LNG prices approach unsustainable levels – Cheniere CEO

HOUSTON (ICIS)–Prices for liquefied natural gas (LNG) have risen to such an unsustainable level, they could threaten the ability of buyers to pass down their escalating costs, the CEO of Cheniere Energy said on Monday.

“I begin to worry about our customers,” said Jack Fusco, CEO of US-based Cheniere Energy, the largest exporter of LNG from the US. He made his comments during a presentation at CERAWeek by S&P Global, an energy conference.

“You worry if they can pass the spot price of energy through to their customers, their longevity and what is going to happen to them in the future,” Fusco said. Prices have reached unsustainable levels.

The CEO of Malaysia’s PETRONAS, Tengku Muhammad Taufik, said fundamentals are no longer driving the market. “The word I would choose is absolute bedlam.”

Like Fusco, Taufik warned about the sustainability of current prices.

He called speculation about spare oil and gas capacity a mirage. It is difficult to bring back production as quickly as some have envisioned.

The world is suffering from the consequences of the lack of energy investment during the second half of the last decade, a reaction to a crash in energy prices, he said.

During those earlier years, speakers at CERAWeek warned about the threat of underinvestment.

“We have reaped what we’ve sown,” Taufik said.

John Hess, CEO of US oil-producer Hess, said “We are starting to see the ruptures in the economy because we are not investing enough.”

The US should be playing to its strength as the world’s largest producers of crude oil and natural gas, Hess said. “We should not have government officials saying we don’t need oil and gas five years from now.”

Prices of oil and LNG have risen sharply after Russia’s invasion of Ukraine and the sanctions imposed in response.

Midday, Brent oil prices broke $120/bbl. WTI was just below $120/bbl.

HIGH PRICES TO ENCOURAGE PRODUCTION
The LNG market has little slack, Fusco said. “With the current price signals, there is nothing holding us back.”

Cheniere said the company has completed another LNG train, bringing the company’s export capacity to 45m tonnes/year, Fusco said. The company signed a contract with Bechtel to build another 10m tonne/year train in Corpus Christi, Texas.

Hess said the company set aside $2.6bn for its 2022 exploration and production capital and exploratory budget, up 30%. Out of that, 80% will be spent in Guyana and the Bakken formation in North Dakota.

Darren Woods, ExxonMobil CEO, said the company is increasing production of natural gas in the Permian basin in western Texas even as it reduces emissions of carbon dioxide (CO2).

SHALE OIL BECOMES MATURE INDUSTRY
The Bakken and the much larger Permian are among the biggest producers of shale oil in the US.

Tight oil is about a decade old, making it a mature industry, Hess said. Shale still has a role to play, but it will no longer be a swing supplier.

As a result, shale has evolved from a growth business to a harvest one, Hess said.

Oil producers will be judicious about managing their inventories, Hess said.

Investors have also told companies to exercise restraint in capital expenditures, Hess said. What money companies do spend will not go as far because of inflation.

Still, Hess expects oil companies will increase spending since oil prices are so high.

“People are going to have to increase spending levels because the world needs more oil,” Hess said.

ENERGY TRANSITION
Oil and natural gas markets could get another jolt from the unintended consequences of polices adopted to encourage the transition to less carbon-intensive fuels.

Woods of ExxonMobil said such dangers could arise from concentrating on Scope 3 emissions. Such emissions arise from a company’s upstream and downstream transportation and distribution, business travel, employee commuting and how the company’s products are treated after they are sold.

If such Scope 3 reductions target refiners, it would do little to reduce demand for fossil fuels, Woods said. Instead, it could shift production from efficient refiners to those in other parts of the world that are less efficient and more polluting.

A similar problem could arise from LNG, he said. A focus on Scope 3 emissions from LNG could lead to more plants burning coal.

Taufik of PETRONAS said the perfect threatens to be the enemy of the good.

Oil and gas producers already can take relatively easy steps to lower their emissions, Taufik said. These include reducing methane emissions, electrifying operations and eliminating flaring.

“We need to do what is readily doable today,” Taufik said.

For its part, ExxonMobil is concentrating on carbon capture, hydrogen production and biofuels, all areas where it has plenty of experience.

For years, oil producers have used CO2 to increase crude production, so they have experience injecting the gas underground.

Hydrogen is central to the operations of refineries.

Renewable diesel uses modified refining process technologies.

“People focus on oil and gas,” Woods said. “It’s actually the emissions that we need to worry about.”

Oil and natural gas are important to petrochemical markets because they determine feedstock costs.

Chemical producers in the US rely predominantly on ethane and its price tends to rise and fall with natural gas. Producers in Europe and much of the world rely on oil-based naphtha.

Meanwhile, sales prices for petrochemicals tend to follow those for oil.

At the same time, petrochemical plants rely on natural gas as a fuel.

CERAWeek by S&P Global runs through Friday.

Focus article by Al Greenwood

Click here to read the Ukraine topic page, which examines the impact of the conflict on oil, gas, fertilizer and chemical markets.

Thumbnail image shows natural gas burning. Image by Shutterstock.