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Energy Transition to Bring More Volatility, Opportunity for Natural Gas Firms, BP’s Alvarez Says
BP plc’s Orlando Alvarez, head of gas and power trading in the Americas, sees natural gas and other energy markets heading further into “unprecedented times” of market volatility and regulatory uncertainty, but those changes don’t all have to be challenges for the industry.
During a keynote address at LDC Gas Forums’ Gulf Coast Energy Forum in New Orleans, Alvarez said it is clear energy markets are being impacted from post Covid-19 pandemic constraints and increased geopolitical tensions abroad. He said companies are likely to endure even more rapid change in the near-term as the world adapts to the need for new sources of reliable and abundant energy.
However, Alvarez said, the volatility of the current market is more of an outcome of years of creeping policy and regulatory changes, especially in the United States, rather than the cause of evolving dynamics.
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“We can blame the Russia-Ukraine conflict, but it is broader than that,” Alvarez said. “The ongoing energy transition, aspirations and normal politics that come along with it, and regulatory policies are just as important.”
BP is the leading marketer of natural gas in North America and has been making complementary investments in renewable energy and alternative fuels.
While the use of unconventional drilling in U.S. oil and gas basins – referred to as the Shale Revolution – strengthened the country as an energy exporter, Alvarez said, its energy mix has also been drastically changing.
He specifically pointed to the accelerated pace of coal generation retirements, more than 70 GW of capacity in eight years, according to data acquired by BP. Those retirements, along with the addition of more renewable projects to the national grid, are changing the energy landscape as states and utilities focus on environmental, social, and governance (ESG) goals, Alvarez said.
‘An Energy Security Plan’
East Daley Analytics Inc.’s Rob Wilson, vice president of analytics, said U.S. exploration and production (E&P) companies could see the impact of those new market dynamics as soon as this spring with a slump in natural gas prices.
While the retirement of coal does mean some incremental increases in natural gas demand in the power sector, Wilson told NGI signs of demand growth have been marginal. Even as the war in Ukraine limits the ability of utilities to switch to coal when natural gas is more expensive, natural gas production has outpaced added domestic demand.
Wilson said in a year’s time, the conversation among E&P firms has gone from increasing value for stakeholders and meeting ESG goals –what he called “capital discipline 2.0”– to figuring out how to retain that value while meeting domestic and international demand for more energy.
“It’s just not an either/or situation, especially not today,” Wilson said. “‘Capital discipline 2.0’ has really changed to an energy security plan.”
Producers have been adding rigs throughout the year, mostly in the Permian Basin, adding more than 130 rigs between January and September, according to East Daley data. By the end of next year, East Daley projects there could be more than 5 Bcf/d in added natural gas production, flooding domestic markets.
The only substantial additions to natural gas demand will come from LNG exports, Wilson said, but could take more than a decade to restore the balance without production cuts. The first train of ExxonMobil and QatarEnergy’s Golden Pass LNG, currently under construction southeast of Houston, could start up in 2024, with the second and third trains expected to follow in 2025. Venture Global LNG Inc. is still commissioning the Calcasieu Pass terminal in Louisiana, with September feed gas deliveries averaging about 1.5 Bcf/d.
In the meantime, Alvarez said energy companies will have to learn to adapt to the evolving regulatory landscape and the opportunities it will bring, as natural gas will remain an important part of the country’s energy mix.
He pointed to the billions in new energy funding incentives and grants established in infrastructure legislation this year, which could change the profitability outlook for hydrogen and carbon capture, utilization and storage projects. New financial dynamics and policies will likely bring more volatility to energy markets as the value chain continues to diversify and expand, but it also brings new avenues for companies to stay profitable, Alvarez said.
“The same policies that are bringing challenges to your prospective business are also the ones that are going to bring new opportunities,” Alvarez said.
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