Global gas challenges a function of underinvestment: Tellurian [LNG2023]

Challenges facing the global natural gas industry today are not merely a product of recent price volatility – especially in Europe and particularly since Russia’s invasion of Ukraine – but of chronic underinvestment in new supply, says the CEO of US natural gas company and LNG hopeful Octavio Simoes.

“I think that if you look fundamentally at what the challenges are, they stem from the fact that since 2014, we have cut down almost in half the annual investment in the oil and gas sector,” he told NGW in an interview ahead of LNG2023.

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In an effort to achieve Paris Agreement goals, economies around the world have turned away from fossil fuels to focus on electricity – and new, greener ways of generating electricity – without really remembering how embedded oil and gas is in global economies.

“People tend to focus only on electricity production, which is only 25%, without realising how important oil and gas is in areas like fertilisers and production of steel and concrete and other processes and materials,” he said.
In the months leading up to Russia’s invasion of Ukraine in February 2022, and certainly in the months since, global attention has shifted from environmental concerns to worries about supply security. Germany has become the poster child for this energy trilemma: in a rush to burnish its environmental image, Germany closed coal-fired generating plants and nuclear facilities, and pivoted directly to renewables to meet its needs.

But that over-ambitious reliance on wind and solar failed miserably, and in an environment of supply shortages when gas from Russia disappeared, Germany found itself ramping up LNG import capabilities and re-starting some coal-fired power plants.

But Germany was not alone in the scramble to secure energy, at whatever cost financially or environmentally, Simoes said. LNG was diverted to Europe at the expense of Bangladesh going dark, Pakistan abandoned gas to go back to coal and other Southeast Asia economies were left to seriously consider whether they could really invest in natural gas and decarbonisation.

“So when we look at the statistics, the goals of decarbonisation are not only not being met, they are actually being made worse, because 2021 emissions were the highest, emissions in 2022 were higher than 2021 and 2023 is going to be more than 2022,” Simoes said.

In a climate for increasing demand, he said, the LNG sector is also left with challenges to attract financing to build new capacity – a result of the price volatility. The ages-old financing model, based on 100% capacity factors and fixed fee for liquefaction, no longer works, because rising costs have pushed the fixed fee much higher than what the market is willing to pay, and projects can’t get financed.

“And I don’t just say bank financing, I also mean equity financing. Equity requires a return and the banks maybe get comfortable with certain coverages, but then there’s no equity,” Simoes said. “We have several different cases in the market that show that some projects have gone ahead where there is zero return on equity and that’s just not a viable model going forward.”