Atlantic Council
Global Energy Forum
Session 1: Globalization of Gas Markets – Geopolitical Consequences
Moderated By:
Dávid Korányi,
Director, Energy Diplomacy Initiative, Global Energy Center,
Atlantic Council
Keynote Speech By:
H.E. Noureddine Boutarfa,
Minister of Energy,
People’s Democratic Republic of Algeria
Participants:
Majid Jafar,
CEO, Crescent Petroleum;
Board Managing Director, Dana Gas
Anatol Feygin,
Executive Vice President and Chief Commercial Officer,
Cheniere Energy
Mussabah Al-Kaabi,
CEO,
Mubadala Petroleum
Anne-Sophie Corbeau,
Research Fellow II,
King Abdullah Petroleum Studies and Research Center
Mohammed Ali Khan
Chief Commercial and Marketing Officer,
GE Middle East
Location: Al Maryah Ballroom, Four Seasons, Al Maryah Island, Abu Dhabi, United Arab Emirates
Time: 5:10 p.m. Local
Date: Thursday, January 12, 2017
Transcript By
Superior Transcriptions LLC
www.superiortranscriptions.com
ANNOUNCER: Please welcome director of the Atlantic Council’s Energy Diplomacy Initiative, Dávid Korányi.
(Music.)
DÁVID KORÁNYI: A very good afternoon to everyone. My name is Dávid Korányi. I’m the director the Atlantic Council’s Energy Diplomacy Initiative. I am largely to blame for the agenda of this conference today and tomorrow. I have the great privilege to moderate this panel on the Globalization of Gas Markets and Geopolitical Consequences. I think we had a terrific day so far, very rich conversations. I think gas was mentioned already many, many times in those conversations, but this panel is going to drill down deep into those natural gas-related issues.
I believe, and I think the minister – the UAE minister this morning already made a reference to that, that gas is probably the fossil fuel with the brightest future if you look into the next couple of decades, from an environmental perspective but also from a business perspective. Which is quite paradoxical if you think about it because for the better part of the 20th century gas was mainly the unwanted and difficult to exploit byproduct of the oil industry. It’s quite a remarkable turnaround, and particularly if you look at the changes in the past decade, they are nothing short of revolutionary when it comes to the importance of gas, the usage of gas and its meteoric rise in the overall energy mix, not only in the U.S. but in other parts of the world as well.
And then in terms of how gas is produced, treated and priced, I think the changes are, again, very remarkable. If 10 years ago someone would have told you that gas would outcompete coal in the U.S., or someone told you that the U.S. is going to export natural gas to Kuwait and Dubai, or if Russia would move aggressively into spot pricing and changing all its contracts, you would probably have called that person completely crazy.
So I think we have a lot to discuss in this panel, but before I turn to the panel and before I turn to the distinguished panelists, I have the special honor to ask the minister from Algeria to deliver a special keynote address. So if I may ask His Excellency Noureddine Boutarfa, who is the minister of energy of the People’s Democratic Republic of Algeria, to come to the podium to deliver his keynote address.
Thank you, Mr. Minister. (Applause)
MINISTER NOUREDDINE BOUTARFA: Excellencies, lady and gentlemen. I would like to thank the excellencies, Minister Mazroui, and Mr. Kempe, president of the Atlantic Council, for the invitation to the – to this forum. I am pleased to intervene in as a keynote speaker in this session on the Globalization of the Gas Markets and its Geopolitical Consequence.
First of all, I would like to express my condolences on the tragic death of Emirati’s diplomats, killed in Afghanistan, who were carrying out humanitarian work there.
This is for me an opportunity to listen to you, to your views, and get to know perception of this evolution. But also, an occasion to inform you of the gas sector development in my country, with its potentialities and prospects, in the light of the international context and the ongoing global challenges.
Before addressing the issues of globalization of the gas markets, it seems to me useful to review some of the main trends in this industry over the last decade. What do we observe? First, gas is taking advantage of a structural dynamic. It is in a good position within the global energy mix, in that proven recoverable reserves have increased substantially nearly 20 percent, and thus, despite the significant growth in production during this decade leading to an overall ratio of reserves to production of 53 years in 2015. Market production has increased at the significant rate of nearly 200 percent by year, to exceed 3,055 billion cubic meter in 2015, even though it has somehow slowed over the last few years due to a modest economic growth, but also as a result of stronger competition from other sources of energy that are encouraged by public policies.
The Middle East has experienced the strongest growth, followed by the United States, then Asia-Oceania region, including China – in contrast to Europe where production has declined. Oil consumption represented 21 percent of the overall energy consumption driven by demand in the United States, but also in China and the Middle East, while Europe saw a net decline during this period. Demand remains as to now dominated by the electricity sector and the need of industry. Even if new uses for land transportation are developing, they are still marginal on a global scale.
International gas trade pipelines and LNG has increased steadily to exceed 1,000 billion cubic meters in 2015, far above the modest growth pace of the demand recent years. The trade value represents about 30 percent of total market production, of which a third was LNG. On this issue, one should note the remarkable development of infrastructure of international gas trade, particularly in the liquefied form, which experienced the highest growth in employed an increasing number of liquefaction and he gasification units. More than for other industries, technology has been a key factor both in production systems, as illustrated by the development of international resources, as well as in transformation and expansions of trade with the floating units of LNG.
