The World Gas Conference 2018 reaffirmed natural gas's dominant position in the energy mix. That really was no surprise. International oil companies, in particular, have been focused on “gasifying” their portfolios. They foresee a bright future for this source of energy. But turning the promise of gas into reality won’t happen automatically. It will require oil and gas companies to do three things differently.
Drive value by facilitating new demand, disintermediating value chains and scaling new business models.
While the industry anticipates demand for natural gas to climb in the coming decades, that growth is not a given. A lot depends on how the value chain evolves. Most of the global growth in demand is expected from developing countries in Africa, Latin America, and South and Southeast Asia. However, the value chains in these countries are not as mature as in more developed markets. In many cases, the last mile is broken, with no distribution network from the regasification terminals to end uses. As a result, the latent or pent-up gas demand cannot be met. We’ve seen that scenario unfold in several liquified natural gas (LNG) regassification terminals in India.
We believe there is an attractive opportunity for existing players that are able to break through this bottleneck in the value chain. The investment could take various forms. A simple example could involve laying pipelines or establishing truck fleets to take the LNG from regasification terminals to various end-use customers, such as fertilizer manufacturers, utilities, petrochemical companies or others. A more sophisticated example might involve establishing a fully integrated value chain where LNG producers become utility players, public transportation providers, or manufacturers of sustainable petchems-based materials, ammonia or carbon fibers in the end-use countries. Finally, there is still headroom to drive incremental demand for LNG globally through alternative uses, such as LNG bunkering and LNG retail, and also through smaller-scale (and often modular) LNG plants and regasification infrastructures.
Adopt a transformative cost mindset and digital technologies to significantly improve the relative economics of gas.
Operators need to stop thinking that low gas prices are a temporary phenomenon and start thinking how to generate healthy margins at these or even lower prices. As was made clear at the conference, the long-term race for energy supply dominance is on between gas and renewables. The future will be defined by even greater competition between gas and renewables, primarily because renewables are expected to rapidly improve their cost structures.1 In that scenario, operators will need to realize that there is 30-50 percent value trapped in hydrocarbon development. Our research and client engagements demonstrate that oil and gas operators can reduce CapEx by 10–20 percent and OpEx by 20–30 percent.2 This can be achieved by leveraging and orchestrating zero-based-budgeting, digital technologies and agile business models. In other words, there is money to be made at $3 Henry Hub (HH) prices, and even below.
Put methane emissions back on the agenda as it makes both economic and environmental sense—and the industry has the wherewithal to manage this challenge.
The exploration and production industry is fast realizing that costs associated with reducing methane emissions are more than offset by concurrent economic and environmental benefits. Reducing current emissions by a third would generate billions of dollars in annual savings, just in the United States alone. On a hyper-competitive energy supply curve, that can be a game changer.
In addition, in the face of the growth of renewables, the hydrocarbon industry now needs the social license to operate. Operators should use their emission-reduction efforts to not only influence public opinion, but also act as a differentiator against competitors that lag. Several leading oil and gas companies have already pledged to adopt and sustain high standards for methane reduction. And there are both mature and nascent technologies for leak detection and repair (e.g., distributed detectors, manual infrared imaging, flame ionization detectors, etc.), drones with infrared cameras, plunger lift systems, and controllers and dehydrators to monitor, detect and control emissions. More recently, Artificial Intelligence platforms that analyze, optimize and refine the management of complex gas systems have started to emerge and should become more prominent going forward.
Is gas the fuel of the future then? Yes. But considerable effort is needed to make that happen and usher it into its golden age characterized by higher returns (see figure below) and lower emissions.