ExxonMobil Australia Chairman, Nathan Fay speaks at the Credit Suisse 7th Australian Energy Conference
23 June 2020
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It’s great to be with everyone today and to have the opportunity to speak to such an informed audience.
While the continued impact of the global COVID-19 pandemic means that we can’t all be together as would be the norm for such an event.
It’s fantastic that with modern technology Credit Suisse have been able to still bring so many of us together to share our views, ideas, and perspectives on a variety of important topics.
Today I’d like to spend a little time talking about the evolving energy market and some of the dynamics of change impacting industry - change at the global level and how that change impacts us locally here in Australia.
I’ll also give you one perspective on what is needed as we respond to these changes in order to ensure that Australia can maintain the energy supplies it needs into the future.
Of course, we can’t begin this discussion without the appropriate cautionary statement, which basically says we can’t predict the future.
But as the rest of my remarks will reinforce, that certainly doesn’t stop us from trying!
Global demand for energy is determined by population and living standards, both of which are increasing.
The world’s rising demand for energy must be met and at the same time we also need to address the risks of climate change, as we move towards a lower carbon future.
But these two objectives are not mutually exclusive.
This is the dual challenge that our industry and society must collectively address.
The evolving global energy market
As I said a moment ago global energy demand is correlated to society’s well-being.
The United Nations uses what they refer to as the Human Development Index to characterise well-being using three dimensions.
Firstly gross national income per capita, as a proxy for standard of living.
Secondly longevity, as a proxy for health.
And finally, years of education.
The chart links the index for a country shown on the y-axis with its energy consumption shown on the x-axis. The size of the bubble represents population size.
As you can see there is a clear correlation.
As living standards rise, so does consumption of energy.
This should intuitively make sense when we think about all the conveniences of modern life.
But here in Australia it’s difficult to imagine that half the world’s population, roughly 4 billion people, have a life expectancy of 10 years less than ours, receive a third less education, and 1 in 4 don’t have access to electricity.
In fact today about 13% of the global population still don’t have access to electricity.
This has enormous implications for future energy demand.
This chart shows the predicted change between 2017 and 2040 across a number of key aspects.
Over this period the world’s population is set to increase by 1.6 billion.
The equivalent of adding a city the size of Melbourne or Sydney to the world every month.
But the global economy is growing even faster than the population.
Over the same period, while the world’s population will increase by about 22%, GDP will almost double.
This reflects a global reduction in people living below the poverty line and unprecedented growth in the middle class.
This growth means a need for more energy.
We forecast an increase of approximately 20% in global energy demand by 2040.
But despite this growth, increased energy efficiency and a shift to lower carbon energy sources, particularly gas, is helping to curb CO2 emissions.
We believe the world’s emissions will peak in the next 10 years and begin to decline.
Abundant supplies of energy will enable people to raise their standard of living.
And as we see here, despite this increasing demand for energy, the carbon intensity of the world’s economy is projected to decline by about 45%.
The evolution of energy
I’d now like to spend a few minutes exploring the evolution of energy and the important role of natural gas as the world continually works to reduce its carbon intensity.
Oil was first used as an energy source in the 1870s and took roughly 100 years to replace coal as the world’s dominant form of energy.
And while coal has been recognized for decades as a carbon-intensive, particulate-laden energy source, its use continued to grow until 2013.
Today it makes up 26% of the global energy mix and is expected to maintain a 20% share in 2040.
Wind and solar represent about 1% of the global energy mix today and by 2040, are projected to make up 4%.
Finally despite its many deficiencies as a fuel and its widely known impacts on health traditional biomass remains an important source of energy in many societies.
This chart illustrates a fundamental reality that energy transitions take a long time.
If we look specifically at the role of natural gas we can see that it plays an important role.
One of the largest drivers behind the continued growth in gas is the rising use of electricity globally.
While energy demand is expected to increase by 20% over the next 20 years we forecast that electricity demand will increase by 60%.
Natural gas is playing an increasing role in power generation as it replaces coal in order to reduce emissions and improve air quality and supports growth in wind and solar.
By 2040 we see gas contributing around 26% of the global energy supply up slightly from about 23% today.
Global gas outlook
I’d now like to turn our attention to gas and take a closer look at the expected growth in the global gas market.
This slide is a little busy but shows our outlook for supply and demand for natural gas through 2040 contrasted versus a starting point in 2000.
As you can see we’ve broken this down by regions, with individual bars reflecting 2000, 2017, 2025, and 2040.
The bars, or columns, themselves reflect demand for natural gas in each region, with the different colours showing how this demand will be met - through local conventional or unconventional production, as well as via imports, by pipeline or LNG.
The small black squares show the extent of regional supply, with the delta between these squares and the tops of the bars, reflecting net exports or imports of natural gas into or out of the region.