Let’s observe also that international gas trade flows reflect the impact of the regional development and production and consumption, which has led to a shift towards the most dynamic centers of growth in Asia, particularly in China and India. In parallel, we finally observe the stimulative of convergence of the three original markets — Asia, Europe and America — with clearly narrow price differences. During last year, gas markets were characterized by – (inaudible) – supply, and production capacity of LNG expected to grow strongly over the medium term. Contrasted by a modest growth in demand – in demand. This should accentuate competition, particularly in Europe, where spot markets are developing with gas contracts of shorter duration increasing.
What do we learn? Despite its structural dynamics, the perspective remains uncertain. Recent projections pointed to a profound transformation of the market with the introduction of shale gas and the entry of the United States as a large LNG exporter. And also, additional volumes are huge, given the liquefaction plants and the (contracts ?) across the Atlantic with some 65 million tons per year by the end of the 2018. Yet demand is not materialized, given the economic difficulties all over the world. Instability becomes a major issue for an industry as capital-intensive as the gas industry – an industry that is, moreover, put in trouble by the low prices as a corollary by the dark prospects for investment.
There is also competition from other forms of energy that remains fierce – like coal and conventional hydrocarbon and renewable – but also the questioning of the traditional modes of transaction based on long-term contracts and the development of spot and short-term markets, coupled with new pricing based on these markets, prices lower than those of long-term contract. All the uncertainties arising therefrom are accentuated by the geopolitical upheavals that we know. Lady and gentlemen, the stakes for Algeria are not different. Historically Algeria has been a pioneer in the trade of liquefied natural gas, with the first delivery of Algeria LNG to the United Kingdom in 1964. With the expansion of the use of the gas, Algeria has developed its resources, production capacity and export infrastructure to some 90 billion cubic meter per year by pipeline to Europe in LNG form.
Market production of natural gas has been measured during the past decade around 85 billion cubic meters by year. However, with the – (inaudible) – in 2016, these developments took place in favor of a steady growth in domestic consumption reaching 40 billion cubic meters in 2015, and despite declining demand in Europe, our main market. It is to be underlined that with the technological developments that lead to the commercial exploitation of shale gas, Algeria undertook an assessment of an unconventional gas resources, which confirms reserves among the largest in the world on the order of 20,000 billion cubic meters.
Currently the we are working in the fine tune our knowledge of this resource from the technical and economical aspects as well as the various impacts of their exploitation. Our own assessment studies confirm those of other specialized agency to rank Algeria in the third place on the world scale in term non-conventional natural gas resource. The two pilot driving projects carried out in the southeast of the country showed very promising results regarding the prospects for production, and thus corroborate our estimates. The country enjoys vast mining hydrocarbon demand, still under-explored with an important share of conventional and non-conventional resource.
Thus, the medium-term plan of the national oil company includes another assessment of some 75 billion U.S. dollar, of which a large share, almost 80 percent, is dedicated to the upstream in order to expand the reserves base and ensure the long-term energy security of the country with – (inaudible) – exploitation of the currently projection deposits. Our objectives are to meet the growing internal demand and to remain a major player on the international energy markets, in particular gas markets, and thus contributing to the security of supply for our customers. That objective will be pursued through the development of all resources of the country, including the unconventional oil and gas resource and the renewable energy, thus ensuring the diversification of the national energy mix.
There remains the need for us to find new means to attract investment in exploration and exploitation of new gas sources. If we want to maintain our export to Europe in the long run, just we must acquire new market share around the world to deliver our gas, notably in liquefied form. LNG is an important transforming factor in gas markets, since it contributes to the globalist, this market to make then more flexible.
Ladies and gentlemen, the move toward the globalization of the natural gas market will reinforce the security of supply of the importing country and reduce risk from the dependence on a limited number of suppliers. This development offers also an opportunity for the exporting countries, because this reduction of the risk should contribute to the expansion of gas consumption and markets. This is an additional factor promoting interdependence and stability worldwide.
Our vision is dedicated to the globalization of the gas markets and its geopolitical consequence. I will make some comments as a premise to the discussion.
First, even if several developments indicate that we are heading towards a globalization of gas markets – (inaudible) – will remain to the foreseeable future basically segmented into three major traditional regional markets with, however, more flexibility. It is our views that the increasing number of the producer exporters and that of liquefaction and reception regasification infrastructure gives it more global character. Also, it is still in its infancy and remains quite different from that of other hydrocarbons.
In spite of the uncertainty that I have mentioned, this move toward globalization with multiple consequence at a geopolitical level seems to me overall to offer more opportunities than raising concerns for the production countries, the industry and the consumer countries. Among these opportunities, there are the advantage of the new markets for producers. Since they are more flexible, contracts allow to develop LNG for the most rewarding markets or new sources on the route of supply for importers. These prospects should mitigate, if not eliminate, the tension of rigid commercial links and allow the development of more – (inaudible) – and trustful relation, contributing to the development of the gas industry but also to stability and overall, if I may – if I may say, to peace.
However, this move towards globalization must not be to the detriment of producer countries on the long-term investment opportunities. The issue of a fair price is of paramount importance if we are to ensure the sustainability of this industry. The development of the industry-owned – (inaudible) – reinforced gas market will also contribute to the preservation of the environment, less air pollution, and to the reduction of greenhouse gas emissions. The latter will be further strengthened by the role of gas as support factor for promotion of renewable energies through hybrid infrastructures to address their intermittent nature.
