Gass on Gas

28 February 2006 (Last Updated February 28th, 2006 18:30)

John D Gass looks at how to improve the supply chain for natural gas as demand escalates in the coming years.

Gass on Gas

Chevron, like most of the USA, is very focused right now on recovering from the tragic and destructive aftermath of hurricanes Rita and Katrina. The energy industry was at a critical point even before these disasters, with soaring demand driving more volatile and higher prices, and leaving very little spare capacity. Now, those factors have been exacerbated.

"Oil will remain dominant in the medium term but gas is growing."

Thankfully for Chevron, all of our employees in the areas affected by the hurricanes are safe and secure, though many have lost their homes. All of us with operations in the Gulf Coast face tough challenges in recovering from the damage. We will remain focused on helping our employees and the communities where we operate, and on restoring our production and refining capabilities.

I am very proud of our industry and its response to the devastation. Meanwhile, the disruptions caused by the hurricanes emphasise in very stark terms why diversifying the energy supply is critically important. Natural gas is a major component in diversifying the world's energy mix, and we can accelerate that process.

OIL DOMINANT

It is clear that oil will continue to be the predominant energy source for some time to come. Renewables and alternative energies will play an increasing role in the energy mix, but not on the scale of petroleum products. However, the role of natural gas in meeting global energy demand is forecast to grow strongly.

Chevron is committed to this future. Although it has been in the gas business for more than 100 years, the company created a global gas organisation in 2003 to better manage its assets across the entire natural gas value chain. Also, Chevron's recent acquisition of Unocal adds significantly to its natural gas business.

This is an exciting time for all of us in this industry because natural gas has very much come of age. What was in the past viewed as a consolation prize, and sometimes even an unwanted byproduct, is now a valuable commodity in its own right.

While global demand for energy is expected to increase by nearly 50% over the next 20 years, the real growth in demand is for natural gas, which is projected to increase by nearly 70% over the next 20 years.

With this kind of projected growth in demand, we are at a tipping point in the evolution of the natural gas industry. We are making a transition from an industry based almost solely on dedicated projects and long-term contracts, to a global commodity market – one in which gas can be more effectively developed, transported and marketed, and its economic value fully realised.

To achieve this, we must build an infrastructure that delivers natural gas safely, efficiently and cost-effectively anywhere in the world.

"Partnerships across the industry are crucial."

The successful development of the world's natural gas supplies through the LNG and long-distance pipeline projects that are now under way globally will help diversify the world's energy portfolio.

They will deliver the full promise of gas for host countries, for local communities, for consumers, for the environment as well as for oil and gas companies.

But to successfully develop projects of this scope and scale is not easy. It will require an unrelenting focus on three fundamental challenges common to all gas projects: the 'three C's' – cost competitiveness, cycle time and complexity.

COST COMPETITIVENESS

The International Energy Administration estimates that in order to meet the projected rate of gas demand growth, roughly $2.7tr of investment – or $100bn per year – is required across the entire gas value chain by 2030.

Given this level of investment, and the long development timeline
inherent in gas projects, it is absolutely critical that costs are managed aggressively from start to finish.

Because of the scale of projects today, even small overruns can be huge in absolute dollars. This is particularly true in the environment we are in right now. The unprecedented number of projects on the drawing board – and the demands this is placing on contractors and suppliers – is causing costs to rise and putting project schedules under pressure.

CYCLE TIME

We need to reduce cycle time so that projects come online sooner. Historically, long cycle times have been an inherent part of gas projects. Building a new industry requires a dynamic balance between a whole range of factors: markets, technology, commercial arrangements, investments, policies and partners.

"We must build an infrastructure that delivers natural gas safely, efficiently and cost-effectively."

But even if the history of natural gas projects is one of going slowly, we cannot let the past define the future. Reducing cycle time is necessary if we are to keep up with global demand for natural gas.

Some words of caution, however: managing cycle times aggressively does not mean abdicating prudent decision making and capital stewardship. These are imperative, especially in today's hyperactive gas project environment.

COMPLEXITY

The third C is complexity. How do we manage the inherent complexity of projects in ways that add value but do not add to costs and cycle times?