As the world turns increasingly towards natural gas to meet our growing energy needs, we are seeing an increasingly fluid international gas market.
Rising global demand, competitive new projects in diverse locations, and robust trade are expected to shape future natural gas supplies.
The diversity and reliability of LNG supplies, combined with the flexibility to ship it where it is needed, make LNG imports a favourable choice for nations needing dependable lower-emissions energy sources to foster economic growth.
In recent years we have seen rapid growth in the number of LNG suppliers and importers and this has created an increasingly competitive market.
As the chart shows, Asia Pacific makes up around 80 percent of the growth in LNG imports in the period out to 2040, presenting tremendous opportunities for geographically advantaged gas-rich countries in the region, like Australia and Papua New Guinea.
But geography alone is not enough.
For LNG suppliers to compete most effectively in a global industry, having the lowest cost of supply is essential.
Those projects with the lowest break-even costs will have the best chance to move forward and capture growing market demand.
If we look at the LNG market, demand this year has been impacted by the COVID-19 pandemic but to a significantly smaller degree than oil due to the nature of gas demand.
The markets have worked well to accommodate temporary dislocations with some suppliers also responding by cutting production.
The long term future of LNG remains strong with continued growth, albeit from a marginally smaller base in 2020.
Supply-demand outlook for oil and gas
Depending on your perspectives there are various assumptions you can use around supply and demand for oil and gas moving forward.
And while it’s possible to spend a great deal of time debating the merits and likely accuracy of these different assumptions, what I’d like to do now is spend a little bit of time talking about the substantial investment that will be required in new supplies of both oil and gas, irrespective of those assumptions.
We’ll do this by looking at some forecasts for an expected supply - demand gap.
These charts show an outlook for both oil, in green, and natural gas, in red, from 2017 to 2040.
The black lines reflect ExxonMobil’s outlook for demand for both sources of energy, built off our assumptions around population growth, increasing living standards and changes in technology, coupled with a move to lower carbon intensity.
But this is not the only outlook for demand. Nor is it likely to be 100% correct.
Unfortunately I can’t claim that we are that accurate!
The black diamonds to the right offer some different perspectives on potential demand in 2040.
For the purposes of this chart I’ve represented an average demand scenario based on the multitude of 2 degree Celsius scenarios out there, as well as a high and low demand scenario from the same data set.
Depending on the demand scenario you choose to focus on, you may see anything between a slight growth to an approximately 50% reduction in the demand for oil.
Gas is a slightly different story, with the range of demand outcomes shown covering anything from a 25% reduction versus 2017 to a more than 50% increase.
However, the more important factor is the depletive nature of the oil and gas business.
In addition to the lines representing demand, the solid green and red areas show the expected natural decline of existing oil and gas production that is expected to occur without further investment.
The implication of this decline is significant.
Even using the average demand scenarios aimed at delivering a 2 degree scenario as it relates to global warming by 2040, we as an industry will need to have brought new supplies online equivalent to close to 50% of today’s oil production and 100% of today’s natural gas production.
That is an incredible amount of investment.
In its World Energy Outlook, the IEA makes it clear that many trillions of dollars will be need to meet growth in oil & gas demand to 2040, in both its New Policies Scenario and its Sustainable Development Scenario.
And that investment will need to be underpinned by efficient and free markets as well as the fundamentals of supply and demand and the intrinsic link to commodity prices.
Increasing demand leads to upwards pressure on prices, price signals provide confidence in new, supply-side investments, those investments bring on new supplies, new supplies reduce pressure on demand, which subsequently reduces pressure on prices, and the desire to invest further in supplies is tempered.
This is a normal and natural cycle we’ve seen over countless years across our industry.
While it’s very clear that a substantial amount of investment will be required globally to meet oil and gas demand, the same is also true here in Australia and that’s what I’d like to talk about now.
Australia is emerging from a gas-development boom that was driven by a global LNG supply shortage around five years ago.
As a result we are now the largest LNG supplier in the world.
However, Australia is not immune from the depletion in gas production that we’re seeing around the world.
Australia’s energy market
I’d like to spend a little time looking at AEMO’s forecast of the investment required to meet East Coast Australia’s gas demand out to 2039.
What is clear from this chart is that even as the largest LNG supplier in the world, further investments will be required in Australia, especially with the growing role of gas as we move towards decarbonisation and an increasing use of gas as a fuel for electricity generation.
In fact significant investment will be required just to maintain supplies to meet demand.
Investment in not only developing new discovered supplies but also further exploration to fill in the gap beyond known anticipated new developments.
There are many people who are anxious about the price of gas on the Eastern Coast of Australia people who long for the “good old days” of $4 a GJ gas prices.
Those days are unfortunately behind us.