There are other challenges and real constraint facing the gas industry. I am referring to gas prices, but also to the security of investment. Once again, one of the important challenges of this globalization and commoditization of the gas market, with its gas hubs, spot sales and short-term contracts, is to secure the development of important resource, including those that require large investment, and thus the guarantees of market outlets, met in the past through long-term contracts.
As a pioneer in this industry, Algeria will contribute towards such solution by remaining a reliable supplier for its current and future consumer, while working to expand its resource base. In so doing, it will support the move towards enhancing energy security for all and contribute to the improvement of the global geopolitical climate.
Ladies and gentlemen, I hope that this introduction will contribute to a fruitful discussion, and thank you for your attention. (Applause.)
MR. KORÁNYI: Thank you. Thank you, Mr. Minister, for this wonderfully comprehensive presentation, which I think serves as a great scene-setter for this conversation. You touched upon issues within Algeria on the global gas markets.
Let me dwell upon one of your points that you made about the difficulties of the continuously rising domestic demand. And let me turn to Majid Jafar, who is the CEO of Crescent Petroleum, and also the board managing director of Dana Gas, major producers of gas and great experience in the region, in this region which also struggles with the same issues.
It is a region with 40 percent of global gas reserves, yet many of the countries in the region struggle with gas shortages. So how do you explain that, and what can we do to remedy those gas shortages?
MAJID JAFAR: Thank you. So first of all I’m, you know—I believe a lot in natural gas, and we heard about it being a key fuel. And not just even as a transition fuel. It’s kind of the reserve fuel, even for renewables, because most of the new renewables are intermittent in their supply, and you end up needing a gas fired generation as a backup.
But what you see worldwide, and I’ll come to the Middle East, there’s a lot of strange things going on because of policy in the name of being better for climate change. If you really care about climate change and carbon emissions, we should be focusing on switching from coal to gas. That’s what the U.S. did, that’s what the U.K. did, and they have about the third gas in the mix, and that’s how the U.S. has the lowest emissions in their generation since the early ‘90s, and the lowest per capita since the ’60s, I think. And that’s because of the shale gas revolution displacing coal.
But many countries elsewhere, because of policy, like in Europe, for example Germany, it’s kind of a policy decision against fossil fuels, including gas. So so much money is spent on renewables, trying to bypass gas and they end up importing coal now from the U.S. to generate power. And they have high energy costs and rising carbon emissions for the last two years.
So by trying to be more keen by pushing, almost leapfrogging against the economics, they ended up causing the opposite effect. I’m not saying there’s no role for, you know, renewables, but we spent about $2 trillion in the last 10 years on renewables and a lot of it is subsidies in many countries, and we are still 2.8 percent of global energy supplies.
If you look at countries like China and India, as we heard this is where the growth is coming from, they are still almost two-thirds coal and 6 percent gas. So if you really care about the emissions and the environment, yes, we need to be investing in new technologies and renewables, but don’t ignore the current issue and the easiest win in terms of lowering emissions. And that’s really coal to gas plus efficiencies. Efficiencies for cars and efficiencies for homebuilding.
I mean, today all the hype is about electric vehicles. An electric vehicle in the U.S. today results in more carbon emissions because the power that’s fueling the electricity has a big chunk of coal in it, whereas a new petrol car with emissions standards today in the U.S. actually ends up with lower carbon emissions. But people are following, you know, the headlines, not the trend lines, as President Clinton says. You should look at what’s the underlying sort of figures.
For the Middle East, you are right. We have 40 percent of the proven gas reserves, probably more. That’s really under-explored. Most of that 40 percent is associated with gas that was discovered looking for oil because, as you said, it was an unwanted, flared byproduct until relatively recently. And yet we only have a sixth of gas production. We have a third of oil production so we are below our potential there, but we are really below our gas production.
As you said, there are shortages in many countries. And again, it’s an issue of incentives and policy. Most of the national oil companies have been focused on oil, some exceptions being Sonatrach and QP, but most of the countries with a lot of oil have been focused on oil.
Many of the countries have a low gas pricing that doesn’t give the incentive to invest in gas. It’s much more capital intensive, longer return horizons, more surface infrastructure required. And you can’t really do that unless you tackle the underlying energy subsidies. If the electricity is going very, very cheap, you cannot have an upstream price of gas that is competitive.
So there are reforms that are required in terms of tackling subsidies and allowing an investment regulatory mechanism which allows more private sector investment in the gas space. I think that would help unlock the potential of the region, and also enable more cross-border trades. I mean, you have situations where countries in the region are importing energy from the U.S. or from the other side of the world but not from their neighbor across the border because of some political issues.
Here in the UAE there has been real innovation, you know, the Dolphin Project as the kind of flagship project in terms of cross-border gas trade, and import from Qatar. We tried to import gas from Iran. The Iranians never delivered, but that was the other kind of obvious regional resource. And then diversification across the energy spectrum while exporting gas still from Abu Dhabi LNG.
And now there is importing of LNG going on at multiple emirates in the UAE. So there is this real kind of innovation and entrepreneurship to diversify and be fully engaged in the gas space, while tackling the underlying subsidies and encouraging more investment.
MR. KORÁNYI: Thank you, Majid. This was not the pre-agreed order, but because the Dolphin Project was mentioned, I may jump right to Mussabah Al-Kaabi, who is the CEO of Mubadala Petroleum and the managing project in the Dolphin Project. And Majid talked about the lack of intra-regional trade in terms of gas, and that’s exactly what the Dolphin Project aims to remedy. So if you could just update us on where that project stands, that would be great.
