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CERAWeek 2022: Balancing near-term energy security with long-term energy transition

07 March 2022 Kevin Adler

With the turmoil and turbulence in global energy markets, the energy transition must be balanced with the need to stabilize prices and meet rising demand for fossil fuels, said three corporate leaders on the opening morning of CERAWeek 2022 by S&P Global.

At the same time, they said that the oil and gas industry is not forsaking its critical role in making the transition to a lower-carbon future—and that it's already made great strides in that direction.

"It's absolute bedlam … just chaos" in oil and gas markets, said Tengku Muhammad Taufik, president & group CEO, Petronas, in a panel discussion on 7 March in Houston. "There's really no fundamentals driving it [prices]."

"The focus right now should be on energy security," said John Hess, CEO of US oil and gas producer Hess Corporation. "The global oil market already was tight going into the Ukraine crisis. There's very little spare capacity. There's no cushion in the system if we have more interruptions [of flows] from Russia."

Calling the tightening market an energy "emergency," Hess said that the US and other nations should arrange for releases of 120 million barrels of oil from international reserves this month and commit to another 120 million barrels next month.

In a move coordinated by the International Energy Agency (IEA) last week, certain states agreed to sell 60 million barrels of oil from their national emergency reserves to show "global oil markets that there will be no shortfall in supplies as a result of Russia's invasion of Ukraine." The 60 million barrels released so far is only 4% of the world's strategic stocks, Hess noted.

Taufik agreed, but he warned that "there's almost a mirage that there is spare [production] capacity to be brought out."

Beyond the crisis

Whenever the market returns to a more traditional balance, the executives said that the lesson is that oil and gas—especially gas—are needed for the energy transition. They dispute the argument that oil and gas are the problem, as has been the claim by proponents of rapid phaseout of coal, oil, and gas.

"The energy transition is going to take time," said Hess. "Oil and gas are going to be needed for decades to come." Hess cited an IEA analysis that $400 billion needs to be invested in replenishing oil and gas production every year for the next 10 years. Oil and gas producers underinvested for several years in order to improve profitability, and then further slammed on the brakes during COVID-19, and "now we're paying for it," he said.

For Petronas, the national energy company of Malaysia, 70% of its portfolio is natural gas, and Taufik said, "bringing gas molecules forth should be our [the world's] priority."

Not only is natural gas a clean option, but it provides affordable energy for the emerging world, Taufik suggested. "Whatever transition we embark on must be just and responsible ... We have allowed for too long the perfect to be the enemy of the good. There are available technologies [such as carbon capture] that can be embraced today" to reduce emissions, he said. "We need to do what is readily doable."

LNG as a solution

One company that's "doing what is readily doable" is Cheniere Energy, the largest LNG exporter in the US. On the eve of CERAWeek, Cheniere announced hiring Bechtel to build 10 million metric tons (mt)/year more liquefaction capacity at its Corpus Christi, Texas, facility. This $7-billion commitment will bring the company's investment to $47 billion, said CEO Jack Fusco, and 55 million mt/year of production.

Cheniere has shipped more than 2,000 tankers to 37 countries since its Sabine Pass facility began to operate in 2016, and lately almost all of them have been to Europe, Fusco said. That illustrates the flexibility of LNG as a fuel solution, he said, as it's in high demand when droughts affect hydropower production in Brazil, or when coal prices surge in Asia.

The difficulty for LNG users, like other fossil fuel users, is that the industry is maxed-out right now, Fusco said. And that could have negative consequences if LNG prices rise. "We provide energy security, an affordable product at basically a fixed price," he said, referencing Cheniere's contracts in which it produced LNG for a fixed processing rate.

But its buyers are concerned that they will not be able to pass along the higher cost of natural gas to their customers.

Cleaner fossil fuels

Companies in the fossil fuel business are focused on reducing emissions throughout the value chain, said the three executives.

Cheniere has conducted a life cycle analysis that Fusco said follows Task Force on Climate-Related Financial Disclosure standards. "We use it to make our decisions," he said, and the company has extended it to how it works with suppliers of nearly 8 billion cubic feet/day of gas that it processes. And on the other end of the chain, Scope 3 emissions, Cheniere has partnered with shipping companies to "monitor, quantify, and validate" emissions at delivery ports.

While the oil and gas industry is reducing its emissions, the executives also cautioned government officials to be wary of pushing too hard on the energy transition due to unintended consequences.

"People, while well intended, tend to oversimplify decarbonizing fuel and [forgetting it's hard to] make the electric grid stable with intermittent sources," said Hess.

On top of that, today's crisis shows how geopolitics matter. "The US needs a strong oil and gas industry ... we should be playing to that strength," Hess said. "We should not have the government say we will not have oil and gas in five years … nor have bankers saying it."

The oil and gas industry brings 12 million direct and indirect jobs, low-cost energy that is a competitive advantage for US manufacturers, and strategic power, he said. "It's very important for the US to stand tall here … by ensuring a strong oil and gas industry."

When asked by CERAWeek Chair Daniel Yergin what government can do to support the industry, Hess and Fusco said a "realistic" price on carbon should be set, which would allow the industry to innovate without having one technology favored over another. They also said that with a stable US policy, investors will be more comfortable coming up with the trillions of dollars that both the fossil fuel industry and the energy transition need.

From Taufik's perspective in a country facing significant climate-related storm impacts already, it's a matter of "families coping with energy bills or putting food on the table next week," not just a policy debate about what the energy mix should look like in a decade. Global policies "must allow for every emerging country to access affordable energy to grow," he said, and he made it clear this involves fossil fuels. "The future of decarbonization is not absent hydrocarbons," he said. "Countries will move from coal to gas, and can't be mandated to move to renewables overnight."

Posted 07 March 2022 by Kevin Adler, Chief Editor

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.


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