Summary of The Gastech Conference 2022 – Geoffrey Cann

The Gastech Conference 2022 in Milan Italy has just concluded. In case you missed it, or you weren’t following along, here’s my executive summary.

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About Gastech

There are a handful of oil and gas industry conferences (ADIPEC, Gastech, CERAWeek) that are distinguished by their global nature, the topics being discussed, the scale of their trade show floors, and their enduring focus. Gastech is one of the biggest and best of the lot. I first came across Gastech in 2015 when I was living in Australia, and the Gastech conference was then being held in Singapore—unsurprisingly, as Australia was then building out its world-class liquefied natural gas (LNG) industry, gas prices were off the charts in Japan (US$18 per gigajoule), and the talk was all about expansion potential. Today $18 seems like a bargain and LNG is back on the table in a big way.

Gastech moves around the world to different locations, but is planned out years in advance. Sometimes the gods place favour on locations by dint of world happenings, and this year’s affair was conveniently located in Milan, Italy, a mere 6 months after Russia’s invasion of Ukraine. Energy security suddenly leapt onto the agenda.

Not everyone has the budgetary wherewithal to travel to distant centers for conferences (I know I don’t) and time zones get in the way of attentiveness. Here’s a snapshot of the key topics discussed at the conference.

Energy Security Dominates

Energy security is now paramount on any discussion about energy, and Gastech is no different. Security reveals itself in the form of energy shortages, energy poverty and destructive price volatility for energy intensive products. Many Europeans are today living through energy policy and sourcing decisions from the past that have now been revealed as “unwise”.

The conference noted that the seeds of today’s energy security challenges were actually planted years ago, in the form of underinvestment in new energy infrastructure. Russia’s invasion of Ukraine is not the cause of energy security, but has merely accelerated the situation. There are plenty of good reasons why investment fell short:

• A one-to-two year slowdown in economic activity in 2008 and 2009 that pulled $500b out of oil and gas development. This investment was never really replaced.
• The oil volume war at the start of the pandemic that filled storage to the brim. Inventories have slowly been unwinding as economies moved back into action. New investment can find it hard to compete for capital when there is so much inventory to clear.
• The COVID pandemic which caused a global coordinated economic recession, and which still has lingering effects.
• The decisive capital markets shift to favour digital companies. In response, energy companies resort to buying up their shares to maintain pricing (returning cash to their owners), leaving capital budgets short.
• Regulators that make new energy infrastructure very challenging to sanction. To meet the demands of the Paris Climate agreement, regulators want to ensure that any new energy infrastructure is accretive to that goal. The UK and France, for example, banned fracking for natural gas.

The effects are now plain:

• European efforts to unwind decades of increasing reliance on Russian energy inputs has resulted in extraordinary energy price increases.
• OPEC, who have been collaborating with Russia to balance the oil market, are unable (or unwilling) to expand supply.
• LNG infrastructure is running flat out, itself sowing seeds for unplanned future outages as operators delay maintenance today to meet demand. More on this later.
• European domestic ability to produce sufficient energy supply to offset sanctioned Russian gas fall well short of the demand. Old coal plants are brought back on line.
• Industrial disruption is now underway. A prominent glass maker in Germany has shut down its lines because of the high cost of energy. Permanent demand destruction is now a real and present danger.
• Governments are actively considering a range of energy market interventions, from price caps, direct consumer support, direct investment, and accelerated project sanctions to help alleviate the pressures.

I would take away a number of points from the discussions. First, societies need to move beyond the current one-sided energy policy discussions framed exclusively around climate effects. Prolonged high energy prices will simply erode public support for climate friendly policies. Second, diversity of energy supply is now seared into the regulatory and political memory as a factor. Projects in the regulatory queue will now face increased scrutiny on this front, and I suspect few have even factored it into their submissions. Third, the tedious debate about which energy type should replace fossil fuels is only serving to delay new energy infrastructure. Of all the energies ever invented by humans, only whale oil has been completely phased out. We can safely assume that fossil fuels will not go away.

LNG On The Rebound

As a gas conference, the forum devoted considerable time to LNG. Liquefied gas is viewed as the only plausible short term option to meet Europe’s immediate needs for gas to replace Russian supply. But many speakers also noted that gas must play a longer term role in displacing coal (which is the greater climate demon) given social opposition to nuclear power.

