January 2018, Vol. 245, No. 1
Features
Gas Industry Looks Toward Long Haul Amid Stagnant Prices
The prevailing thinking within the natural gas industry appears to be that the low-price environment is here to stay, prompting more players to pursue a strategy designed to optimize current assets while cutting costs rather than waiting for a recovery.
This is according to the newly released Black & Veatch (B&V) report, 2017 Strategic Directions: Natural Gas Industry Report, which examines how companies are planning for long-term sustainability amid rising supplies. Maximizing performance from existing assets was cited by 65% of those polled as the highest priority within organizations hoping to maintain stable earnings.
“Solid asset management strategies increasingly are a focus area facilitating long-term efficiency, safety and cost reduction,” said Deepa Poduval, senior managing director at B&V. “Asset data analytics, for example, is allowing operators to automate and optimize asset maintenance and reduce redundancies.”
As in previous years’ reports, the need for additional natural gas infrastructure to carry out these efforts remains critical as 72% surveyed said more pipeline capacity is needed for market growth. (That number rose to 84% among local distribution companies.)
The report, conducted Aug. 8-29, involved responses from over 300 utility, municipal, commercial and community stakeholders, and reflected the growing role of LNG trade in shifting oversupply of the commodity from countries like the United States to growing demand centers in Asia, Latin America, India and Sub-Saharan Africa.
About 80% of respondents considered increased involvement by the United States in LNG to be either “extremely” or “somewhat” likely to shape the global market over the next five years. Over 75% cited new LNG markets in developing countries as likely to shape the market during that period.
“Global LNG activity is impacted by several factors including foreign relations, emerging production leaders and available infrastructure,” said Hoe Wai Cheong, president of B&V’s oil and gas business. “Some of these issues may be perceived as challenges, but many industry leaders are now keeping a close watch on international events to proactively map out future business opportunities.”
Not coincidentally, the Energy Information Administration (EIA) is forecasting that by 2020 the U.S. will trail only Qatar and Australia in LNG export capacity, based on construction plans. A growing number (42%) of respondents rated LNG liquefaction as second only to pipeline capacity in importance for future investments.
Of those taking part in the survey, 38% called the emerging U.S. role as a major LNG supplier the most prominent trend and “extremely likely” to dominate the global market. Contributing to this is the relatively low cost of the U.S. supply and the growing volume of spot LNG on the market from U.S. producers.
Among other key findings of the survey:
Respondents believe building pipelines (32%) and investing in LNG (27%) are the most important investments for growth.
In increasing numbers (27%), those responding say their company plans to balance renewable energy with gas resources.
Companies are still unlikely (32%) to use data to manage risk and slightly less likely (30%) to incorporate this technology to enhance management functions such as budgeting, strategic planning and daily operations.
Natural gas storage operators (44%) frequently see pending final rules from the Pipeline and Hazardous Materials Safety Administration (PHMSA) as likely to make their jobs more difficult and increase the cost to customers.
Global Crude
One major shift in the survey from previous years concerned expectations for global crude oil between now and 2020. Of natural gas industry respondents, nearly half expect prices to range between $40-50 a barrel for the period.
“This marks a significant decline in optimism from the 2016 results in which a mere 7% of respondents anticipated the price range to remain this low,” Poduval said. “In fact, last year more than half of those who participated foresaw a price between $51-70 per barrel as a more likely scenario.”
One significant reason for lowered expectations for oil prices stems from the lack of production cuts by the OPEC, she said.
The survey pointed to an interest among natural gas providers to find operational efficiencies, divest non-core assets and comprehensively strengthen organizational foundations to remain competitive. Storage operators are also implementing varied strategies to cope with a changing regulatory landscape.
“Those who do not commit to optimizing internal processes now, or see the bigger global picture in terms of where the market is headed, risk being unable to capitalize on big opportunities down the road,” said Cheong.
Market Outlook
B&V analysts still predict a strong market rebound in the next decade but warn that proactive planning, especially concerning long-term projects, is essential.
Rising demand for natural gas in Latin America, particularly Mexico, is seen as a big opportunity across the industry as steadily growing economies are “spiking energy demand and, in turn, catalyzing soaring imports from the United States.”
Reforms in Mexico, Argentina and Brazil have begun to attract foreign money and development, the report noted, along with increased interest in infrastructure including an “all-in-one approach” that concentrates on demand from users for power plants and importation infrastructure.
Also, many developing regions are trying to establish long-term gas markets. South Africa, for example, began its LNG-to-Power Independence Power Producer Procurement Programme for 3 GW of new gas-to-power capacity. Other regions, such as South America, Bangladesh and Indonesia have comparable programs in the works.
Not lost on investors is the Central American Electrification Council (CEAD) projection that LNG-fired plants will account for 43.7% of the region’s 11.12 GW in capacity growth by 2035. While the small market size of many Central American and Caribbean countries has stalled past investments for LNG infrastructure, this trend has been lessened by the relatively low cost of LNG from the U.S. Gulf Coast.
“Even as oil prices remain low, the lure of LNG’s environmental advantages is expected to intensify the growth of natural gas in regions where governments are eager to meet constituent demand for lower carbon footprints,” said market analyst Denny Yeung, a principal at B&V.
Safety, Technology
While asset performance monitoring assists in lowing operational costs, another factor in the advancement of smart technologies is safety, which again was named by respondents as the most important issue for the natural gas industry.
Faced with greater regulatory concerns that are driven by safety issues, decision-making will increasingly depend on asset intelligence, the report concluded. To comply with regulatory mandates and concerns about transparency, natural gas providers will need flexible data management and collection solutions.
Still, while for over a decade risk-based approaches to asset management have been gaining momentum among utilities, B&V found that less than one-third of respondents are using data to manage risks. This is true even though state and federal regulators are pressing for improved data collection.
About half of the survey respondents said their organization has “good-quality data” (52.9% responded their data is “always good” or “above average,” but only 42.3% give high marks for their data’s completeness.
This lack of completeness, B&V found, can be tied to an inability to access assets and historical records. With much gas transportation infrastructure underground or in remote locations, the data can be difficult to collect and analyze.
B&V concluded that “the natural gas industry has done a reasonable job of collecting historical asset data, but lacks the type of data that can be used for predictive analysis.”
Regulatory Concerns
Although the U.S. has seen considerable buildout of pipeline infrastructure during the past year with a more sympathetic administration, serious problems continue, including environmental activists’ litigation and protests. Confusion over federal methane guidelines and state regulations has also made a path forward difficult for companies to navigate.
Not surprisingly, the effect of these concerns on respondents has been mixed. For example, while only 6% of those polled felt “significant impact” from the FERC vacancies and 34% of those respondents considered the impact “slight,” 60% said activist groups and public opposition have affected business. Construction progress was seen as the biggest area of concern (32%), with permitting delays and regulatory review (24%) also cited.
While the future of the 2016 federal methane rule and other greenhouse gas dictates remain up in the air, states, most notably California and New York, have enacted laws to reduce methane.
“Once thought to be dead, its [climate change guidelines] back-and-forth status has created uncertainty and left many in the industry whipsawed in their ongoing compliance management efforts,” wrote David Price, chief technical officer at B&V.
Most survey respondents indicated they expect to see environmental reform efforts increase at the local level, with most expecting 30 or more states to enact climate change-related laws. Fewer than one-in-three respondents think fewer than 10 states will initiate their own programs.
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