In deciding on mega-projects like an LNG plant and deepwater field development in Mozambique, ENI and other companies are faced with the question of what the price of natural gas will be when commercial operations begin several years later.
During his keynote address at the 2012 CERAWeek energy conference in Houston, ENI chief executive Paolo Scaroni addressed how the gas markets have become an integral part of his company’s business. While there is an abundance of natural gas resources in play thanks to the shale boom, the step change is a bit of a mixed blessing for Scaroni and other E&P executives.
“The gas markets have become a major part of my time…[but] my job, like that of many energy CEOs, has become much harder because the future of the gas markets has become a riddle wrapped in a mystery inside an enigma. Finding the key is not just an intellectual exercise today. It’s an essential part of the job in an oil and gas company.”
To illustrate how the new complexities of the gas markets can affect a company’s development initiatives, Scaroni referenced ENI’s giant Mamba North 1 discovery off the coast of Mozambique, which may represent up to 30 trillion cubic feet of gas in place. The discovery, in water depths of 1,690 m (5,577 ft), reaches a total depth of 5,330 m (17,589 ft) and is approximately 23 km north of the Mamba South 1 discovery and 45 km off the Capo Delgado coast. The discovery well encountered a total of 186 m (614 ft) of gas pay in multiple high-quality Oligocene and Paleocene sands.
Developing the fields in terms of upstream capex and liquefied natural gas (LNG) trains will require a few tens of billions of dollars, he said.
“I will need to go to my board and ask them to authorize these gigantic investments. I will need to be able to say how much gas will be produced by 2018. The most important question will be ‘What price will I get for it?’ That’s where things get complicated, because in the current gas market there is no such thing as a single price.
“The same stupid molecule of gas that changes hands for $3 in the U.S. is sold in Europe for $9 on the spot market and $15 in the Far East,” he continued.
When comparing the cost per unit of energy provided, gas now trades at one-sixth of the price of oil in the U.S., down from half of what it was in 2008. This is surprising, he said, since natural gas is arguably a higher quality fuel than oil.
“Gas prices will need to narrow the gap with oil prices. Either gas prices will go up or oil prices will go down. But there is no economic reason to keep a differential like we see every day in the U.S.”
Global supply is another factor in determining gas prices. How much gas will actually be available for export by 2020? In part, this depends on attitudes in the U.S., Scaroni said.
He added that North America has become “an island” in shale-gas terms. With recoverable gas resources of 50 billion cubic meters (1.76 trillion cubic feet) and stronger gas markets across the ocean, there are many who think the U.S. could become an exporter during the next decade.
“But it remains to be seen whether American citizens, who accept the discomfort of shale-gas activity for reasons of energy independence, will willingly accept it to benefit the bank accounts of a few exporters,” he added.
Another key variable in gas pricing will be the pace of global unconventional gas development and LNG growth. Many new gas projects are currently under way overseas with a good number of them in Australia, he explained, but it remains to be seen if the country will have enough skills and resources to develop them all.
Despite huge shale-gas potential across the world, inherent complexities mean that LNG development will be important. This LNG growth means there will be at least a partial rebalancing in global gas prices, he said.
While many industry pundits agree that global gas consumption is set to grow, opinions vary greatly about the expected level of growth. One critical factor will be emerging markets. Another big swing factor will be the fate of nuclear power. Yet another will be the transportation sector, he noted.
“With gas so cheap compared with oil, it’s not hard to see this sector doing a massive fuel switch to natural gas,” he emphasized.
Meanwhile, ENI’s own shale-gas initiatives in the U.S. are happening in baby steps -- on purpose. The company launched a strategic alliance with Quicksilver Resources Inc. in 2009 to acquire a 27.5% interest in the Alliance area between the cities of Fort Worth and Dallas in North Texas. The Quicksilver leasehold interest in Alliance covers an area of 13,000 net acres with production from unconventional gas shales in the Barnett shale formation of the Fort Worth Basin.
“The general idea was not to become a gas leader in the U.S., but to learn about technology and how things are done here, so we could transfer that knowledge to other parts of the world. My view is that I want to enter areas where I can bring some knowledge, some value. It’s why we are in places like the Gulf of Mexico and Alaska -- but I don’t think America needs us in the Lower 48.”
Contact the author, Bertie Taylor, at email@example.com.