The Last Barrel

Several major international energy companies plan to transition their business models in the next several decades to a mix of renewables and traditional fossil fuels. The shift will enable them to focus on creating less carbon dioxide and address shareholder concerns about governmental regulations focused on carbon pricing mechanisms. The new business models are designed to help meet oblations outlined in the UN’s Paris Agreement on climate change.

At CERAWeek 2017 in Houston, Royal Dutch Shell CEO Ben van Beurden said that he expects energy demand to increase significantly in the next 15 years. To satisfy the new and emerging markets, Mr. van Beurden said that Shell is looking at LNG and alternative energy methodologies, including offshore wind generators to help provide cleaner energy solutions.

Renewables. While reports vary on degree, green-energy proponents are touting wind and solar as viable major source-of-supply alternatives. However, during a three-person global gas plenary session at CERAWeek, LNG guru and Tellurian CEO Charif Souki lambasted the “keep it in the ground” initiative as basically a “racist” concept. “We take such talk very seriously. There are millions of people in the world that have no access to electricity or clean fuel to prepare food. Renewables won’t address today’s problem of providing quick access to fuel to those without power.” These green-energy groups are narrow in their understanding of the role hydrocarbons play in our world and developing our quality of life, according to Mr. Souki.

Another major benefit that green-proponents would deny underdeveloped nations are the significant economic gains that come with E&P activity. These include untold numbers of high-paying operational/manufacturing jobs, and lease bonuses and legacy payments to royalty owners and government agencies. Through sheer arrogance, these “keep it in the ground” advocates want to deny developing countries and the next generation of citizens an opportunity to build on today’s technologies and enjoy abundant, reasonably-priced energy supplies. These enviro-groups, and their super-hero members, should perpetuate their cause leading by example, and leave the work of satisfying the world’s energy requirements to the professionals.

Emerging LNG markets. The LNG market is strong, and industry leaders are optimistic about the future. In 2016, 270 million tons (MTPA) were traded globally and by 2019, that amount is projected to increase 35%, to 365 MTPA. The bulk of the new supplies will come from three areas, including the U.S. Gulf Coast (65 MTPA), Qatar (81 MTPA) and Australia (87 MTPA). Much of the demand for growing LNG supply will come from emerging markets, according to PETRONAS President Datuk Wan Zulkiflee Wan Ariffin.

“Seventy percent of the growth in LNG demand will come from emerging markets, including Southeast Asia, India and Pakistan.” Between 2016 and 2035, demand in Southeast Asia should grow by 11% annually, with 7% in Pakistan; India’s LNG market will grow 6% annually through 2035.

U.S. capitalizing on LNG exports. Historically, the geological philosophy in the oil patch was to find “less shale and more sand.” The search for gas reserves in porous and permeable sediments reached a frenzy in the early 1970s, when wildcatters drilled two 30,000-ft wells in western Oklahoma, searching for the elusive resource. How times have changed! The chance of missing a shale pay zone is virtually zero, and these formations, once considered too “tight” for commercial production, have dramatically increased U.S. reserves and enabled companies to produce large volumes of gas without supply disruption. The shale boom has caused the EIA to raise its U.S. reserve estimate to 2,000 Tcf, with shale “reservoirs” accounting for 480 Tcf of the total.

The abundant supply was created by new efficiencies in prospect selection, horizontal drilling and hydraulic fracturing methods, tools and techniques. This, combined with shale’s short ramp-up time, has finally given U.S.-based LNG exporters a chance to return to profitability. Thanks to the vision and tenacity of innovators like Charif Souki, Cheniere Energy’s Louisiana liquefaction facility shipped its first cargo of U.S. shale gas to Brazil in February 2016. Since then, the company has been benefiting from higher prices for its LNG products, with prices hitting $7.50/MMbtu in January, eclipsing the 2016 high of $6.20. A total of 15 tankers sailed from the terminal in January/February, the highest volume reported since the facility opened early last year.

Since its inception, Sabine Pass has sold gas from America’s shale basins to various end-users, including Mexico, Japan and Jordan. Mr. Souki added, “The U.S. is the low-cost gas provider in the world.” The Haynesville can yield product for about $1.50/MMbtu, while costs are less than $1 for Marcellus/Utica, Eagle Ford and the Permian. The flammable vapor now trades for around $3/MMbtu on the Gulf Coast, while liquefying costs $2.50/MMbtu and shipping adds another $1.50. Considering that LNG brings $8 in established markets like Japan and Korea, the profit margin is acceptable, for now. The situation, aided partially by favorable legislation, enabled Cheniere to turn a profit in the fourth quarter of 2016, its first since 2010. If the trend continues, the U.S. should become a net gas exporter by next year.

Win-win-win. A report by IHS Markit on the economic impacts of shale gas estimates that for every billion cubic feet of daily production, approximately 32,000 total jobs are supported throughout the economy. The additional gas production, associated with exports, will generate billions annually, filling federal/state coffers while reducing the nation’s trade deficit. While we need to ensure the best possible outcome while producing energy, the path forward is perfectly clear. 

About the Authors

Craig Fleming

World Oil

Craig Fleming Craig.Fleming@WorldOil.com