Gastech ’17: International energy leaders call for cost-cutting, buyer-seller cooperation

Adrienne Blume, Editor, Gas Processing

TOKYO -- During Tuesday’s plenary session, a panel of international energy leaders examined how gas suppliers are adapting to the changing global market.

The late-morning panel session was moderated by Wood Mackenzie Chairman and Chief Analyst Simon Flowers.

Panelists included Chevron Vice Chairman Michael K. Wirth, ExxonMobil Gas and Power Marketing Co., President Robert S. Franklin, Qatargas CEO Khalid bin Khalifa Al-Thani, Total SA Chairman and CEO Patrick Pouyanné, ConocoPhillips Chairman and CEO Ryan M. Lance, and Woodside Energy Ltd. CEO and Managing Director Peter Coleman.

The executives at Tuesday morning’s, “International Energy Leadership Panel Debate,” shared their views on the state of the LNG market.

Mr. Flowers noted that the present LNG market is “not pretty,” unlike the cherry blossoms currently blooming in Tokyo. “So, then, how does the industry work its way through these difficult times?” he asked.

A long-term view on collaboration. Chevron’s Michael Wirth noted that his company holds a bullish longterm view of LNG. “Over a period of time, LNG supply will exceed demand, but that’s not unusual” for large, consumer-driven industries, he said.

Over the short term, said Mr. Wirth, LNG supply will come online faster than demand will grow. “As we can all agree, the supply gap will confront us in the years that follow, if we don’t sanction new LNG projects.” However, beyond the wave of new projects coming online in Australia and the US, only cost-competitive projects are likely to receive approval. These projects will require the support of host governments, and producers will need to drive down costs to attract buyers.

“With technology, collaboration and ingenuity, we will solve these challenges,” he said.

Cost-cutting challenges for producers. How the so-called “Golden Age of Gas” has evolved was the topic addressed by ExxonMobil’s Robert Franklin. Based on provisional 2016 data, natural gas demand growth has averaged 6.5%/yr since 2011, led by the US with 8 Bcfd of growth. By 2040, global gas consumption could rise to 515 Bcfd, Mr. Franklin noted.

However, gas trade has expanded just 1.5%/yr since 2011.

“These will be interesting times, as 16 MMt of new—and, in some cases, higher-cost—LNG seeks buyers in a market where prices are generally weak,” the executive said. ExxonMobil remains bullish over the long term. “Those projects with the lowest break-even cost will have the best chance to move forward and deliver maximum returns, both for the seller and the buyer.”

Qatar optimizes its LNG offerings. A fairly optimistic view was offered by Qatargas CEO Khalid bin Khalifa Al-Thani. “In terms of market evolution, it is clear that a transformation of the global LNG market is underway,” he said. “New markets are emerging, and new technologies and applications are evolving.”

The CEO also noted that the integration of Qatargas and RasGas optimizes the efficiency of Qatar’s energy portfolio at a global level. The consolidation will enhance the company’s ability to offer more flexibility and service to customers through a single interface, while continuing to address environmental concerns and reduce carbon emissions.

It will also result in hundreds of millions of dollars in cost reductions.

Energy majors must continue to invest. Total’s Patrick Pouyanné noted that, “Although we may be in a bearish mood on the producer side, there is potentially a very bright future for gas.”

Energy majors like Total must continue to provide customers with clean, reliable, affordable energy, he said. To that end, Total continues to invest in large projects, such as Ichthys LNG in Australia and Yamal LNG in Russia, despite the volatility of energy prices.

The company is also investing in a new onshore LNG project in the US, Driftwood LNG.

Smaller-scale LNG offers opportunity. Ryan Lance of ConocoPhillips touted recent developments in smaller-scale LNG. “We are working on small-scale and mid-scale LNG applications to make LNG more costcompetitive,” he said.

For LNG projects both large and small, governments must maintain stable fiscal terms, develop stable regulatory regimes, and provide a level playing field to encourage the growth of industry, said the CEO.

Supply side poised to tighten. Woodside’s Peter Coleman expects the LNG market to tighten sooner than expected. He pointed to 93 MMtpy of project deferrals from 2014 to 2016. Market uncertainty makes greenfield investment challenging, the CEO said.

Emerging markets now account for 5% of global LNG demand. By 2025, Mr. Coleman expects 142 MMtpy of new demand from emerging markets.

“The LNG market is rapidly becoming more liquid and transparent, and there is room to negotiate more flexibility in contracts,” Mr. Coleman said. “We need to have an open conversation about the conditions that caused a supply overhang in the market … And we need buyers to do their part and help us create new markets.”

Encouraging greenfield investment while reducing costs. Mr. Flowers then posed the question: “What must happen to encourage investment in greenfield projects?”

Pointing to three phases of investment, Mr. Coleman said that a buildout of brownfield projects will occur first, including the expansion of capacity at recently built greenfield projects. The second step is non-frontier greenfield projects, including the incorporation of new fields into existing infrastructure.

The third step is frontier greenfield projects. These three steps will require different examinations of risk and varying financing structures, the Managing Director said.

Mr. Wirth opined, “Those projects that will be successful are the lowest cost. If you remain bullish on longterm demand, then low-cost wins in the end … It’s about grinding out every bit of everyday operating cost possible, while still operating safely and reliably.”

Mr. Flowers then asked the panelists what the industry is doing to develop new markets, to which Mr. Franklin replied, “I think the opportunities are out there. Our competition, historically, has been liquid fuels. As we move forward, our competition is becoming more complicated. We now have liquid fuels, some coal and some renewable fuels, too.”

“We do have the opportunity to win in that market space,” Mr. Franklin said. “But it must be at a lower price than we’ve seen in the last 20 years.”

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