North America has become a “global energy powerhouse” in the 20 years since the North American Free Trade Agreement (NAFTA) was implemented, and the continent now has a “tremendous opportunity” to further leverage its position globally by improving efficiency, collaboration, and connectivity, a speaker noted at a Sept. 24 event hosted by the James A. Baker III Institute for Public Policy at Rice University in Houston.
“Our challenge is to try to identify economies of scale and find comparative advantages,” said Robert Mosbacher Jr., chairman of Mosbacher Energy Co. and son of the former US Sec. of Commerce under President George H.W. Bush.
The event, entitled “North America in Global Energy Markets: Infrastructure and Integration,” touched on everything from “lower-for-longer” oil and natural gas prices to crossborder politics amongst Mexico, US, and Canada, each of which is undergoing its own, unique energy transition.
Mosbacher echoed what author Daniel Yergin stated in the past that “the ‘axis of influence’ in terms of global energy policy has shifted from the Persian Gulf to North America.” It’s a change the Persian Gulf hasn’t taken lightly, Mosbacher said, and now members of the Organization of Petroleum Exporting Countries and US producers are battling for market share and price influence. The Saudis have gone from a “swing producer” to an “overproducer,” he said.
Current oil market ‘unsustainable’
Walker Moody, managing director and chief operating officer of energy investment firm Tudor, Pickering, Holt & Co. LLC, explained during a discussion of panelists from the US, Canada, and Mexico that he believes the current oil market environment is unsustainable.
“If we stay at this [sub-$50/bbl crude oil] price longer, then a third to a quarter of the [US] industry will go bankrupt,” he said. When it comes to oil production, “there [aren’t] enough high-grading and better wells to offset an oil rig count falling by 60%,” he said.
Moody continued, “More activity could drive production, but that takes money and the US industry doesn’t have it anymore,” explaining that companies don’t want to take on more debt and can’t get equity. “We don’t believe that US production can grow at $50, $60, or even $70/bbl. It will likely take $80/bbl cash flows to return the US from decline to growth.”
Reinvestment levels in the US are currently being slashed as cash flow is down 50-60%, hedges are expiring—many at yearend—and access to capital markets is limited by the cost of capital and unwilling investors, he said.
Moody stated that, globally, 2015 reinvestment will not offset a non-OPEC production decline curve of 5-8%. However, demand “has to rise,” he added, noting that in the past 20 years demand has only fallen during the global financial crisis of 2008-09.
National oil companies also have to deal with the reality that the “cash-flow drain from social spending does not abate,” leaving less money to invest in energy. Moody highlighted the variance in oil prices needed by different countries to balance their budgets, specifically mentioning $54/bbl in Kuwait, $55/bbl in the UAE, $105/bbl in Russia, $109/bbl in Saudi Arabia, $122/bbl in Nigeria, $131/bbl in Iran, and $160/bbl in Venezuela.
When prices were at $90/bbl, production from only the US and a few OPEC countries was growing, while output was already declining from the UK, Mexico, and Venezuela. Non-OPEC production simply didn’t grow. “It is very hard to grow supply away from OPEC and shale,” Moody stressed.
Despite its recent struggles, Moody believes that North America has “the best non-OPEC opportunity in the world” given its technology, existing infrastructure, generally industry-friendly regulations, and availability of capital.
Changing US, world gas market
A separate speaker, Zin Smati, president and chief executive officer of GDF Suez Energy North America Inc., noted shale gas has transformed the energy industry in not only the US and North America, but the entire world. He said that investment of more than $300 billion is going toward shale development in the coming years to accommodate growing output.
Smati said there has been a massive shift in gas supplied by GDF Suez from large markets in the northeastern US through Massachusetts, where GDF used to import large amounts of gas from Trinidad and Tobago, to LNG facilities along the Gulf Coast—if anywhere at all.
“After 2008, we moved all of our gas to Asia, especially to Japan and Korea,” Smati said. “And now, we really don’t move gas anymore because prices are down everywhere.”
Factoring in liquefaction and shipping costs with low gas prices, which are linked to the price of crude, Smati remarked that, with the exception of countries like Qatar, “nobody is really making money with LNG.” He added that it’s going to be “a dire situation for anyone thinking about building a liquefaction facility,” each of which requires billions of dollars in investments.
Smati explained that GDF Suez is compensating by entering emerging markets where demand is growing and taking advantage of a “huge market” in the US for LNG trucks and ships, which are much less expensive to build and use than larger liquefaction facilities. In the meantime, demand in China and India will need to rebound and grow dramatically to take care of the US-created gas glut, he said.
US energy politics ‘shallow’
While Smati doesn’t believe public policy in the US has a large impact on gas markets, Gaeton Caron, executive fellow at the University of Calgary’s School of Public Policy, expressed concern about the “shallow conversations” taking place regarding energy and the environment.
“I am always amazed as to how much more politics there is in energy in the US than there is in Canada,” Caron opined, citing the Keystone XL crude pipeline debate at an example, as it has been directly linked by some US politicians with increased oil production and thus contributing to climate change. He asserted that it’s merely one pipeline of many.
Caron believes the US should mimic how Canada deals with energy markets and let those markets work out their own issues without less knowledgeable, less-efficient bureaucratic intervention.
Amid the policy and infrastructure challenges North American collectively faces, he emphasized that coordination of environmental policies on carbon is the “elephant in the room” and “missing link to energy prosperity” for the entire world.
Caron said a carbon price range of $30-40/tonne is enough to change behaviors and not harm the economy, but qualified his estimate by noting the price is difficult to model because of so many “moving parts.”
Mexican pipelines need ‘massive investment’
As for opportunities in Mexico, where GDF Suez has long had a presence, Smati mentioned that his company is facing increased competition from international firms looking to take advantage of cheap gas and cheap labor, each of which give the country a competitive advantage compared with its peers.
Tania Ortiz Mena, chief development officer of IEnova, a unit of Sempra Energy Co. that develops, builds, and operates energy infrastructure in Mexico, added that while Mexico’s geographic location is a big advantage—with access to the Gulf Coast, Pacific Coast, and a border with the US—the country lacks efficient energy supply, which can be achieved with integration with the North American market.
Smati said Mexico needs “massive investment” in pipeline systems, which will intertwine the country and neighboring Texas in the coming years. Mena noted that private investment in Mexico’s gas systems has been allowed for about 20 years, and in the near term, import capacity will rise to 3 bcfd from 1 bcfd in the next couple years, and then to 5 bcfd in the next 5-6 years, enabling the country to import cheap gas from the US, she said.
Contact Matt Zborowski at firstname.lastname@example.org.