On behalf of BG Group, it is my privilege to welcome you to Gastech 2012. We are delighted and honoured to be hosting this year’s event here in London.
And, it’s great to see so many friends, old and new, from all over the world. Gastech always provides a fantastic opportunity for networking and exchanging ideas with other industry professionals.
I can’t promise an opening quite as gripping as that other big global event held in London this year. Her Majesty the Queen won’t be parachuting in with the help of James Bond to get our proceedings underway!
But you won’t be disappointed with this year’s programme. Because there has never been a more exciting and important time to debate the global future of gas.
In fact, the pace of change is probably faster than at any time in my 38 years in the oil and gas industry
We’ve already seen how the impact of LNG, combined with the huge expansion of inter-regional pipelines, is transforming the market reach and liquidity of gas.
And, now there are two new factors driving change at an even faster pace. Both are linked to unconventional resources.
In the United States, unconventional gas is giving the country a new industrial competitive advantage in terms of low-cost energy supply.
In Australia, the development of unconventional gas is taking place on a scale that is set to make the country the world’s largest LNG exporter.
The trends taking place are irreversible. And yet the evolutionary path is never entirely predictable. As markets develop and grow there are always new boundaries and challenges to negotiate and overcome.
And it worth reminding ourselves that in the midst of all this change and technical innovation, we must never forget to put ourselves in our customers’ shoes. We need to think about the questions they will ask and the issues they face.
Knowledge of markets and customers’ specific and changing needs are key. We need to show customers how gas is the solution to their energy challenges.
The Nobel-prize winning American economist Paul Samuelson once said, “Good questions outrank easy answers”.
So ahead of the discussions that will take place over the next two days I’d like to start the ball rolling by posing some questions and offering some preliminary ideas.
The first question is indeed a matter of economics. What impact is the world economic slowdown having on supply and demand for global gas and LNG?
The second question is about LNG specifically. How is it changing today’s gas industry? Will LNG and inter-regional pipeline gas be capable of creating a fungible, globally traded gas market?
The third question is about unconventional gas resources, especially shale gas. Will these resources change market dynamics? What actions does the industry need to take to reassure stakeholders and protect our licence to operate?
Separately, but pertinently, how do we reflect on the superficial view that the world will become awash with cheap US gas supplies? Some suggest the burgeoning export business could amount to 100 million tonnes per annum. Is this likely and how would this impact our industry?
Which brings me to the issue, the executive leadership panel are going to be discussing next. Have we entered the golden age of gas? To which I might add, will fair returns be made in such an era?
I look forward to hearing debates on these and other questions over the course of this conference. To start the ball rolling, here’s what I believe the evidence suggests.
IMPACT OF THE GLOBAL ECONOMIC SLOWDOWN: While the economic slowdown continues to affect industrialised countries, emerging markets are still doing well overall. Both China and India are predicted to grow at enviable rates.
We see demand for gas growing at a compound rate of 2.6% per annum through to 2025.
In just 10 years China has gone from barely registering in global energy markets to being the largest single energy consumer in the world.
Between now and 2025, China and India alone are projected to add 60% more in terms of GDP than the combined total of the US, the EU and Japan.
But China faces huge challenges too. It is impossible to say whether it will be able to overcome them or not.
However, steps are already being taken to achieve the transition to a more sustainable growth pattern. The Chinese Government has significantly shifted investment from export-oriented eastern provinces to the less developed interior provinces.
The composition of China’s GDP has also begun to shift. Net exports have begun to drop and domestic consumption is rising. These are all positive signs.
Looking forward, China and India will more than double their share of global energy demand by 2025. Their total will rise from 16% to 37% of all energy consumed, driven primarily by growth in power generation.
To meet all this expansion in energy demand, gas will increase its market share, and LNG will play an increasingly important role.
HOW LNG IS CHANGING TODAY’S GAS INDUSTRY: LNG has already made a huge difference to major economies in the Asia-Pacific rim. They are enjoying the long-term benefits of stable contracts and diversity of supply. Japan continues to lead the way, but we expect China to be the second largest importer of LNG by 2025 with India third.
Japan’s partial approval of a plan to phase out nuclear power brings into question what other sources of energy they may turn to, to power their economy.
Last year, Japan imported nearly 80 million tonnes, a 13% increase over 2010. Imports this year are likely to be even higher due to the prolonged nuclear outage. Next year could see imports approaching 90 million tonnes, close to Japan’s maximum import capacity.
Reduced nuclear power may trigger the building of additional gas-fired generation capacity and conversion of older power plants to more efficient models.
