CERAWeek 2014 - Changing Landscape of North American Gas

This North American plenary addresses the critical questions shaping the future of Natural Gas in North America:

1) Can the projected demand growth be served by the upstream sector? Can the industry develop the necessary infrastructure, and do it on time? 2) Are the resource estimates real or overestimated? Or, as is typically the case, are the true numbers going to turn out to be much larger after technological progress and exploration have their way? 3) Is price volatility a thing of the past? Or is it part of the territory? 4) What and how will environmental policy affect the shale boom? How can the industry address public concerns over fracking, chemicals used in fracking, produced fracking water, methane venting during completion, and so on. Will the government kill the golden goose? 5) Will natural gas displace oil, especially in transportation , and to what extent might this impact global oil markets and geopolitics? 6) LNG exports: why are the US terminals winning the battle against the Canadian projects? 7) What are the strategic threats to gas and potential surprises (for instance continued rapid fall in the cost of solar)

Bob Ineson, Managing Director, North American Natural Gas, IHS, opened the Wednesday afternoon Plenary "Changing Landscape of North American Gas" by asking panelists to reflect on the issues facing the gas industry today such as the short-term effects of the cold winter, the pullback in drilling activity, and institutional and environmental challenges. Colin Parfitt, President, Supply and Trading, Chevron Corporation, remarked that North America is uniquely positioned to make use of the shale resource advantage. The strong knowledge base and experience, continued adaptation to upstream challenges, and transparent regulatory system have allowed cheaper production of increasing quantities of natural gas. The growing interest from end users is good news for the industry, and the spillover effects to the broader economy are strong. Although gas prices have fluctuated recently because of the cold weather, volatility has been more subdued than it would have been years ago owing to the gas infrastructure improvements that have taken place since.

Lamar McKay, Chief Executive, Upstream, BP Plc, acknowledged the vast scale of the gas resource base in North America, but also mentioned that the shale revolution was possible in part because of both good pipeline infrastructure and private ownership rights. Barriers to entry in the industry are practically nonexistent, which encourages innovation and experimentation by multiple parties. Mr. McKay commented that the recent decrease in gas rigs is more than offset by growing efficiencies in drilling and completion. The impact of shale gas on the global energy industry is undeniable and has major geopolitical implications. Gregory Ebel, President and CEO, Spectra Energy, President and CEO, Spectra Energy Partners, stated that the supply discussion has moved from concern about the resource base to the ways of bringing supply to market. Nearly $1 trillion must be spent on gas infrastructure expansions in the next 12 years. Projects are going forward, but delays are occurring mostly owing to intra-agency delays following Federal Energy Regulatory Commission approvals. Mr. Ebel illustrated his point about infrastructure additions mitigating price volatility by discussing Spectra's recent completion of a 12-mile pipeline lateral into New York City and its effects on price premiums. He suggested that there is a place for liquefied natural gas (LNG) exports out of both the Gulf Coast and British Columbia, as long as the regulatory structure is sound and mitigates the investment risk. Mr. Ebel commented that the gas industry must constantly be on its toes regarding operations safety and emissions, and carefully monitor public opinion.

The question and answer session began with a discussion on the possible consequences of the cold winter. The panelists again underscored the resiliency of the infrastructure and dispelled notions that the price volatility is scaring new end users or threatening use by established customers. Mr. Ebel shared a concern that the small percentage of firm contracted pipeline capacity by power generators, the largest growing demand segment, is not a good phenomenon. He also stated that regulators must find ways to facilitate the build-out of infrastructure where it is necessary, keeping in mind that the benefits significantly outweigh the costs. With regard to LNG plants in British Columbia, all panelists singled out First Nations as the wild card for progress. Canada has an excellent resource base and location for such projects, but each possible facility will have to go through the full "pluses/minuses" checklist before proceeding.

Questioned about the state of the pipeline industry, Mr. Ebel said that Spectra has spent about $1 billion evaluating and upgrading existing infrastructure. Looking at the future, he said he is not worried about steel costs, but qualified workforce availability is a real challenge. Many pipeline companies contracted in the early 2000s and have not quite recovered, requiring partnerships with engineering providers. Mr. McKay commented that the gas industry has responded well to challenges to its environmental and water footprint and will again do as required. Mr. Parfitt added that all criticisms need to be kept in perspective: natural gas is still the cleanest burning fuel, despite its perceived pitfalls. The panelists said that the biggest wild card ahead seem to be changes in perception about reliability versus what actually unfolds in the gas markets. Fundamentals do not mislead, but sometimes perceptions get out of hand.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.