From oil and gas prices to the renewables debate, Chairman of BG Group Andrew Gould talks to Sylvia Pfeifer, former special correspondent at the FT, about his view of the current E&P market.
Andrew Gould was appointed BG Group Chairman in May 2012 at a time when the British oil and gas giant was engaged in a colossal LNG project in Australia and, as the non-operating partner of Petrobras, was in the middle of a gargantuan expenditure programme. With potential projects on the horizon on the US Gulf Coast, and in western Canada and Tanzania, BG Group will spend 2014 building its future LNG portfolio pipeline.
“I think oil prices will remain stable or go down slightly, depending very much on what happens in the economy. I’m not a believer that the US gas price is going to drive world gas prices, because the current US gas price is constrained by the fact that it is a closed market. As it begins to become an export market, prices won’t grow to the Far Eastern Asian price, but they will undoubtedly rise”.
Gould believes the US could begin exporting gas to Asia within the next three or four years, and says these cargoes may even have been pre-sold. But with so many LNG projects coming onstream does he foresee a glut in supply? “I don’t think so,” he says. “In fact, I think that the over-optimism in the forecasting agencies at the moment is a real problem. If you look at the EIA’s 2013 energy outlook, they have LNG from Western Canada and East Africa before 2020. It’s not going to happen! It won’t happen! Therefore, the danger is that people will postpone additional FID because they think there’s going to be a glut. In fact, you’ll get the opposite effect.”
“I also don’t believe personally that oil and gas prices are as reliant on each other as they once were. I don’t believe the argument that the LNG price level in Asia for new LNG contracts will only be driven by oil price levels is a true argument any more”, says Gould. The LNG price will also be driven by the marginal cost of new developments particularly those offshore in countries like Australia, Mozambique and Tanzania”.
The UK and Poland remain committed to driving development of a European shale gas industry but Gould says the idea of cheap European shale is a myth. “Shale in Europe would probably be as costly as conventional gas, if not slightly more costly,” he says. “The conditions that made shale gas cheap in the US just don’t exist in Europe. Firstly, the amount of opposition to it is really high because the conditions that you have in the US, where the mineral rights are owned by the people who own the land and they get money out of letting people come and frack next door to them, just don’t exist.”
Gould identifies further evidence that comparisons to the US model may be inaccurate. Having been drilling for around 100 years, America has accumulated a wealth of seismic data while newcomer Europe is still at the exploratory stage. Also, shale gas wells are poor producers and require numerous outlets – and greater expenditure – in order to generate sufficient volume and compete with the Atlantic Basin gas price.
So is Britain wise to be so bullish about its plans for shale gas development? Gould believes it’s still too early to say for sure. “Should we look at the prospect? Yes. But should we make a huge commitment to it? It’s probably too soon to say. I have a theory as well that the shale gas should be used in local applications in places like the UK. It’s dead against our system of grids, but if you have shale gas in your village in Lancashire, let that shale gas provide the power for the village.”
Gould believes that approaching shale gas as though it were a renewable, and the quickest way to reduce emissions in a short time frame, could help soften opposition to gas extraction both in the UK and across Europe. Here Gould is keen to dispel what he considers is another false assumption, this one concerning the gas vs. renewables debate. “The equation in which you balance renewable subsidies against gas is a false debate at this point in time,” he says. “I don’t think there’s any doubt that more gas in the mix in the short term or the medium term would produce a much cheaper domestic energy price, even if that gas was imported; it is better for the economy, retail market and would help reduce emissions. I can never understand this fear that Europe and the UK have of Russian gas because we have gas that can come from everywhere. We’re probably the best positioned – the most strategically positioned – continent for importing gas from multiple markets.”
Gould sees challenges for his own company further south in Africa, specifically developments in Mozambique and Tanzania, where a lack of reliable infrastructure and security issues remains a considerable obstacle. “It’s not so much the technical difficulty of building an LNG plant or doing wells offshore; that we can manage,” he says. “It’s a question of having proper institutions in the country to exercise the governance over the agreements that you have with the government. That’s going to be quite slow and quite difficult to put in place.”
But such successes have been hard-won, as Western E&P companies like BG Group find themselves fighting for space in Africa with the Chinese, who have invested heavily in the region. Gould admits China may well have leapfrogged the West in this respect. “How sustainable their model is I don’t really know,” he says. “The Chinese modus operandi is to use their principal force, which is the labour force, and to import labour into Africa to build harbours or to build roads. It’s okay until people start to notice that that takes away from local jobs.”
As global competition intensifies and oil prices continue to fall, Gould believes E&P companies like BG Group will evolve to adopt a much tighter focus on geographies and specific activities. “People are going to specialise,” he says. “I think that’s probably quite a good idea.”
To find out about Andrew Gould’s view of BG Group in today’s market, watch KPMG’s video interview