There are number of LNG projects well down the approvals pathway, most of them in the southern US along the Gulf Coast. The US has considerable experience building and operating energy infrastructure in that region. It is home to a handful of leading LNG shippers. There is a lively market of skills and contractors able to take on these projects.

Of course, new LNG projects take years to bring on line, and panels noted that gas demand in Europe may be permanently destroyed by Russia’s war long before any new supply becomes available. Russia will naturally try to shift their gas to other markets, either by pipeline (to Asia, presumably) or as LNG, but that will also take time and the market receptiveness to that gas is up in the air.

The world’s energy buyers find it difficult enough today to impose and observe sanctions on liquid energy products, such as Iranian crude. Doing the same with gas will demand new and better solutions, which will be digitally driven.

My LNG take away from the proceedings are that energy producers need to come to grips with their inability today to track and trace their products. The tolerance consumers have for funding war budgets through their energy purchases is wearing thin. My second take away is that the risk of gas demand destruction is now a new consideration for energy project proponents, suggesting that greater optionality in project design may be valuable. New risks on long projects merely serve to slow them down to preserve reaction time.

Energy Transition At Risk

European sanctions on Russian gas exports are a microcosm of the interplay between energy transition (a policy shift) and energy security (an outcome). It is now plainly obvious that abrupt changes in energy policy related to energy transition can have similar unintended but massive impacts on energy pricing and energy security. We now know what chaos would ensue if a large developed economy unilaterally decided to halt all oil imports in support of its climate policies.

The logic to proceed slowly on energy transition has been underscored, much to the distress of the community that espouses rapid energy change, which has resulted in tragically negative consequences.

The conference noted that there is a frustrating misalignment between the timeline required for climate action according to scientists (50% less fossil fuel use by 2030), the timing of the investment cycle for energy infrastructure (several trillion by 2030), and the capacity for energy companies to respond with new infrastructure (measured in years of work).

If there is a positive, it’s that the industry now has a sufficiently compelling crisis on its hands to drive hard forward (the energy industry tends to react well to crises) but that response will require coordinated action by a number of market participants to do things like:

• Carefully balance out declining investment in incumbent energy supplies with increasing investment in new alternative supplies
• Manage the transition across interconnected energy supply chains and grids
• Achieve a level of supply diversity across multiple interconnected energy product types
• Best match the energy type to the energy need so that investment is not wasted.

None of these is easy within a single company, let alone across companies and countries.

Digitalization and Business Renewal

Overshadowed by events in Europe, the drive to digitalize the energy industry took a back seat to energy security and energy transition at the conference. Read between the lines, however, and the importance of a robust digital foundation in a rapidly evolving energy landscape has never been greater.

To date, energy transition and digitalization have been highly linked. Some companies, such as Worley, even view energy transition as practically synonymous with digital adoption.

In that context, data is now recognized as a critical resource. Good decision making about energy investments, as well as sourcing energy, supplying energy, and tracing energy all depend on good quality data. That data is even more valuable when conditions are rapidly changing (as when gas pipelines are abruptly shut down).

Collaboration across the energy industry to enable more flexible responses to changing conditions is a fresh imperative. In Europe, there is much more of a sense that ‘we’re all in this together’. Energy actions and choices in one country can have a ripple effect on others, while the combined actions of multiple countries can have outsized impacts, as in the case of sanctions on Russian gas and oil.

Promoting solid real time demand response to energy shortages means providing data to energy users in ways that are easy to understand and action. This is often not the case where a consumer’s energy demand profile is frequently a billing consideration at the end of the month.

With gas replacing coal for power generation, gas is increasingly connected to the demand for electricity, and power generators (and their customers) are competing with traditional gas customers (glass foundry, cement plants, steel mills) for effectively the same commodity. System-wide data about energy demand and supply, cutting across energy value chains (gas, power, oil), is now highly valuable.

Conclusions

Big global energy conferences like Gastech are terrific venues for market analysts, executives, deal makers and regulators for sorting through the noise of the day. Gastech returns in 2023 to Singapore, where hopefully the conversation will be much less about energy security and more about a just energy transition.

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