MUSSABAH AL-KAABI: Well, thank you. Dolphin Project, it was a groundbreaking project in the region. At that time it required certain requirements in order to make it happening. So one primary requirement was vision at that time. Not many people believed that there is an anticipated shortage or deficit of gas going forward. So vision was very important in order to bring that project to the way it is operating now.
Also political blessing, and that’s extremely difficult in this part of the world. So we had blessing from three countries, Qatar, UAE and Oman, to go ahead and execute that project. But also it was purely based on a commercial arrangement. So the supplier at that time set a certain price and the customers in this part of the region were willing to pay that price. So it is a combination of, you know, parameters that need to be aligned in order to bring a big project like Dolphin into operation.
Also very important I would like to highlight is that you need to have the technical and financially capable partners to execute that project. There is of course a possibility or an option to expand in the project, and if you think by Majid’s remarks, that there are a wider scope for cross-border gas projects, but it would require I would say a different geopolitical environment. But technically speaking it can be done. It can be expanded and Dolphin Project was a remarkable success to all parties.
MR. KORÁNYI: I think another key or interesting example from that perspective is the emerging gas relationship between northern Iraq and Turkey, which is also something that was unfathomable 10 years ago, but now it’s being shaped up. It’s one of the fascinating prospects, and Majid mentioned Iran, and the Iran-Saudi gas relationship, although again, unfathomable today, but it would make perfect commercial sense.
But let me now turn to Anatol Feygin, who is the executive vice president and chief commercial officer all of Cheniere Energy. Your company last year in 2016, broke revolutionary new grounds, and I had the pleasure to attend the Sabine Pass opening ceremony back in April in 2016. For the first time you exported LNG from the lower 48, from the United States, which is nothing short of revolutionary when it comes to the gas markets.
According to the IEA, the United States could become the third biggest natural gas exporter by the end of this decade, which is again, given that in 2005-’06, still people predicted that the U.S. is going to become one of the largest importers of natural gas. It’s just a wholesale change.
So how do you see the gas markets shaping up, how do you see your impact and other LNG suppliers coming online in Europe and also in Asia in terms of pricing, in terms of gas supplies, in terms of competition?
ANATOL FEYGIN: Thank you, Dávid, and thank you to my fellow panelists for setting up this discussion. I just want to build on themes of technology, innovation, kind of commitment, and being ahead of the curve. As Dávid said, we’re coming up on the one-year anniversary of the first of our trains becoming operational. The first exports were in February 24th of 2016, and that was built on a vision and a pivot that happened really late last decade, early this decade on the back of a period where there was another revolutionary pivot done by the United States in a previous decade.
It was early in 2000s there was one BCF a day of import capacity into the U.S. BLNG available, and through the decade as the view became more and more prevalent that North America was going to be short of gas, that number grew to over 20 BCF of capacity. Virtually none of it was utilized. At its peak it was 15 percent utilized.
So on the back of technology innovation, the right pricing signals being sent, North America started to become much more innovative, and of course we are now the beneficiaries of the unconventional revolution that really started to hit stride late last decade, and already started to impact that, along with changes in the global LNG market really started to affect the global gas trade long before that cargo left the Sabine Pass facility in February of 2016.
We continue to see that innovation continue, the innovation that allowed the U.S. power sector to shift dramatically away from coal, reduce carbon emissions from 2.5-plus billion tons in 2006, 2007, to 20 percent lower than that today, as the economy actually became more energy intensive and grew by about 50 percent in terms of headline GDP. So quite a remarkable achievement in terms of CO2 reductions, all, again, on the back of this ingenuity and technological innovation.
We see that continuing. We see a very robust resource continuing to be developed, and as we sit here today the well-publicized estimates that there is 800-plus trillion cubic feet of resource available that, with economics that are attractive at $3 and a number that’s 50 percent higher than that, just modestly higher, we are very confident that two, three years from now that number for economic break-even, and the resource number will continue. The economic break-even will be reduced and the resource will be increased as that technological push continues.
As you said, we’ve got right around 65 MTPA of capacity under construction today in the U.S., and we think that number will grow as long as we are right about that resource base continuing to be attractive and a stable kind of low single digit price as measured by the Henry Hub.
So we think that North America, U.S. and Canada primarily, are dealt a very good hand in terms of resource. We at Cheniere will continue to grow the de-bottlenecking function of allowing the rest of the world to access that resource base, and we think we will be very competitive in the global scheme, again on the back of that resource and on the back of our ability to competitively bring online liquefaction projects to date, on time and on budget in Cheniere’s portfolio at least.
So we feel pretty good about the U.S. position and we hope that we continue to have the opportunity to serve the global gas market with this attractively priced resource and the efficiencies that it affords along the value chain.
MR. KORÁNYI: Thank you, Anatol.
So the focus is on the supply side so far. I want to focus a little bit more on the demand side going forward and turn to Mohammed Ali Khan, who is the chief commercial and marketing officer of GE Oil and Gas in this region.
Mohamad, if you could talk a bit about gas demand from the end-user perspective, from GE’s perspective. You are a major industrial conglomerate. You are actually becoming a digital industrial—or in the process of becoming a digital industrial company. So if you could talk a bit about how you see gas demand from GE’s perspective regionally and then globally, and then maybe as a follow-up question I might ask you about the role of digitization across the value chain and how that impacts gas usage.
