Back in 2015, RBAC’s Founder, Dr. Robert Brooks Ph.D. spoke at the World Gas Conference in Paris on the relationship between gas and power markets and was quoted as saying:
“Europe is very worried about Putin’s ambitions as exemplified by the annexation of the Crimean Peninsula, a part of Ukraine, and the war in Eastern Ukraine. They are terrified that he will repeat these actions in other areas of Eastern Europe and Central Asia to establish a new Russian Empire. They combine this fear with their worries about climate change into a strategic decision against natural gas.”
Following the Conference, I wrote a short article entitled “Geopolitics vs. Economics,” the main topic being whether North America was going to take advantage of the Shale revolution and blossoming LNG market by investing in the LNG infrastructure.
Fast forward to 2022, Europe has been suffering from an energy crisis, where wholesale gas prices soared over 400% in 2021[i], Russia invaded Ukraine in February 2022 leading to sanctions against Russia as well as retaliatory gas shutoffs to Europe further exacerbating the energy crisis.
This past May the World Gas Conference was held once again, this time in Daegu, Korea where the main theme shifted its focus from purely the Energy Transition to Energy Security playing a much more prevalent role given the current geopolitical environment.
That brings me to my current topic and question I hope to address.
“Can we ever learn from history?”
As this question is very broad in scope, I am going to narrow this down to the energy sector.
“Can we look at the different industry approaches and regulatory policies put in place to resolve the problems of providing clean, reliable, and affordable energy and discern which have worked and not worked thus far and use that as a guide for creating workable solutions now?”
Up to this point (for the most part), the energy industry has demonstrably improved with cleaner, more reliable products and services at a more affordable rate. As noted in my article on the Energy Transition, “You Need to Learn to Walk Before You Can Run,” we saw this with the shift away from coal-fired generation to gas-fired generation.
Figure 1: EIA – Total net summer capacity of retires and retiring coal units[ii]
Although this shift was already well underway, it was further accelerated during the two Obama administrations.
As any good business should, Energy companies keep a watchful eye on current market conditions as well as potential trends, they are also constantly seeking out new opportunities for growth and investments. This drives innovation, efficiency, and economic growth which are shared by both the company and the consumer. The biggest most clear-cut example of this in my generation has been the shale gas revolution.
Shale gas practically changed the global energy landscape overnight. The United States which was an energy importer and had been preparing for importing LNG as a future energy source, was now poised to become (and did) a net energy exporter. The idea of energy scarcity changed to energy abundance and providing the whole world with clean, reliable, and affordable energy was on the table.
However, policy makers and regulators do not operate at the same pace or even have all the same goals as energy companies. In response to President’s Biden’s jab that, “Exxon made more money than God this year,” Exxon released its own statement. “We have been in regular contact with the administration to update the President and his staff on how ExxonMobil has been investing more than any other company to develop U.S. oil and gas supplies. This includes investments in the U.S. of more than $50 billion over the past five years, resulting in an almost 50% increase in our U.S. production of oil during this period.[iii]” Although this references oil rather than natural gas, the sentiment (and results) is all the same. When you have a hostile regulatory environment, the problems of energy do not get resolved and the consumer pays the price.
Exxon went on the say, “In the short term, the U.S. government could enact measures often used in emergencies following hurricanes or other supply disruptions — such as waivers of Jones Act provisions and some fuel specifications to increase supplies. Longer term, government can promote investment through clear and consistent policy that supports U.S. resource development, such as regular and predictable lease sales, as well as streamlined regulatory approval and support for infrastructure such as pipelines,” which to me holds true and puts into question whether the current government bodies in the United States and Europe truly want to resolve the current energy crisis or plan to stay the course and force a move away from hydrocarbons despite the cost to the consumers and economy.
