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Natural Gas: Is It Actually a Global Sector?

By Warren Levy - Jaguar EP


By Warren Levy | CEO - Fri, 03/18/2022 - 11:00

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After surviving a two-year pandemic, I realize the world has inevitably changed. As this new world again ushers in a period of vibrant travel and growth, the consequences of underinvestment in conventional oil and gas over the last few years, caused by the growing trend among investors to look for more sustainable energy sources, are becoming evident. Unfortunately, we lack sufficient conventional energy supply to avoid price spikes in case of a shock to the system. Today, the Russian invasion of Ukraine is driving oil prices up over US$100 per barrel and early-March gas prices are reaching all-time highs in Europe.

Despite the current situation in Europe, why have gas prices in the US not escalated significantly to reflect the price differential between liquified natural gas (LNG) in Europe and Asia, and North America? The answer lies in the fact that, despite significant increases in LNG production capacity worldwide, the global system still lacks sufficient capacity for gas to behave like oil, which is a truly global commodity.

A global expansion of the LNG network could provide us with two key advantages: we could balance out the available supply in the US, the Middle East, and parts of Southeast Asia with the current demand in Northern Asia and Europe; and, perhaps more importantly, we would achieve it through environmentally friendlier means than other energy sources. Certainly, LNG vessels are significantly more energy-efficient and produce lower emissions than conventional oil or coal transport. Gas consumption in markets like China could significantly offset coal power generation.

The way I see it, significant investment in gas, jointly with new investments in renewable energies, is the only way we stand a chance of reducing emissions to Paris Accord levels. Whether emissions occur in this or that country is irrelevant because we share only one atmosphere; we should be concerned about reducing emissions globally, not just displacing them to other markets. 

Now for question No. 2: Why is gas production not increasing? Or, to look at one aspect of the challenges, why do we not have a greater LNG capacity? Simply, it’s because of a lack of investment. Fossil fuels are being tarred with the same brush because investors and consumers are looking for a more sustainable energy supply. However, sadly, underinvestment in natural gas has led us to witness how coal is meeting the rising demand for power since it is faster to bring back old coal-fueled plants in Europe and Asia than it is to build new, critically needed gas infrastructure.

But what if we bring this scenario home? Living in Mexico, we should be seriously concerned. For the last two decades, we have suffered systematic underinvestment in natural gas ever since PEMEX decided to focus on driving quicker cash flows to service debt from existing and new offshore oil-focused activities. The logic behind this decision was that the US had a seemingly infinite supply of gas and that could meet any of Mexico’s demands. But this assumption was proven dead wrong during the cold snap of February 2021. Next time, it could be more than just a few days of supply interruption affecting millions of homes and businesses.

Gas in the US will not be aggressively developed alongside current US gas prices. However, it could be developed, quite aggressively, if US gas could access the European or Pacific markets through LNG. As additional LNG capacity comes online, required gas could readily flow to the maritime exports market. The likelihood that there will be supply mismatches as new capacity comes online is high. It is possible that significant diversions of gas from the Mexican export market could occur to ensure LNG facilities are fully supplied. 

I strongly encourage more production in Mexico to reduce the risk of supply interruptions, and to drive the growth of jobs and development in areas that are in desperate need of them. Eliminating our commercial gas relations with the US should not be the goal. Rather, we should focus on balancing our supply; we should lower our reliance on imports, which currently stands at 80 percent. By doing so, we will ensure not only the continued growth of the Mexican economy but also attain higher levels of resilience against supply shocks.

So far, Mexico has been comfortable living in a world in which American gas only had three markets: domestic consumption, Mexico, and Canada. Gas supply was abundant and cheap; but now, it is increasingly becoming a global commodity. The huge differential in gas value between the US and other major markets will drive investment capital into solving the inability to carry LNG across the ocean. Should Mexico fail to act, Mexican gas consumers could end up having to pay prices reaching international levels for LNG equivalent; or worse, gas might become unavailable. The economy will face strong resistance to growing with more expensive and dirtier fuels. 

Capital markets are actually global. Capital will flow to wherever the pace and ease of resolving these global issues are most manageable. Because available investment dollars have publicly shifted away from backing any conventional fossil fuel projects, the amount of capital available for projects of this nature has drastically reduced, while competition for capital has shot up dramatically. It is a buyer’s market and only the most attractive investments will receive funding.

Mexico faces an additional challenge: A decades-long neglect of gas has led to a belief that gas cannot be produced profitably in the country. This is patently wrong. The geology doesn’t change at the US-Mexican border; rather, the highly profitable south Texas gas fields have been aggressively and efficiently developed in a way that has not occurred in Mexico. Putting this all together, government and industry need to move quickly and decisively together to ensure that Mexico is well-positioned to take part in the new global natural gas market, lest we risk being left behind. 

Photo by:   Warren Levy

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