MOHAMMED ALI KHAN: OK. Well, thank you for inviting me to this I guess esteemed panel.
When you think about the region here, and we specifically think about LNG afloat and regasification, during 2005 to 2014, you know, LNG trade increased significantly across—I think across four countries increased around 6 percent. And historically those countries have been outside this region.
When you think of it now, this region actually equates to that increment across Jordan, Egypt and places like Pakistan. Morocco in itself as well is establishing to 1,200 megawatt combined cycle gas power plants, and they are moving away from a typical oil-fired plants to gasification plants.
The technology that we sort of developed and we continue to develop in terms of what’s within our portfolio of GE, small-scale LNG is a very integral part of what we build. And that’s something that, you know, when you think of remote locations in a lot of these countries across the region, we build and house fully completed, integrated solutions and offerings that are used and transported on modules to different remote locations.
So you know, the movement in terms of from unconventional gases as such, you know, it’s become a lot more available. And I think, you know, the integrated offerings that we have is really beneficial. You know, we go from what I think about the entire value chain. We go from extraction to transportation and to regasification. And we have product offerings that fulfill the requirements across the whole value chain of that.
When I think of, you know, some of the countries that we’ve really developed those in and we have supported projects, if I think of one country I could say is Turkey. Turkey has really become an integral part of, you know, East to West. They have recently announced, you know, the Turkish Stream agreement between Russia, which is a gas pipeline, you know, something that we’ve been engaged in in terms of discussions.
We last year won a project to supply aeroderivative gas turbines for the TANAP pipeline, which was, you know the south corridor pipeline which will be transported through Turkey into Europe. And then there’s, you know, there’s other pipelines that we are heavily involved in, discussions with regards to east Turkmenistan, Afghanistan, Pakistan and India, which is the TAPI pipeline.
So, you know, these are all projects that we are heavily in discussions with. But when you think of our product offerings, you know, one of the areas in terms of that really is a beneficial aspect for our customers is the rapid startup of our gas turbines. And that’s something that really has developed.
You know, our facilities, whether it’s in Florence, whether it is in the U.S., have really continued to develop those products, and we’ve got a lot closer to our customers to really understand the requirements from their side.
You know, we can’t ignore the dynamic source, so when you think of financing, financing forms a big part in regards to how do we work closer with these governments in terms of being able to bring associated financing for a specific project. And we work very closely with our export credit agency companies, where we’ll have, you know, products that are either being manufactured in France or in Italy, where they front financing and provide export credit for those projects, which really helps these countries to be able to, you know, encourage these countries to really show that they can execute on these projects.
MR. KORÁNYI: Thank you.
Let me now turn to Anne-Sophie Corbeau, who is a research fellow at KAPSRC in Saudi Arabia. She has a wealth of experience in gas markets working with the IEA, and I just said before you worked on the gas market reports at the IEA so you know everything there is to know about international gas markets.
I want to stick to the demand side of the equation and then ask you about how do you see demand shaping up in the next 10, 15 years. And in my mind that’s one of the biggest uncertainties. The IEA, in 2011 I believe you were still there, heralded the golden age of gas, which we are not there yet but we might be there.
There are of course many uncertainties in terms of the long-term usage of gas from a client perspective because it’s still—it’s cleaner but it’s still a fossil fuel, and in terms of a long-term whole de-carbonization agenda you have to think about either gas fits ECS or no gas at all beyond 2050.
And there are enormous uncertainties in both Europe in terms of how the gas markets and gas demand will shape up, function of economic growth, function of fixing the EPS system, et cetera, but also in Asia, how Chinese demand will look like, whether India is going to be able to diversify away from coal and move more aggressively into gas. So how do you see that picture?
ANNE-SOPHIE CORBEAU: Well, I think I will drag this golden age of gas (will be important ?) in the rest of my life, because it has been six years and everybody who is seeing me still reminding me about the potential of gas. I think the only country which has really achieved the potential of gas has been the United States. I mean, it has actually exceeded our expectations in terms of demand and production.
For the rest, unfortunately, it’s not so golden. And actually, this is exactly what I was going to talk about because what is keeping me awake at night right now is that whenever we are talking with agencies, with companies about their long-term projections in terms of natural gas demand, everybody sees a golden future for natural gas, and so last I hear projections again are reinforcing this image. Everything is going well. When I’m looking at the past few years, I do not see any reason to be that optimistic. And I think I find three reasons for that.
The first one is that natural gas is still considered as a fossil fuel, and therefore it’s still emitting CO2 emissions. And it’s not always considered by governments in their long-term policies as a solution. It might be accepted as a bridge, but never as a long-term solution.
Another thing which is coming up on top of the CO2 emissions is methane emissions, which I’ve been hearing more and more talked about over the past few years, in particular in the United States. But the problem with methane emissions is that there is not that much data, and I think there is a lot of work to be done by the gas industry in order to basically quantify that problem and also address that problem. Because, otherwise, the green people and some government officials are going to say, why have we choose gas? It’s actually worse than coal, so, no, thank you very much. So definitely that’s a problem.
And the third issue is that while we have been enjoying very high gas prices, notably in Asia, and this has attracted all these LNG investments that we are seeing coming to the markets today, but the problem is that these high gas prices means that natural gas could be very expensive and not competitive. And in my opinion, in order for natural gas to succeed and to secure its golden future or the golden age of gas, you have to have a product which is competitive and affordable, and that’s very, very important.