The disconnect between energy companies and the current regulatory bodies creates an unnecessary “catch 22,” where there is a high demand for oil and gas as well as pressure to produce more oil and gas, but energy companies are both running at near capacity and are reluctant to make long term investments in new capacity (infrastructure) when the future of hydrocarbons is possibly in question. Paul Ashworth, Chief North America Economist for Capital Economics stated, “Investors in energy stocks have been a bit thrown off by the volatility, so they’re looking more for energy firms to pay back down their debt, or return money to shareholders, rather than going and investing in new wells — even if those new wells would be profitable.”[iv]
The argument being presented for the continued push for the energy transition and moving away from hydrocarbons is the need to lower greenhouse gases (GHG) and slow or stop the negative the impact of climate change. This was quite prevalent in the European Commission’s Climate Plan, which aimed to reduce GHG emissions by 55% by 2030. However, despite all the push for increased renewables such as wind and solar and switching to electric vehicles, to date the most significant decreases in GHG and arguably the biggest environmental initiative has been the replacement of coal-fired generation with gas-fired generation.
Figure 2: IER – Ten Countries with the Largest Reductions and Increases in CO2 Emissions[v]
As you can see from Figure 2 above, the United States had the largest reduction in CO2 emissions by far, while India and China had the largest increases. This is quite significant in that all the progress made in reducing CO2 was not only negated but worsened by the increase from India and China. According to EIA, “China alone accounts for 76% of the projected net increase in world coal use, and India and the rest of non-OECD Asia account for another 19% of the increase.[vi]”
Figure 3 below shows global energy growth and as you will see India and China alone account for a major portion of global energy demand, which will be met largely by burning coal. According to Chinese Premier Li Keqiang, “China is set to increase coal production by 300 million tonnes in 2022, as well as launch new energy projects.[vii]”
Figure 3: EIA – Global Energy Growth
EQT’s CEO, Toby Rice noted, “One thing I think that people don’t understand is how much energy demand there is in this world. And when solar and wind aren’t capable of meeting that energy demand, people will turn to their next option, which is coal.”[viii]
This is quite noteworthy in that we are not only seeing a disconnect between energy companies and current western regulatory bodies, but also a disconnect between the “West” and the “East”. Pushing climate change initiatives that will only apply to western countries in North America and Europe will do little to significantly lower GHG emissions levels. But as reality has set in with the energy crisis, China has not been the only one to look to coal to meet demand and quell the skyrocketing cost of energy. Germany, arguably one of the most ardent proponents of the energy transition and moving away from hydrocarbons, has turned to coal during this crisis. Germany’s Economy Minister, Robert Habeck said, “To be honest, this means more coal-fired power generation for a transition period,”[ix] which begs the question, “how did we get into this mess?”
The answer to that question has been put forward by many different groups, individuals, and governments alike. Everything from “it’s Putin’s fault,” to “it’s the energy transition” to “supply chain and labor issues stemming from the Covid-19 pandemic.”
My answer is a little different.
Looking at energy and environmental related problems through an adversarial (as opposed to a cooperative) approach and making bad decisions based on poor data, has led to unintended consequences; and then digging in ones heals and doubling down on those bad decisions until there was nearly no other alternative paths to take.
This seems to be a common trait throughout history.
“In politics… never retreat, never retract… never admit a mistake.” – Napoleon Bonaparte
Although some of these other answers offered up have merit in that they have contributed to the current energy crisis in one way or another, the underlying problem is what needs to be addressed for real solutions to be put in place.
Having a cooperative approach between the energy industry and regulatory bodies is a vital component in solving the problems of the energy crisis and establishing a workable path forward for an energy transition that achieves both environmental and energy security goals. This concept was put forward in both Exxon’s response to the Biden administration and more recently, Chevron’s CEO, Mike Wirth’s statement, “While today’s geopolitical situation is contributing to this energy crisis, bringing prices down and increasing supply will require a change in approach. You have called on our industry to increase energy production. We agree. Let’s work together. The U.S. energy sector needs cooperation and support from your Administration for our country to return to a path toward greater energy security, economic prosperity, and environmental protection.[x]” The full statement (link in footnotes) is worth the read.
