Editorial: A question of timing [NGW Magazine]
Even before the first LNG cargo left the first train at Sabine Pass in the US, much was written – prematurely, it turned out – about an imminent gas glut and the devastating impact this will have on prices. There was talk of upstream renegotiations, US Gulf Coast plant shut-ins and midstream discussions with off-takers. The downstream markets would be so disadvantageous for intermediaries as Russian, US and other LNG came online.
While some gentle braking or accelerating needs to be employed at either end of the price range, this is an excellent opportunity for gas producers to extend market share so that the fuel may become mainstream in areas previously considered marginal for gas, such as shipping and transport, and edge out coal from the power sector. None of this would be to the detriment of renewable energy, for which demand will continue to grow; while back-up from gas – methane but increasingly hydrogen – will remain necessary to maintain living standards.
Because now we are in indisputably in the era of oversupply, only the low-cost LNG has a chance of making a profit – if any. Until Asia builds the amount of storage reservoirs appropriate to its seasonal demand patterns, there will be abrupt rises and falls in demand and hence short-term prices. With European storage full, wholesale gas market prices show there is almost no room now for gas not destined for immediate consumption.
But the glut still seems to have caught some key players off guard. While the operator of the Egyptian Zohr field was ramping up output ahead of schedule, to the point where it reached its December 2019 target in the summer, the downstream situation gave Cairo a lot less to cheer about. Instead of shipping excess production a short distance to a low-price Europe, it has had to stop liquefaction; while some 1bn ft³/day of production has been turned down, the local press reports. This is the market seeking to correct itself after the event: major energy users in the cement and other sectors have already seen their gas price fall by a quarter this year.
Technology has enabled more flexibility, up to a point: lower boil-off rates and on-board re-liquefaction compensate for longer voyages to higher-priced markets. But the cost of speculative storage tanks remains prohibitive, and it is the hard-pressed industrial consumers and utilities, rather than producers, who have the greater interest in building them. Consumers tend to have fewer optimisation opportunities, without offshoring. Producers can swap cargoes with each other to fulfil their supply contracts at a lower cost for each; or spin out their maintenance operations for longer than strictly necessary. So now it is the consumers who have the upper hand, for as long as this oversupply lasts.
On the other hand, it is in nobody’s professional interest that the wild volatility continues indefinitely, either hugely benefiting or threatening to bankrupt one side or the other. Humans like to have some rough maximums and minimums framing their economic activity. Against this backdrop, producers will have to put their money where their mouths are and promote the cleanest of the fossil fuels, trading on its price as well as its suitability for decarbonisation.
Because from today’s perspective, it is inconceivable that all the world’s natural gas will go from the reservoir to the burner tip with only some cosmetic improvements in the next decade. At the same time, more infrastructure now will make it easier to deliver clean energy in the future: biomethane, a blend of methane with hydrogen, pure hydrogen and carbon capture and storage, and so on. This drive towards lower intensity output is already on the agenda of the Middle Eastern giants Saudi Aramco and Qatar Petroleum and a number of European and US majors. Russia too, for pragmatic purposes, is moving fast with gas in wet and dry transport sectors.
As a first and temporary measure, gas could be delivered at a price that enables it to compete against coal, instead of oil, where it is used for power generation. This would ensure that the benefits gas has brought to the US environment may also extend to the regions of the world where the exigencies of population growth and rising prosperity mean governments are reluctantly locked into the dirtiest fossil fuel or risk an angry electorate. A similar principle would apply to its use in bunkering, where the past year has seen more LNG bunkering vessels ordered and more small-scale liquefaction plants being approved.
But even this will be of little practical use unless the public is kept better informed. Constantly being on the defensive against the tide of public opinion is an inefficient way of putting across the other point of view. As Total CEO Patrick Pouyanne said, consumers want clean energy with one half of the brain and the other half does not want to pay for it. But if the majors all stopped producing tomorrow, there would be panic. And if the world were to achieve net-zero carbon by 2025, as Extinction Rebellion wants, the financial and social costs incurred would be colossal – and punish the poorer regions of the world most.
But while messaging is important, it is ‘society’ that creates the demand for oil and gas. Rather than blaming producers for providing essential energy, governments should play a bigger role in guiding patterns of consumption in a sustainable manner. They should regulate intelligently and not with an eye on the ballot box.