Investment in the global gas business: 2 factors to consider

Benoit Mignard's picture
Benoit Mignard, Operational Financial Director in charge of Infrastructures and Global BUs, ENGIE
Michel Lebon's picture
Michel Lebon, General Manager Jakarta Office, ENGIE E&P
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IEA long term forecast relatively to gas demand presents very positive development perspectives, with the share of gas in the world primary energy demand increasing even in “green” scenarios (24% in 2040 in the IEA New Policies scenario, 22% in the IEA 450 scenario versus 21% today).

These perspectives are the consequences of the advantages of natural gas. In particular it features less CO2 emissions and less NOx compared to other fossil fuels, it is abundant and competitive. Natural gas appears indeed as a privileged partner of renewables to lead energy markets towards a less carbonated world.

IEA forecasts that 11 TUSD will have to be invested to fulfill the needs on the gas value chain, 80% of them being dedicated to upstream and LNG. However, before carrying out all these projects (characterized in particular by a long time to market), many challenges will be faced, especially in a low oil price environment.

Two major conditions will have to be fulfilled:

  • First condition relates to the control of the level of upstream costs, both in E&P and LNG chain: upstream costs have been increasing for the last 10 years, skyrocketing in 2014. For example, CAPEX in Australian E&P and LNG projects may reach several tens of billions dollars. Major projects are becoming more and more complex, leading by nature to higher breakeven prices and longer time-to-market and face tremendous cost overruns which may jeopardize their economic feasibility. Therefore cost control is really crucial and main players have already initiated cost reduction plans – a global trend emphasized by the situation in oil markets.
  • The second condition is to properly value the positive contribution of natural gas relatively to climate change considerations. Investments in “cleanest” fuels production shall be incentivized by a realistic price set by energy markets for each emitted ton of CO2 to recognize the global benefits of substituting gas for other fossil fuels (eg. coal).

As a conclusion, if those two conditions are met – reduction of upstream costs and proper valuation of natural gas positive contribution relatively to climate change-gas will be able to fully play its role as a major contributor to a less carbonated world.

What other factors need to be considered when investing in E&P and LNG? Let us know your views.

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