Almost all gas projects today involve complicated commercial arrangements and multiple interfaces between many different stakeholders. For example, the Angola LNG project, co-led by Sonangol and Chevron, has multiple joint ventures supplying gas to a liquefaction facility that has five partners.

The level of complexity of this project is enormous, and managing it has involved a lot of hard work. But we have developed a shared vision of success, identified and rallied around common needs, and approached conflict resolution creatively and with respect. This approach to managing complexity has proved successful.

Earlier this year, the Angola government passed a resolution establishing the necessary regulatory framework to move the project forward. It enabled the partners to reach key agreements that started front-end engineering and design work.

However, the challenge of the three C's cannot be tackled without an investment environment that ensures stable, long-term returns. Transparency, predictability and discipline must guide the investment environment for a successful gas project. We cannot succeed unless investors have confidence in the rules of the game.

"Being ready requires the gas industry to focus on the three C's."

Taxes, fiscal regimes, protection of intellectual property, sound regulatory structures, sanctity of contracts – all these have to be in place and fit together so that investors can make the big decisions and commitments needed to move ahead.

Qatar is a good example. It is a country with enormous gas reserves and has attracted a scale of investment unprecedented in our industry.

Qatar's transparency and robust business frameworks, together with its ability to develop long-term plans and implement them effectively, has enabled it to attract that level of investment.

EFFECTIVE PARTNERSHIPS

Controlling costs, reducing cycle times and managing complexity are crucial elements of a successful management of gas projects. Transparency, predictability and discipline are essential to create the investment climate necessary for gas projects. But the catalyst that really brings the Three C's to life is effective partnerships.

Chevron's 50-50 joint venture with Sasol has helped it to achieve a leading position in the Gas-To-Liquids (GTL) sector. The partnership combines Sasol's GTL technology with Chevron's downstream technology and global reach. The joint venture has high hopes for GTL. It will dramatically impact the natural gas industry and its ability to meet the global need for clean transportation
fuels.

But, as is often the case in new partnerships, its start-up five years ago was not without its challenges. Sasol and Chevron have very different corporate origins and cultures, and the challenge from day one was to get aligned and remain aligned.

The partnership has worked because the parties have focused not on differences but on what they share, such as the ambition to be the leading company in GTL, a heritage of making challenging energy projects work and the desire to create a partnership of complementary strengths.

Today, SasolChevron is a model of what can be accomplished by building strong partnerships among stakeholders – the kind of partnerships that allow us to more effectively pool resources, share risk appropriately, link multiple markets, and leverage technology and best practices. And as we continue to build the global gas industry, new levels of collaboration and partner alignment will be required.

GAS FOR THE FUTURE

I think we can all agree that the challenge is set out before us. Managing the Three C's is critically important for bringing successful gas projects to life. But I believe that there is a higher purpose in building the global gas industry of the twenty-first century.

In the energy industry we are all custodians of the world's natural gas resources. We have a responsibility to develop gas projects not only for the benefit of our companies and our investors but also for the benefit of millions of people worldwide.

This higher purpose can be found in China, where LNG will provide energy for a power plant that delivers electricity to homes and businesses in Zhejiang Province.

"Renewables and alternative energies will play an increasing role in the energy mix, but not on the scale of petroleum products."

This higher purpose can also be found in Venezuela, where recently discovered natural gas will eventually help ease gas shortages in the western part of the country and provide energy to hospitals, schools and homes.

It can be found in Africa in the kitchen of a mother who used to cook her children's food using wood or coal, but now heats it over the steady blue flame of natural gas.

By mastering natural gas projects and partnerships, the global energy industry can continue to grow and prosper. And by mastering gas projects and partnerships, the industry will deliver the energy needed to fuel global economic development and a better way of life for millions.

Clearly, the opportunities are enormous and the responsibility huge. But I am confident that together we can seize those opportunities and meet the responsibility we all share to deliver the promise of natural gas.

This article is adapted from a speech given by John D Gass, president, Chevron Texaco Gas, at the World Petroleum Council's annual meeting, in Johannesburg on 28 September 2005.