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    Energy Industry in Turmoil: Daniel Yergin Cites the Challenges

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Summary

Dr Daniel Yergin on the forthcoming challenges to be faced by the energy industry, and, specifically, natural gas at the 26th World Gas Conference in Paris.

by: Drew Leifheit

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Top Stories, , Security of Supply

Energy Industry in Turmoil: Daniel Yergin Cites the Challenges

In a session entitled “Energy Industry in Turmoil,” Dr. Daniel Yergin, Vice Chairman, IHS, recalled that the day before he'd been asked whether now was the “Golden Age of Gas” as coined by the International Energy Agency about 3 years ago.

He replied, “And I said, 'no, it's certainly not the golden age, but it is the global age of gas.' We're seeing markets increasingly integrated into a single market, and when we look out into the future in the scenarios we do at IHS, we see this continuing even more.”

Dr. Yergin went on to describe the forthcoming challenges to be faced by the energy industry, and, specifically, natural gas.

“If you look out 20-25 years we're going to have 20% more people on this planet. Despite mediocre economic performance right now, we could have almost a doubling of the world economy. We're going to have 1-1.5 billion people who don't have access to commercial energy having access to commercial energy – all of that means growth in energy demand, and despite all of the pictures people have, we think in a quarter century from now 75% of energy will come from oil, gas and coal.”

Regarding the energy mix, he said one could see a very interesting situation: no dominant source of energy, something unusual in history. “But we'll have a horserace between coal, gas and oil, and it's our conviction that the horse that will move ahead, take the leadership, is indeed natural gas.”

Still, he added that one saw different perspectives in different regions, and noted the depressive attitudes surrounding the European energy market.

He commented, “Gas in Europe is clearly on the defensive. Right now, gas is struggling very hard against economic distortions that are a result of economic policy.”

In contrast, he explained that the US gas industry showed continuing growth and is seeing the impact of formations like the Marcellus shale or the Utica. Dr. Yergin said he had also observed things like well performance there, which has demonstrated both learning and greater efficiency.

He reported, “Sixty-five percent of the wells that are drilled in 2014 are economic at $65/barrel, and by the end of this year we think that a dollar invested in oil and gas production in the US will be 65% more efficient than it would've been in 2014 – in other words, part of the continuous learning that goes on in the industry.”

Meanwhile, he said, intense competitive pressures exist. “Companies, in order to go forward, with new projects have to bring down, manage costs and that means moving towards standardization. Major projects simply will not go forward unless the costs can be brought down.”

Regarding the new markets for gas, Dr. Yergin said that a study by his organization on natural gas in transportation concluded that the sector would be one of the major new avenues for natural gas demand: transportation, trucks, ships powered by gas.

He opined, “But Europe needs a new concept about gas demand. If it's thought that it's just going to compete in electricity, we think it's too limited.”

IHS, he said, is developing a new study looking at how to transform Europe's heat sector, which could assist Europe out of its despondency.

Growth of gas production in recent years has created new demand and been an impulse, has created new demand for gas in parts of the world – a positive case for the gas industry, according to international consultant Marcel Kramer.

The application of new technologies, he added, had also facilitated smaller gas projects for smaller markets that now need gas. Mr. Kramer offered, “We used to live in times that you could really only get LNG if you were ready to build a really large project. The bottom line was that somewhere around 5-6 bcm it is very difficult to get the economics off the ground – that is changing thanks to industry efforts, thanks to creativity. Another positive development.”

Finally, he cited the growing recognition that natural gas is indeed a cost efficient and practical way to enable renewables. “And it is also clear,” he added, “that natural gas is a very cost effective way to reduce emissions.

“In practice, of course, we do not see that applied everywhere – that understanding. There are large regional differences in the position of gas and in the outlook.”

According to Mr. Kramer, the geopolitical climate is creating frustrations for the industry, “and, sometimes, real obstacles.” Other frustrations, he added, come from competition from coal, and the high cost of gas, in parallel with complex projects needing to be implemented, in difficult parts of the world and difficult environments.

While, he said he still sees a silver lining, one challenge remains: “That is, that we together have to make sure that the world around us, and especially the key decision makers, are equally convinced of the benefits that our industry brings, and of the need for ensuring enduring good relations between key suppliers and their customers around the world.”

In a clear reference to Gazprom, he stated: “Creating diversification in supplies and outlets can be a very logical, commercial and strategic step for business, but in doing so we must be cautious not to alienate those who have been strong, valuable and loyal partners in a very difficult time in the past, for many many years.

While he said he is a believer in increasing trade and investment as a key to stability, security and progress, sometimes replacing that with “a more adversarial approach” brings pressure to bear upon neighbors and important players in the global energy market is a questionable approach. “It may impose new challenges upon us, which we are probably very ill-equipped to deal with. When there's real turmoil in energy, its effects will be global. Next generations may suffer from that, particularly the poor without access to energy,” said Marcel Kramer, who opined that policymakers should work together to avoid such a scenario from becoming reality.

-Drew Leifheit