in Europe, he said that International Energy Agency estimates put them at 1,600 TFC.
“Unfortunately, some nations such as Germany, and right here in France, have put in place policies that have effectively banned hydraulic fracturing.”
In contrast, he said, the US and Canada have provided access, enabling the industry to apply hydraulic fracturing for more than 50 years, working with government to safely and successfully complete wells with those techniques on 2 million wells. He quipped, “I think we have enough data.”
The same could be done in Europe, he said. “By opening up access and applying such proven technologies, European and global markets would capture the benefits of increased energy diversity, flexibility and security.
Regulation, he said, should strike a balance between risk management and economic viability.
“By maintaining dialogue between government and industry, we can meet this challenge and establish policy pathways for business to invest and successfully execute long-range projects,” said Mr. Tillerson, who added that policymakers should open avenues to free trade and energy investment. Doing those things, he opined that governments help industry find more innovative and efficient ways to bring important energy sources to market.
He noted the debate in the US congress regarding foreign trade agreements, the Trans Pacific Partnership and the Transatlantic Trade and Investment Partnership, whose completion, he opined, would renew the appreciation of international trade and investment.
Mr. Tillerson stated that the future for natural gas will be as bright as it is transformative.
“The global move to natural gas is an evolution in markets that is changing economies and is changing the environment for the better,” he concluded.
-Drew Leifheit