Constant innovation has enabled the industry to make LNG readily available, secure and cheaper than many other energy sources.
So much so, that last year LNG accounted for 10% of all natural gas consumed. That share is expected to grow to 14% by 2025. This means that the LNG market would grow from 240 million tonnes per annum today to around 450 million tonnes by 2025.
It’s fascinating to recall, for a moment, that global trading in LNG began just a few miles down river from here. The story is part of BG Group’s heritage. Back in the 1950s, long before North Sea gas was discovered, the UK began looking at LNG to diversify its sources of gas and ensure security of supply.
A converted naval vessel, the Methane Pioneer, embarked on a historic transatlantic voyage from Lake Charles in Louisiana to Canvey Island in the Thames. The voyage was stormy one, but a success that paved the way for the first LNG export scheme – a 15-year contract for Algeria to supply the UK.
Since then, the industry has crossed numerous technological and commercial frontiers. From the pioneering work to develop ocean going transportation half a century ago, to the evolution of gas as a commodity traded worldwide.
That process of change is still only in its infancy. A truly fungible market will need much larger short-term traded volumes. More sources of supply. More destinations. Disaggregation of the gas value chain and access to the end customer.
Oil, of course, has all of these things, and in most markets. Building the same model with gas will take time. But I believe that fungible global gas markets will eventually come, but I think this will take several decades yet to perfect .But there is no doubt an irreversible trend is underway that will change global energy dynamics for good.
You can trace the origins of this trend back to start of the new millennium, when BG Group took capacity at Lake Charles from 2002. That was when we first used the commoditised and liquid nature of the US gas market to underpin long term LNG take or pay offtake agreements.
This move was accompanied by a new concept of ‘Destination Flexibility’ that would enable BG Group to divert LNG volumes to other markets, depending on price signals. The result was a new, flexible LNG trading model, anchored in the liquidity of the US gas market, and not dependent upon traditional long term fixed point-to-point agreements. This yielded an ability to divert cargoes at short notice to respond to changes in demand patterns and customer requirements. A new LNG business paradigm was thus born.
GOLDEN AGE: So, looking now to the future, is this truly the dawn of a new “golden age” for gas?
There are convincing reasons to think so, most visibly in the US and Australia.
Gas is an affordable, increasingly abundant, secure and relatively low-carbon form of energy. It is a growing part of a diverse energy mix. It is not, in my view, just a “transition fuel” on the path towards a less carbon-intensive future. Rather I see it as a “destination fuel”; a permanent feature of the energy mix and an excellent long-term partner for more costly, intermittent sources of renewable energy.
Throughout history, the term “golden age” has been characterised by fresh thinking and great individuals who have pushed boundaries.
I spent some of my career working in the Netherlands and one of the fascinating things I remember about economic growth in the Dutch golden age was the supply of cheap energy from windmills and peat.
Now in the US, the supply of cheap energy in the form of gas looks set to be the catalyst for an industrial renaissance there.
Barely five years ago the US expected to be a big gas importer. Today, at current production rates, it has enough gas to last for more than a century. And it will soon be an LNG exporter too.
And here’s another landmark. The second quarter of this year was the first period in which natural gas and coal contributed equally to power generation in the US.
That’s good news for US energy related CO2 emissions. They have already fallen by 450 million tonnes over the last five years due to switching from coal to gas.
The International Energy Agency predicts that global gas reserves will last for 250 years at current rates of production. That gives the world an abundant energy source that is economic, increasingly fungible, and that has lower carbon intensity than other fossil fuels. The reserves life of gas is now 100 years greater than coal and two hundred years greater than oil.
However, every golden age has its challenges and gas is no exception. We need to grow the industry’s licence to operate and continue to ensure the highest level of environmental performance.
Our licence to operate cannot be taken for granted. The crucial challenge for the industry here is to set standards and self-regulate. Consumers and communities must have confidence in us and it is our job to earn that confidence.
Unless we set ourselves the highest of standards, we risk facing a variety of regulatory controls. Controls that will not necessarily deliver the highest standards or most cost-effective solutions.
So, have we entered the golden age of gas? Gastech 2012 will form its own view. For me the answer is an unequivocal and resounding ‘Yes’.
On to the next big question. Will the world soon be awash with cheap US gas, given the prospect of new US LNG exports? And if so, how will this impact the industry?
THE IMPACT OF US LNG EXPORTS: Many countries face tough decisions and choices about diversifying future energy supply.