So, indeed, I mean, in the U.S., we have natural gas beating coal, and the main reason was that natural gas has become very cheap. If you remember 2012, certainly we had gas-fired generation, zoom, going through the roof. Yes, gas prices are too. Obviously you are beating coal when – like that. But if you are looking now at Asia, for example, despite lower gas prices that we have seen for most of 2016 – not right now – where gas was still not competitive against coal. And that’s a problem, and this is exactly what Mr. Pouyanné has said this morning. I mean, you need to have a carbon price in order to make natural gas more competitive, or you need to address coal-fired generation.
How did the U.K. manage to increase its usage of gas recently? That’s very simple. They have, on top of the ETS, a carbon tax, and they have closed down coal-fired plants. So if you want gas to succeed, you need to close down these coal-fired plants, otherwise, they always do come back through the back door. Believe me, they are competitive, and it’s very, very worrying in Asia, wherever – I mean, look at Japan. Look at Korea. These great countries – hey, look at the long-term forecast. Coal is inside. Look at all the investments in power generation in the Philippines, in Vietnam, in Indonesia, in Malaysia. Malaysia, a gas exporting country, is building coal – coal, coal, coal, coal, coal is coming in Asia. Where is the golden age of gas there? Gas has to be competitive and affordable.
Six weeks ago, I was in India. A very interesting country, India. And when you talk to the minister of power, he’s telling you, yeah, well, I’m not against gas, but you know what? I have about 600 million people who do not have access to electricity. So you give me cheap gas? Yes, sure. I mean, we can have natural gas in the power mix, but if gas is more expensive – or, really, more expensive than coal, why on Earth should I have gas – should I impose gas in my power mix? I mean, give me a good reason. I need affordable electricity for the people who do not have access to electricity right now.
So, this is the things that are keeping me awake at night. But – I mean, there are some glimmer of hopes. If we manage that, we really need to make natural gas affordable. That’s the first thing. And forget about, you know, the very expensive energy projects that we have seen. And I mean, I’m talking about things like Gorgon in particular, which became outrageously expensive. I mean, we are no longer in the $100 bubble of oil, and we need to forget for the moment about the $15 per MMBTU of natural gas, because this is not something that customers are ready to accept. Even in Japan – I mean, Japan, no, no, no. I mean, they want to delink natural gas from oil right now. They want to have affordable energy.
I think there is hope, also, in the transport sector. The IMO decision – International Maritime Organization decision on sulfur is actually a bright spot if you want to switch from oil product to LNG in the maritime transport sector. And I’m sure some people here are looking me horrified, like, oil decreasing in the maritime transport? No, bad idea. Well, I think in terms of sulfur, that would be quite important, and also in terms of the overall production, that would be a good thing.
And we do have about 1.3 billion people who do not have access to electricity. So I fully agree renewable has a role to play, but if you are looking at roughly the 600 million people who do not have access to electricity in Africa, well, I think there is a role to play for natural gas, so I’m sure people from – (inaudible) – and the other people are looking at me like, oh, no, no, no. I mean, we don’t want Africa to turn to gas. Well, they do have natural gas resources. Look at Mozambique, look at Tanzania, look at the discoveries in Mauritania, in Senegal, in Ghana. These people have natural gas. They should be developing natural gas resources for their domestic market, and maybe, also, consider energy export. But for that, we have a crucial problem, which is financing.
Another big thing which worries me right now is, of course, 2020 period, because we have had about two years of lowering gas prices; investments have been going down – very few investments in LNG export. What’s going to happen past 2020? And the last thing we want is suddenly to have, you know, demand picking up, because there are a lot of people who suddenly are very interested in LNG or in natural gas. They’re thinking, hey, it’s cheap. So you have a lot of customers – and I’m sure my friend from Cheniere is going to agree with me – I mean, we have a lot of countries which are suddenly appearing on the LNG radar screen that we have never seen before. I mean, suddenly – (inaudible) – Kenya, South Africa, Morocco, Cote D’Ivoire – all these countries are seriously considering importing LNG. They were not really considered before.
Yes, but if all these countries are coming and consuming more and more LNG, and then, suddenly, past 2020, there has been no investment because prices were too low because there was a lack of investment due to the economic conditions, we are going to have a huge market squeeze. And that’s not something that the public opinion wants, but definitely not something that the politicians want. And this is, I think, a huge danger for natural gas, because renewable is coming big time, and the big ideal association of natural gas and renewable is something that the gas industry should not count too much on.
I mean, maybe it’s OK for the next 10 years, but think about the evolution of batteries. I mean, in 10 years from now, maybe, you know, the renewable industry is going to debut – you know what? I mean, gas-fired plants, we don’t really need them. I mean, we have all the flexibility we need on the demand side. So, sorry guys, not interested. So beware the renewable industry. I think we should not consider them as friends.
MR. KORÁNYI: It’s very similar to the oil markets – the underinvestment, and then, from the gluts, we could quickly find ourselves in a very different situation. Maybe a little delayed – maybe there will not be a line, but the LNG situation will come later.
MS. CORBEAU: LNG, you need five years, roughly.
MR. KORÁNYI: Yeah. We are running out of time, unfortunately. I wanted pivot back, just for one second, to the supply side. And Majid mentioned the Iran, which is either – depending on the statistics you look at, either the first or the second when it comes to global gas reserves, and has huge potential, is already a major producer and has very ambitious plans going forward in producing twice the amount of gas or even more than it does in the next five, six years, doubling the production capacity.