But as noted, poor data, will lead to poor decisions, and thus the other essential component to finding workable solutions is a deep understanding of the current and potential future market conditions under different assumptions; from supply & demand factors and infrastructure needs to proposed regulations. Using market simulation tools to accomplish this will allow energy companies and government agencies alike to better understand likely market outcomes under different assumptions. Running a variety of scenarios for sensitivity studies around different projects such as new infrastructure would give both parties a robust understanding of the potential market impact of any given decision, whether regulatory or investment.
This has become even more crucial as the world has moved towards a more integrated global market. What happens in North American greatly impacts the rest of the world and vice versa. Decisions can no longer be made in a vacuum and expected to be followed by all those who might be impacted. A good example of this has been seen in the impact of decisions from the banking and investment sector to curb investments in oil and gas projects in developing countries such as in Africa.
There has been an expectation that these countries will immediately adopt renewable energy such as wind and solar and move away from or completely bypass the utilization of hydrocarbons such as oil and gas. With billions of people on the planet still without any energy, let alone reliable energy, that expectation is not only unrealistic, but morally unsustainable.
In a previous article, “RBAC’s Role in Bringing Energy to a Billion People Still in the Dark”, Dr. Brooks discussed the stages the energy industry went through to bring access to electricity to a majority of the world, stating, “there is an important principle for growth in production and economic activity: quantity, then quality, then viability. This can apply to almost anything, including energy. First you have to grow in volume, no matter what the cost. Next you have to improve the quality of that production. Finally, you have to make the whole process viable.”
I found this statement to be quite relevant when discussing the energy problems of the developing world, which I actually consider to be the energy problems of the developed world as well. These areas need to be brought up through these stages quickly and with the current knowledge and the investment wherewithal we have, we could do it!
Nigeria for example, which holds vast oil and gas resources, has committed to the energy transition, but also, Nigerian National Petroleum Corporation’s CEO Mele Kyari stated “We are committing our resources for the next decade, which is tagged the decade of gas, to explore and produce more gas relative to oil, to power Nigeria and the international community as we transit away from hydrocarbons.[xi]”
So, can we ever learn from history? I think we can.
To resolve the current energy crisis and prevent future ones, we need energy companies and government regulators to come together in cooperation, we need robust market analysis to examine the market impact of any investments and/or regulations, and we need to think globally with the thought, “if we raise all boats, we can all win.”
RBAC, Inc. has been the leading provider of market fundamental analysis tools used by the energy industry and related government agencies for over two decades. The GPCM® Market Simulator for North American Gas and LNG™ is the most widely used natural gas market modeling system in North America. RBAC’s G2M2® Market Simulator for Global Gas and LNG™ has been instrumental in understanding evolving global gas and LNG dynamics and is vital in fully understanding the interrelationship between the North American and global gas markets.
[i] European energy prices are surging, creating ‘frightening’ uncertainty (cnbc.com)
[ii] U.S. Energy Information Administration – EIA – Independent Statistics and Analysis
[iii] ExxonMobil statement regarding President Biden Letter to Oil Industry
[iv] U.S. producers reluctant to drill more oil, despite sky-high gas prices – CBS News
[v] Since 2005, U.S. Has Had Largest Decline in Carbon Dioxide Emissions Globally – IER (instituteforenergyresearch.org)
[vi] U.S. Energy Information Administration – EIA – Independent Statistics and Analysis
[vii] China to ramp up Coal production by 300mn tonnes in 2022 (australiannews.net)
[viii] Can U.S. LNG Cure The World’s Coal Addiction? Toby Rice Thinks So. (forbes.com)
[ix] Germany Turns To Coal Power Amid Natural Gas Crisis | OilPrice.com
[x] A Letter to President Biden from Chevron CEO Mike Wirth — Chevron.com
[xi] We’ll use Nigeria’s vast gas resources as transition fuel – NNPC – Thebizhub