It is natural for countries to hesitate while they consider the issues. What effect might US exports have on global supply? Will other countries also enjoy an unconventional gas windfall? How should government’s best take advantage of the benefits of new, flexible sources of supply?
I’ll tell you what I believe the likely outcome will be. Firstly, although we expect to see a substantial volume of US LNG exports, given expectations of increasing gas demand, the impact will not be overwhelming. Global markets will require substantial volumes from new non US sources as well. That means, in turn, that US domestic gas prices cannot be the ultimate determinant of gas prices in other global markets.
US exports undoubtedly have the potential to inject additional beneficial flexibility in the LNG system. But we do not expect to see this drive a full convergence of Henry Hub and Asian term prices. In fact, we expect gas prices to remain highly regionalised for the foreseeable future.
This view is based on a number of key factors. The first is a simple matter of relative costs. The cost of turning gas into LNG in the US and shipping this LNG to Asia exceeds the current US gas price.
Conversion and transportation is very capital intensive, as well as knowledge and time-intensive. Just think about the geography. Yokohama is on the other side of the world from the Gulf of Mexico and customers there simply won’t be able to enjoy Henry Hub level pricing. Also LNG manufacturers and traders will need fair reward to invest and take substantial venture risks.
And it will take time before US exports begin to have any influence. Only one US export project is proceeding, meaning the first shipment of LNG out of the US is still three years away. The US Government has yet to take a decision on exports beyond this first project.
So if Henry Hub doesn’t become a global gas price marker, will LNG continue to be oil indexed? I think it will for a number of reasons
The capital costs of gas production facilities themselves tend to move in line with the oil price over time, primarily because oil and gas projects compete for the same goods and services.
Also, sellers must be sure that each phase of multi-phase conventional developments will deliver adequate returns; and buyers want this too, to vouchsafe long term security of supply. The pricing basis where both sides have been content to transact has historically been provided by a globally transparent and relevant oil price indexation.
There’s another major factor to consider when weighing up the likely impact of US LNG exports. As an industry, we frequently tend to over-estimate our future supply prospects. And I wonder whether we are not in danger of heading the same way with regard to the current optimism about supply.
Remember that LNG projects are quite difficult to deliver.
More generally, the scale of the gas supply challenge is daunting. By 2020 production from existing fields will decline by 15 hundred billion cubic metres per annum. At the same time we expect demand to increase by more than 900 bcma. That adds up to a requirement for 24 hundred bcma of new supply in just nine years. That’s a supply growth rate of more than 9 per cent per annum, requiring some 2 trillion dollars of investment.
So, with or without US LNG, meeting future gas demand will be a huge challenge that will test our industry to the limits.
CAPITALISING ON THE OPPORTUNITY: As Albert Einstein famously put it, “in the middle of difficulty lies opportunity”. And I’d like to bring my remarks to an end by reflecting on what else the “new” LNG industry needs to do collectively if we are to seize the huge opportunity that now exists.
Decisions on security of supply, which affect the whole industry, are being made as we speak. Many countries have not yet made up their minds about their preferred options. If a new “golden age” of gas is to become a reality, we need to take a fresh approach and adopt a consistent message across the industry.
That will necessitate a bold, new, collective approach to advocacy. We must ensure that governments and consumers have a better understanding of the benefits of natural gas.
We are going to have to do a better job at explaining those benefits, as well as any uncertainties about, for example, fracking in the production of unconventionals. And the confidence of governments that gas not only features along the path to a lower carbon future but is, in fact, a “destination fuel”; one that forms an integral and vital component of a balanced energy policy.
Ensuring that natural gas remains competitive is vital. Cost and availability are key. And we must never forget that in the end it is all about our customers.
I very much look forward to hearing some of your ideas about these and other issues during the conference.
GOING FOR GOLD: In conclusion, despite the pace of recent change, further evolution is inevitable. The winners will not necessarily be the most intelligent but rather the most adaptable.
The industry of 2030 will be vastly different from the industry of today. New technologies and fresh ideas will have re-shaped the realities we now take for granted in ways we can scarcely imagine.
It would be foolish to try and predict the exact shape and dynamics of that future. Yet we are in the business of doing the impossible. And our collective track record of achievement is nothing short of remarkable.
Let’s follow the inspiring example of athletes at the London Olympics like Kenya’s David Rudisha. He set a new world record and won the 800 metre gold medal. He said modestly afterwards “Today the weather was beautiful and I decided just to go for it.”
Let’s do the same – in the new golden age of gas, let’s go for gold.
Ladies and Gentlemen, thank you for your attention.
Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.