But at the same time, there are many challenges. So, my three questions – and to Majid, but anybody else from the panel who wants to – wants to respond is, how do you see Iran’s gas production potential going forward? How expensive or affordable that gas is going to be? Are they going to produce enough so that it does not only satisfy the growing domestic demand, but also will be available for export? And then, finally, what will be the export destinations if the Iranian gas, indeed, will be exported?
MR. JAFAR: So Iran, you know, has, as you said, huge reserves, and not only a big share of the north field – the Qatar North Field/South Pars, but fields all across the Gulf, and flaring and so on. It’s one of the biggest flarers – I think first or second. The problem is, again, policy and politicization. There’s a national oil company which has exclusive investment rights since the 1979 constitution, and they haven’t had a good track record for investors or even contractual partners. So they signed two gas contracts to export gas – Turkey and with us, for the UAE. Both went to arbitration, the Turkish one twice. Their import contract was – ironically, they are actually still a net importer. They import more from Turkmenistan than they export to Turkey, but that’s going to arbitration now.
So – and again, it’s politicization. And I think it takes us back to the key message I’m hearing from the whole panel and from the whole session, and really, from the whole forum, which is, beware the politicization – the political policymaking, whether it’s based on geopolitics in the region here, as Mussabah said, or whether it’s based on fashion in Europe, you know? Let’s do renewables, because it looks good. And actually, you find your carbon emissions are going up because you’ve, you know, taken some strange decisions.
I mean, yes, coal is more competitive. Absolutely, especially, you know, above five, six dollars, depending on where you are. But subsidizing renewables is far less competitive, but they’re doing it anyway. So there’s a cheaper way to achieve those targets. And I think we need to all look at the U.S. – the amazing result of the U.S. shale revolution, and, again, look at what we can learn – other parts of the world. I don’t think anyone can replicate the free market they have in the U.S. – the infrastructure, the capital markets, the fact that everybody owns the petroleum under their own real estate, the traded natural gas market, and Henry Hub and so on. But we can learn that when you unleash the private sector and you rely on market forces and the right regulatory regime, you can achieve what governments never thought possible. I mean, the Obama administration came in speaking the same language as Angela Merkel and all the other Europeans, but the market had other ideas. And then, when – (chuckles) – when the results became clear, the administration was very happy to try and take credit for it, but they had nothing to do with it. They were going in completely the opposite direction with their – with their policy.
And it’s not even recent. If you go back – you know, the Carter administration passed legislation to ban the use of natural gas for new power and industry, because they thought in the ’70s that the U.S. was running out of natural gas. And then they ended up pushing to coal, and a lot of the rest of the world followed them. So beware – you know, because, as we’ve heard, there are long horizons for investment, and you can’t be making those decisions based on short-term political considerations. You need to be really taking decisions that are commercially, as well as environmentally, viable to be sustainable.
MR. KORÁNYI: Thank you, Majid. We have about seven or eight minutes left. Let me now turn to the audience and see whether there are questions out there. We have a rolling mic, I think, in the middle. I see David Goldwyn there; I’m pretty sure he has a question or a comment. (Chuckles.)
Q: Thank you, Dávid. David Goldwyn, Atlantic Council.
I guess my question is about the new customers and demand. Anne-Sophie, you said a lot of the problem was that gas is too expensive. Do you think a lot of this is a credit problem? That you have a lot of new customers who don’t have the credit? And how are – and I think that’s my question for Anatol and others is, how are the contract structures changing and the terms changing? Is LNG becoming more affordable to a new class of customers, because they don’t have to have a 20-year take-or-pay contract? And does that, in small-scale LNG, provide some optimism for demand for LNG?
MS. CORBEAU: Yeah, I think that it’s a big problem regarding, indeed, the credit, because all the countries – a lot of new countries which are looking at LNG right now are very small countries with relatively poor credit rating. So you have either no gas market at all or very small gas market. You don’t have creditworthy customers like power generators, et cetera. (You’ve got tanks ?) of gas. You need to do the investment infrastructure. I mean, we are talking about very small and tiny markets, which actually may not be of immediate interest for the suppliers.
And this is something that we are observing across the board right now, is that the customers these days – the LNG buyers – they don’t tend to take huge volumes of natural gas. If you look at the last G2G (LN ?) report of 2016, the volumes imported or contracted were usually below 1 MTPA. So if you are trying to contract your traditional 5-MTPA train, you need four or five customers, which, you know, implies a lot of negotiations. So I think there is a role for the multinational institutions – financial institutions there to support natural gas, but again, this is a question about, what is the role of natural gas in the long-term energy mix, and – because there is a lot of support for renewable when you are looking at, you know, the sustainable energy for all, and you try to do a search for gas or natural gas – you cannot find natural gas in all the documents, or very rarely.
So natural gas is very often not considered a solution, which I find a pity, because if these countries are – I mean, can use as much renewable as they can, but if you can – gas can actually add something else, even in terms of power generation, there’s also potentially as industry, because these countries also need economic development, so by developing the industrial sector, you can also bring more economic growth to these countries. I mean, that’s all the problems that I see for these new countries. It’s not easy – it’s not going to be – (inaudible) – immediately, but I think there is a role for the gas industry, maybe, to invest, along (the chain ?). And there are companies like Total who are doing that, for example, in Cote D’Ivoire, where they are investing in downstreams, but there is also the role of the international financial institutions there.
MR. KORÁNYI: Anatol?
