November 2023

The last barrel

No longer a by-product
Craig Fleming / World Oil

In 1982, I was working for a small independent producer that operated several gas wells in eastern Oklahoma. The assets produced high-Btu wet gas that was “selling” for around $0.25/ MMBtu, when the low-pressure gathering system would take production. In western/southeastern Oklahoma, home of the mighty Morrow and Spiro gas wells, producers were selling their product for around $2.25-$2.50/MMBtu. But any sign of a warm winter would send HH benchmark prices crashing downward, along with the rig count. It seemed to me that the U.S. had more natural gas than we could use or export at that time, so why were authorities still building coal-fired electric generation facilities?   

Fast forward. Although natural gas prices spiked in August 2022 at $8.81/MMBtu, the commodity at Henry Hub was trading at just $2.98/MMBtu in October. And despite improved prices over the last several months, the 12-month running average at HH plummeted 7% in October, down to $3.02/MMBtu, documenting the protracted decline since August 2022. Years of oversupply, combined with logistical and transportation challenges, have historically stymied a sustained natural gas price rally. However, it appears this trend is starting to change, as aggressive environmental regulations are making gas a major exploration target and valued commodity, rather than a by-product of oil production. 

Hydrocarbons: Market-driven necessity. At the World Petroleum Congress, held in Calgary the week of Sept. 18, Saudi Aramco CEO Amin Nasser said, “the IEA’s prediction that oil consumption will peak this decade and grow at a slower rate in the near term, as the energy transition gathers pace, has been proven to be unrealistic. This notion is also wilting under scrutiny, because it’s mostly being driven by policies rather than the proven combination of markets, competitive economics and technology. There is no quick fix for the energy transition.” 

Natural gas: More than a bridge fuel. Another indication that NOCs and majors are moving back into fossil fuels is the consensus that to lower carbon emissions will require much more natural gas than previously stated. Global producers are forging ahead with new natural gas projects that will make gas an important energy component and a viable clean alternative to help reduce carbon output. This momentum marks a turning point for gas, which environmentalists thought would serve as a short-term bridge while developing cleaner alternatives and would be phased out in the near future. But with the promise of renewables failing to materialize, the idea that natural gas demand will peak anytime soon has vanished.  

“LNG sellers look around this market and feel pretty confident that gas demand will be with us for decades to come,” said Ben Cahill, senior fellow with the Center for Strategic and International Studies. Russia’s invasion of Ukraine, and the subsequent energy crisis and record-breaking price surge, has changed the long-term prospects for natural gas.     

Fig. 1. Significant decline in discovered global gas reserves in MMboe. (Source: Rystad Energy)

More gas needed to meet demand. Global gas requirements are projected to rise in the next decade, requiring a 13% increase in production between 2023 and 2030 to meet demand, Fig. 1. A new report by Rystad Energy forecasts that even using moderate global warming scenarios, existing natural gas fields will not be adequate to meet worldwide demand, requiring rapid growth in unconventional gas supply. Gas-rich basins in the Middle East are well-positioned to play an essential role in closing the supply gap, providing an estimated 20 million tons per annum (tpa) of LNG by 2040. 

The production of gas from unconventional reservoirs has continued to expand, due to technological advancements and increased efficiencies in shale operations (Devon Energy). This rapid growth has driven the global share of unconventional gas supply at a pace that has previously required significantly more time to achieve, escalating from 4% in 2000 to 12% in 2022 and 35% in 2023. The influx of economically feasible gas from unconventional sources and ongoing supply from exporting countries like Russia, has tempered exploration efforts for conventional gas. This is evident, in that nearly 70% of discovered conventional volumes have yet to receive sanctions for development, accentuating the logistically and economic hurdles to developing these finds. 

Middle East takes center stage. Historically, the Middle East has dominated conventional gas production. With the expected increase in gas demand, several Middle Eastern countries are ramping up gas operations as part of their energy transition strategies. “Gas is increasingly considered a crucial stepping-stone to a sustainable future. With reduced emissions and regional energy security goals aligned, gas is poised to play a pivotal role in the global energy transition. The Middle East is a key driver of this shift, slowly moving into developing and increasing gas volumes as part of their energy transition strategies,” says Aatisha Mahajan, V.P. at Rystad. 

