The role of natural gas in the oil industry is being redefined, with gas taking an increasingly vital role in future sustainable energy growth, said energy experts Feb. 11 at Cambridge Energy Research Associates' annual energy forum in Houston.
"By 2025, gas could overtake oil as the global No. 1 fuel of choice, especially in [electric] power [generation]," Malcolm Brinded, managing director of Royal Dutch/Shell Group and CEO of Shell Gas & Power, told a packed plenary session of oil and gas personnel from around the globe. Brinded forecast that gas could fuel 70% of industrial and commercial power markets by that date.
Fellow panelist David Thomlinson, chief executive, resources, of Accenture Group, said that demand for natural gas would double by 2030. "Natural gas is 'The Prize' of tomorrow," he said, adding that, in the future, oil companies may be known as gas companies. "Many companies are already into LNG."
John Gass, president of ChevronTexaco Corp.'s global gas unit, concurred, saying that the growing world demand for gas was one of the "two powerful forces" sweeping natural gas. "In Europe, gas demand is projected to grow 2-3%/year for the next 20 years," to 65 bcfd from 45 bcfd, he said. And in North America, producers will have to drill more and more wells just to stay even. "Gas demand [in North America] is projected to grow roughly 1%/year" to 85 bcfd from 70 bcfd over the same period.
"In fact, through 2020, on the way to replacing coal as the world's second most important primary fuel, gas is expected to grow twice as fast as oil," Gass said.
Redefining factors
Among factors leading to the increased gas usage is its abundance. "There's plenty of gas available," Brinded said, adding: "Global gas resources have been much less explored than oil. In the last decade, four times as many oil exploration wells have been drilled worldwide as gas wells, which tend to be put on hold until markets develop."
Concerns about climate change—along with the decline of oil availability—are other factors that will continue to push the ascendancy of natural gas as the primary fuel, Brinded said. "Environmental benefits are an increasing driver for rising gas usage—at the local air quality level as a very clean-burning fuel—and at the global level because of the CO2 emissions advantages." He urged the industry to promote that knowledge. "Young people need to think as positively about gas as they do about renewables," he said, adding that gas will be as vital as solar and wind to climate-friendly energy initiatives in the next 20 years.
Despite their high costs, the development of LNG and gas-to-liquids technologies enabling monetization of stranded gas is fundamental to the new role of natural gas, Brinded said. "I believe this is a pivotal moment for the LNG industry, poised for a period of massive growth." Larger LNG trains and carriers are being built as a bridge to rapidly developing markets, especially in North America, "where indigenous supply is struggling to keep up with demand," and in the Asia-Pacific region, where China, South Korea, and Taiwan are beginning to show new demand growth.
And best of all, Gass added, the cost of LNG development, is rapidly decreasing. That is the second "powerful force" affecting the demand for gas, he said. The production cost of LNG facilities and tankers, although still staggeringly high, has dropped by as much as 30% in the past few years, he said.
Ralph Alexander, BP PLC's chief executive of gas, power, and renewables, said LNG development "continues to break the cost barriers." He predicts those costs will continue to drop by 3%/year.
Redefined marketplaces
Natural gas is becoming a completely different business altogether, Gass noted, and one that is redefining the marketplace. Flexibility is key.
"Future relationships between customers and suppliers are being redefined," replacing a straight line with a global web, "that will link buyers and sellers anywhere and everywhere," he said.
"Producers can tap previously unopened markets, meet once-unattainable environmental goals, and commercialize their gas resources," he said.
Natural gas is increasingly a global commodity, sourced from greater destinations, the speakers agreed. "Overall, international sales of LNG will increase between the major gas suppliers and markets," Brinded said, provided the right policy frameworks are in place in both exporting and importing countries, and these sales primarily will be predicated on long-term take-or-pay contracts.
"Traditionally, there has been virtually no spot market in LNG, but such a market is clearly starting to develop as the number of projects and destinations steadily increases," Brinded said. "I believe that the scale of any LNG spot market, however, will remain limitedUto about 10% of the total," due to transportation costs, receiving terminal constraints, shipping availability, "and most important of all, the huge amount of investments on either end of the LNG value chain." Accenture's Thomlinson added that European participants in spot markets increasingly are exposed to risk.
Brinded also said another $100 billion investment in infrastructure would be required over the next 10 years. That is one thing that isn't changing, panelists agreed. Despite all the cost improvements, "staggering investments are still required to take part in this business," said Gass.
"Developing new, greenfield LNG plants calls for outlays of $2-3 billion each, and more than a dozen such projects are on the books right now," Gass said.
"Regasification plants cost another $500 million to $1 billion. Every LNG carrier cost $150-200 million. And, world-scale GTL plantsUrequire sizable investments.
"It's going to take big players with deep pockets, not to mention commercial and technical capability and courage to step out on such a stage," Gass said.
GTL
GTL production also is "an attractive proposition on a world scale," Brinded said, with a whole new GTL industry rapidly developing. The focus on air quality favors fuels from GTLs that give high performance, yet have lower, cleaner emissions than conventional, oil-based fuels.
Declining cost trends will unlock more GTL demand, he said, as more people gravitate to urban environments. "Remember that, by 2020, more than 2 billion people will live in cities of over 1 million people," Brinded said.
Diesel, driven mostly by European demand, Gass said, is "the crude barrel's fastest-growing cut." However, in the US, he said, "diesel has been held back for performance, environmental, and 'image' reasons." He said that GTL diesel contains no sulfur and no aromatics, and boasts impressive power ratings. "I believe that GTL will redefine the marketplace for synthetic lubricants, making these products far more cost-effective and widely available than is the case today."
Business changes
Although many things will change, Brinded said, much also will remain the same in the gas business, including the need for solid, long-term relationships—both company-to-company and country-to-country—long-term contracts, and reliability and safety.
BP's Alexander said the US is losing its competitive edge in natural gas because of continuing high prices. He said CERA predicts that the price of natural gas will remain just under $5/Mcf in the US during the next 3-4 years and in that case, gas will lose market share because of fuel-switching to coal and fuel oil.
He said the customer is the most important to keep in mind, and the US market has the "most worried customers in the world. We must deliver a product that convinces the customer to continue using gas," Alexander said. Companies must offer customers better products and services and guarantee supply. "Customers can't take the risk that long-term supply will be disrupted."
To that end, Alexander said it is important to innovate in getting gas out of the ground in the Rockies and to develop solutions to unlocking Alaska's North Slope gas resources.
Thomlinson advised vertical integration for companies, along with heavy investment all along the value chain. Vertical integration, he said, enables a company to monetize stranded gas, capture margins driven toward retail, and leapfrog its brand with growing importation of gas. He cautioned, however, that vertical integration would not work in all markets—in the US today, for example.
In closing, Gass said, "In the 20th Century, it took partnerships among companies, communities, and countries to launch the global oil business, and in the 21th Century, it will take the same spirit of cooperation to launch the global natural gas business. And just as decades ago, oil redefined energy as a new engine of economic growth, today natural gas is redefining energy in ways that can lift lives."
