Editorial: The end is not nigh [NGW Magazine]
The events of the last year have highlighted the shortcomings of scenarios that governments as well as energy companies follow as they execute their medium to long-term plans. The collapse in oil and gas demand and the impact on share prices caused by the global shift in social and industrial practices has been devastating.
Not for nothing does the International Energy Agency stress that its scenarios are just that, and not forecasts.
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Companies have different obligations depending on their ownership but most subscribe to the goal, set by competition, of producing as much oil and gas, and as at low a cost, as possible. True, their strategies have changed: what a decade or two ago was known as “on the shelf” gas is less and less considered. More is shifting into the “just in time” category – or even “unaffordable”, as some buyers in northeast Asia discovered this winter. Coal plants were turned back on instead.
But companies cannot see into the minds of politicians, for all their lobbying. The shift in thinking about environmental, social and corporate governance, exemplified by major long-term investors such as BlackRock, has also become an unexpectedly powerful “thing” that has blindsided many exploration and production companies. It has the potential to effect major changes, if it is not carefully managed.
In that context it was refreshing to hear OMV’s CEO Rainer Seele remind the European Gas Conference last month that a world based on renewables would have to accept a major setback in its standard of living. Unimpeded by many activist investors – over half the shares are owned by Austria and Abu Dhabi – it can speak as it finds.
And like a few other companies and countries, it cannot accept the consensus that there is enough money around to replace the tried and tested fuels for which the infrastructure is already in place. In the UK, some $14bn/yr is levied on green support schemes, while the net zero carbon goal has a price-tag of three times that each year for the next three decades. Meanwhile large sectors of the economy have shrunk, if not withered away completely, in the last year alone. How will this tectonic shift be funded?
Quick start-ups of generators running on gas step in repeatedly at times of low wind and solar, characteristic of northern hemisphere winters. They averted blackouts in several countries, albeit at a very high price. For that governments too can take at least some of the blame for allowing demand-supply margins to be so tightly squeezed. Space heating is also literally vital.
Moving more of its efforts into gas from oil, OMV’s purchase of Borealis also emphasises its view of the role of oil and gas-derived petrochemicals and plastics. The petchem industry turns oil into products with longer life-spans than fuel, and are essential ingredients in solar panels and windfarms. Pharmaceuticals, now much in the public eye, depend on them too, he said. To be sure, more and more plastic will become renewable but that takes time and money while solutions are needed now.
Nobody can doubt that oil – and gas demand too, eventually – will fall; but wells that are operational today need continual work to maintain output. And then as plateaus are passed, more will be needed. But financing for these operations is growing harder to find. Banks find it easier to invest in renewable energy projects as government support make them more tempting, even if sometimes governments violate their promises.
The risk is that more production will move to countries that are often managed by non-democratic governments. Not inevitably, but certainly often, those governments do not abide by the same standards as OECD countries. Much-parodied “nanny-state” issues such as health and safety – but seldom more important than in energy projects – are a case in point.
The new US president’s announcements about future financing for oil and gas infrastructure and projects, at once vague and threatening, will be more fuel on the fire. US banks play a role in developing downstream markets for gas in places like sub-Saharan Africa where otherwise diesel and biomass are the norm. It cannot be Joe Biden’s intention to step away from such work that benefits consumers and producers alike.
Cheniere is the biggest gas buyer in the US and could be seen as the ambassador for US LNG. It is therefore in an ideal position to apply pressure on the upstream, as it in turn comes under pressure from its own customers to sell LNG with a lower carbon footprint.
US LNG exports, it will be remembered, were seen as a vital weapon in Washington’s armoury. Liberty LNG, a phrase coined a few years ago by former energy secretary Rick Perry, was what allowed Poland and Lithuania to diversify from Russian gas, even if perhaps at a high price in dollar terms. Under a deal hammered out by the previous US administration, China too was to be force-fed US energy products in order to level up the US trade deficit: LNG is among that basket of goods.
At the moment, importers’ demands for lower-carbon LNG are a major incentive to keep cleaning up the operations, particularly upstream where anomalous but cheaply solvable events cause so large a share of the problem. NextDecade has already lost one potential customer worrying about the carbon footprint. But ceding ground to other countries is only likely to worsen the atmosphere.