MR. FEYGIN: Thank you. Thanks, David, for your question, and thanks Anne-Sophie, for setting up part of this answer and contribution.
But, you know, one of the things that the U.S. model and Cheniere’s model brings to the table is a lower upfront commitment to an LNG solution in that the resource – the upstream resource is not integrated to the liquefaction, so the fixed fee component, if you will, and the take-or-pay piece is greatly reduced because you don’t have to pay up front for developing the resource. You can source that at a very large and liquid North American market.
We at Cheniere are, amongst some of our esteemed competitors, evaluating smaller technologies, modular mid-scale and small-scale technologies, and we’re pretty optimistic that that will allow the minimum efficiency scales Anne-Sophie referenced to go from something in the 4 to 6 MTPA range to something in the 1 to 2 MTPA range. It’s been discussed many times on many panels, but in the gas world, it’s not that different. The OECD is not your big demand driver; it is, overwhelmingly, the electrification of the emerging markets that is going to drive incremental demand, and for that we need to scale solutions to service these emerging loads and their power requirements.
And credit is a concern, and we see an increasing role for the ECAs to play, as well as other strategic alliances. We often talk about examples of emerging LNG demand that two years ago seemed at least very aggressive, like a Pakistan, where now it seems pretty clear that it’ll have at least three FSRUs online, and great ambitions beyond that, but it is – it is a credit that is more challenging than some of your traditional-term, you know, 3 to 5 MTPA, load-serving OECD utility-type buyers. So there are challenges, but there are solutions. It all hinges on having an attractive value proposition.
Anne-Sophie’s point about all of these integrated resource plans that you see across the world being very coal-based goes back to her other point, that it is a price signal, and over the last five years, the price signal was that LNG was a very expensive – you know, double digit, MMBTU-type commodity. Now that the price signal is that it is mid-to-high single digits, those plans are being recalibrated, and we’re seeing a lot more – a lot more structural demand for gas being dialed in. So if we are right about our assumption that the North American upstream market continues to supply an attractively-priced BTU, we are highly confident at Cheniere that we’ll be able to deliver very competitive liquefaction projects. Those two together should provide an attractive value proposition. And the responsiveness of both the North American upstream market with the productivity of the unconventional resource and the time-to-market of incremental expansion trains should be a very attractive proposition for enabling the growth of the global gas market.
MR. KORÁNYI: Thank you, Anatol.
Mohammed?
MR. KHAN: Yeah, I guess – I mean, when you – when you look at it from a – from a customer’s perspective, efficiency is a big game, right? Driving improved efficiencies in their existing portfolio. And as we’ve sort of embarked on this digital industrial journey, there’s something that we’ve developed in terms of software applications, asset performance management tools, and something we refer to as the Predix Platform. It’s a cloud-based platform, similar to, like, an iOS platform within the Apple world, where we develop applications specifically designed for our customers to drive, you know, improved efficiencies, optimized offerings within their existing assets to ensure that they’re maximizing on the potential of those assets.
And I’ll give you an example. In Rasgas – sorry, in Qatargas – in Qatar, we’ve developed modules with them, and applications with them that have really seen an increase in efficiency of around approximately 20 percent in their existing assets. You know, and that’s something, as we continue to, you know, develop those products, we’re partnering with our customers to do that, and that’s allowing us, and allowing them to, you know – rather than having a big capital expenditure outlay, or investing in new projects, it’s really allowing them to make sure that they, you know, maximize on their existing portfolio. And we’re doing it across the board. You know, it’s something that, really, we’ve developed and we continue to develop and work with them on this.
MR. KORÁNYI: Mussabah, as our host, you have the last word.
MR. AL-KAABI: Yeah, all – on the demand side, what we see in the – in the region – consistent, for example, with what the minister mentioned this morning – the UAE Strategy 2050 – part of it – or a significant part of it is efficiency. So it – contemplate almost 40 percent efficiency introduction in the system going forward. But on the demand side, we see customers more reluctant to commit for long-term contracts. That was the common practice, I would say, ten years back, but because of the uncertainties associated with the demand and the energy mix going forward, we see more customers shying away from long-term and focusing on short-term. Also, in the LNG space, we see more LNG spot trading, like what – you know, we haven’t seen before, and that trend, we expect, will grow going forward.
MR. KORÁNYI: Wonderful. I won’t even try to summarize the discussion – or maybe, in just one sentence – gas may have a bright future, but that road is going to be rocky. I think it was a very, very rich conversation. We’re going to have run now, unfortunately; we’re going to have to wrap up the first day. I think it was a great start to this forum. It will continue tomorrow morning at 7:45 with the panels. It’s a little early, but I think it will – it will be a really, really, good conversation on the outcome of the U.S. elections and associated risks. So I strongly encourage you to be there despite the early time.
Tonight, though, we have something fun prepared for you. We will all leave here in 10 minutes; at 6:30, the buses will start loading – will actually load, so not start loading – so please be downstairs at 6:30 – going to the Yas Marina Circuits, which is the Formula One racetrack here in Abu Dhabi, and we have a number of electric vehicles available on the race track that you will be able to try. Not necessarily the fastest ones – or not all of them at least – and we have limited availability, so we can’t promise that everybody is going to be able to drive, but those of you who want to drive, please bring your driving licenses – valid driving licenses, and don’t drink and drive.
So, see you downstairs at 6:30. And let’s give a big round of applause for the panel. (Applause.)
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