For half a century oil and gas from the Gippsland Basin has been a foundation of Australia’s growing economy.
The depletion of several legacy Gippsland Basin fields is part of the overall decline in east coast gas production you see here in red.
This is somewhat offset by new Gippsland Basin supplies.
But as we continue to invest in new supplies we are transitioning from our large legacy fields to the deeper reservoirs of the future.
These are more costly and they simply cannot deliver gas to customers at $4 a GJ.
However, they will have to be competitive in a free market, including competing with LNG imports.
I’d like to demonstrate this point by talking a little about two of our gas producing fields - Snapper and Kipper.
Esso Australia discovered Snapper, one of the largest conventional gas fields in Eastern Australia, in the late 1960’s and began oil and gas production from the field in the early 1980s.
At the time Snapper gas was primarily sold as a by-product of oil production until the market demand for gas increased.
30 years later, growing demand for gas and advances in technology saw us develop the Kipper field.
The Kipper field is about one fifth the size of Snapper, is a deeper reservoir in deeper water (such reservoirs are much harder to image using traditional techniques such as seismic, compared with the large legacy gas fields like Snapper) and required dedicated subsea drilling and infrastructure to develop.
Kipper gas contains impurities, such as carbon dioxide and mercury, requiring a multi-billion dollar investment in a gas conditioning plant and associated mercury removal technology.
All this made Kipper significantly more challenging, and more expensive, to develop and is why earlier development wasn’t feasible despite the field being discovered in the mid 1980’s.
Fields like Kipper also don’t have the world class pressure support enjoyed by Snapper, meaning that compression will be required to maintain gas production long term.
As a result in real terms it costs about five times per gigajoule more to produce Kipper gas than to produce Snapper gas.
Achieving a sustainable supply of gas for Australia
All the evidence suggests that over the long term Eastern Australia will have a continuing demand for gas that will require significant investment in new supply.
And new supplies will only be brought on stream if there is a willingness for explorers, developers and producers to risk large amounts of capital for the prospect of an acceptable economic return.
While that may sound somewhat cold and calculated that is what’s needed to attract the investments required in new supplies.
There is a lot of talk at the moment about a gas-led economic recovery post-COVID19.
It is really pleasing to see that the important role gas can play in Australia’s recovery is being acknowledged.
While there’s been a lot of talk about disagreements between our industry and the NCCC, let me start by saying there’s much more that we agree on than not.
We agree that gas can have an important role in Australia’s economic recovery.
It’s really good to hear others reinforcing this point.
As an industry we have historically argued for many of the recommendations being made by the NCCC in order to support a strong energy sector, such as removing moratoriums on gas exploration and development, reducing red and green tape and attracting direct foreign investment.
However, other ideas such as a gas reservation scheme for the east coast or a government-subsidized transcontinental pipeline have the potential to create artificial market conditions and uncertainty for producers, significantly risking a whole host of future investment options including LNG import projects.
As I said before, the days of $4GJ gas are unfortunately behind us and pushing for government intervention to achieve lower prices is unlikely to be sustainable in the long term.
As a local manufacturer ourselves at the Altona refinery, we understand the impact higher energy prices can have on a business.
However, history has shown us time and time again that government intervention into the oil & gas market more often than not leads to higher prices, by discouraging investment.
Some intervention is already happening in Australia on a state by state basis
For example, we have the domestic gas obligation in Western Australia and the Queensland domestic gas pilot program.
Even here in Victoria, the recent lifting of the moratorium on onshore gas exploration came with the caveat that reasonable endeavours must be made to provide the gas to the domestic market.
This intervention by State governments continues despite the ACCC stating in its inquiry into the East Coast Gas market in 2016 that “over time, reservation policies would reduce new sources of gas being developed, meaning less diversity and lower levels of supply for domestic users.”
Australian manufacturers currently benefit from a well-functioning gas market.
If we can continue to develop our own abundant gas resources there are tremendous benefits in terms of jobs, economic growth and revenue for governments.
In closing, I’d like to say thank you again to Credit Suisse for inviting me here to speak and quickly touch again on some of the key points I have tried to make in my remarks.
Firstly, the long term fundamentals for the oil and gas industry remain strong.
The combination of growing demand for energy and the depletive nature of oil and gas will require substantial investment in new supplies both globally and here in Australia.
Secondly, we have seen that Australia has been successful in the past in ensuring both market conditions and a legislative and regulatory framework exist that incentivise substantial investment in supply.
So I’d like to leave you with my final, and perhaps most important, point - that in my opinion, what Australia really needs is the continuation of free market conditions that encourage a diverse range of investments in energy infrastructure across the country.
As has been demonstrated here in the past, a free market is the key to a successful oil and gas industry in Australia and to achieving secure and affordable energy supplies for Australians into the future.