ADNOC throws big ESG party.  Officials at Abu Dhabi National Oil Co announced their long-term commitment to developing hydrocarbons by awarding $17 billion in contracts for offshore and onshore natural gas fields with lower CO2 emissions. The company announced the final investment decision during the first week of October for contracts in the Hail and Ghasha Offshore Development project. The venture aims to operate with net-zero CO2 emissions, reinforcing ADNOC’s legacy of responsible natural gas production and supporting its Net Zero by 2045 ambition and accelerated decarbonization plan.  

The Hail and Ghasha natural gas fields are part of Abu Dhabi’s Ghasha Concession, which is set to produce 1.5 Bcfgd before the end of the decade, contributing to UAE gas self-sufficiency and ADNOC’s gas growth and export expansion plans. The first EPC contract for the offshore facilities includes facilities on artificial islands and subsea pipelines. It has been awarded to a joint venture between National Petroleum Construction Co and Saipem S.p.A. The second EPC contract will deliver the onshore scope, including CO2 and sulphur recovery, and handling has been awarded to Tecnimont S.p.A. The offshore EPC contract is valued at approximately $8.2 billion, with the onshore EPC concession valued at $8.74 billion. 

ADNOC carbon capture strategy. The Hail and Ghasha development design combines innovative decarbonization technologies into one integrated solution. The project will capture 1.5 million tonnes per year (MMtpa) of CO2, taking ADNOC’s committed investment for carbon capture capacity to almost 4 MMtpa. The CO2 will be captured, transported onshore and safely stored underground, while low-carbon hydrogen is produced that can replace fuel gas and further reduce emissions. The project will also leverage clean power from nuclear and renewable sources from the grid. The carbon captured at Hail and Ghasha gas fields will support ADNOC’s wider carbon management strategy, which aims to create a unique platform that connects all the sources of emissions and sequestration sites to accelerate the delivery of ADNOC and the UAE’s decarbonization goals. 

Middle Eastern LNG investment. ADNOC also awarded a contract valued at $400 million to Baker Hughes for the supply of all-electric compression systems for the liquefaction of natural gas to be powered by clean energy, for its low-carbon LNG asset in the Al Ruwais Industrial City, Al Dhafrah, Abu Dhabi. The LNG trains will be comprised of energy-efficient Baker Hughes technology, including compressors, driven by 75-MW electric motors. The Ruwais LNG plant will be the first LNG project in the Middle East and North Africa region to run on clean power, making it one of the lowest carbon intensity LNG facilities in the world. The Ruwais LNG project consists of two 4.8 MMtpa natural gas liquefaction trains with a total capacity of 9.6 MMtpa of LNG. When completed, it will more than double ADNOC’s LNG production target capacity to meet increased global demand for natural gas. 

Fig. 2. The Leviathan reservoir is one of the world's largest deepwater gas discoveries of 2000-2010. It is the largest energy project in Israeli history. (Source: Chevron)

Chevron to pursue Israeli natural gas expansion. Despite the Hamas-Israel conflict, Chevron announced plans to continue to pursue expansion plans for natural gas developments in Israel as part of its long-term view for the fuel’s future. The company hasn’t changed its mind on expansion at its giant Leviathan field (Fig. 2.), which has helped Israel gain energy independence and turn into a fuel exporter, said Chevron V.P. Colin Parfitt. 

While production at Leviathan has continued, the outbreak of the conflict had led to the shutdown of Tamar, another major field operated by Chevron. However, after five weeks, Chevron announced on Nov. 13 that it had resumed production from Tamar. The company said that it had been instructed by the Israeli government on Nov. 9 to resume output.  

Although recent events are concerning, there is no change to long-term plans for the gas-rich region. “Ours is a long-term business. You have to be able to see through this,” Parfitt continued. “There is gas in the Eastern Mediterranean that is a good logistical supply fit to supply European demand for gas—and Iseral is still an attractive geographical location for gas to supply.” This position was supported by Chevron CEO Michael Wirth, who said the company is taking a long-term view “measured in years and decades” as it develops projects. 

Path forward. Chevron’s East Mediterranean projects are part of a portfolio that also includes LNG plants in Australia and Africa. The company is evaluating the best way to bring natural gas from that region to global markets, with options including existing Egyptian LNG plants or a new floating liquefaction facility. Chevron believes in a long-term future for gas, particularly in Asia, where nations such as India and China still need to displace coal in power generation and where population growth leads to an increase in demand. Europe also still needs new supplies to replace lost Russian volumes, Parfitt concluded. 

About the Authors
Craig Fleming
World Oil
Craig Fleming
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