As LNG17 gets underway in Houston, Shell Oil President Marvin Odum spoke with FuelFix about the challenges and opportunities for liquefied natural gas.
Shell is leveraging its position as one of the largest natural gas producers by using the fossil fuel to power its own drilling rigs, ships and heavy trucks — with hopes of spurring others to make the same transition. At the same time, it is investing heavily in small modular facilities capable of liquefying natural gas and building the infrastructure to resupply trucks and boats that run on the super-chilled fossil fuel.
FuelFix: Where do you see domestic demand going for natural gas?
Odum: There are a lot of estimates out there in terms of where demand is going, but what we see, without putting an exact number on it, is pretty steady growth. The wild card around the upper limits of where that growth could go (is) in the government policy realm: coal-fired power generation. A stronger stance by the current administration or a future administration for tighter environmental controls on coal-fired emissions could certainly accelerate that and increase demand considerably.
We recognize that as a potential upside or a high case here, but the way we really plan around the business is for steady growth both through additional power generation with natural gas and also increased usage in industry. It’s very much tied to the story of the fact there’s a bit of a renaissance around American manufacturing, because we will have long term access to low-cost energy now.
The transportation piece, I think, is really a fascinating one. It’s hard to predict the rate of switching right now, whether it’s for trucking companies or others, but I will say my optimism around the fact that it will happen sooner rather than later is going up. And I say that because, first of all, we’re building several of these projects now so we’ve clearly stepped out and are taking a leadership position in terms of getting these projects off the ground. We’re starting to see trucking companies not only like the idea because a big part of their business model is fuel costs, but I think they’re starting to get their minds around the full lifecycle costs of using LNG. It’s been an education for all of us. It’s not just fuel costs. it’s also resale value of those trucks. But I think they are getting to the point that we’re seeing people basically sign up for service. That’s a very positive sign.
FuelFix: The story we always hear on LNG in the transportation sector has been concerns about infrastructure. You’re tackling this head on with the movable modular liquefaction systems and filling stations, but how quickly can some of these small modular plants be brought online, and what kind of advantage does that mean for expanding LNG’s foothold in transportation?
Odum: We have a nice position if you will around development, both from a technological standpoint but also from a manufacturing standpoint in the development of these MMLS, these small-scale liquefaction units. But that particular advantage will only last so long. So while you’re talking about time to build out that infrastructure, which does come in terms of years, … what one of those units would do is service the equivalent of something like 5,000 heavy trucks or maybe 100 offshore vessels. Any one unit is significant, but when compared to the entire market, it looks (small). There’s room for tremendous amount of growth in the LNG transport space before you start to begin to dramatically impact things like diesel, and other competitive and pricing issues that come to your mind when you start thinking about LNG moving into the transportation sector.”
FuelFix: Is it wrong for me and others to focus on infrastructure challenges as being the biggest obstacle?
Odum: It’s the right thing. But again, I think there’s reasonable movement in that space. The other significant announcement we made in the last year is with Travel Centers of America, which is one of the largest truck stop owners across the us. We’re in discussions around putting these in a network form across the nation in a way that could service long-range trucking. This first unit we’re building in western Canada will serve the entire corridor, initially from Calgary to Edmonton, but eventually from Vancouver all the way up to Edmonton, which is the main trucking route for that portion of Canada. And that infrastructure could be built. It will take a handful of years, but it can be built, and LNG can be delivered.
It’s a chicken and egg thing certainly to a degree. But my expectation is the pace will be more driven by the pace of switching fuels than by the infrastructure buildout, because I think we can keep up with the infrastructure buildout. And the real change for me has been the ability to liquefy natural gas to generate LNG at very small scale and very low cost. It’s been a breakthrough in my mind.
FuelFix: How small can the facilities be?
Odum: We’ve found the sweet spot and it is around .25 million tonnes per annum. So, if you think about a normal train for export … one train may be in that 4-6 million tons per annum range. Now we can do that in the small scale with .25.
FuelFix: And, as you noted, with a quicker rollout. These other facilities take years and years to build.
Odum: You can do this quicker, and, of course, it’s a different risk in financial picture as well, which will help with the buildout, because you can take smaller, incremental steps. It’s also interesting to note that while there’s still very much a place for the very large, very efficient liquefaction plants for major LNG export, the Elba project that we announced in Georgia with Kinder Morgan will actually be built with a series of these mini LNG modules. That’s different than most of the projects you see. And one of the things it will do is allow that production to come online sooner.
FuelFix: One more question on the transportation side of things. You are obviously focusing on commercial, heavy-duty fleets and commercial marine transport. Do you think of this as an avenue to eventual residential transportation demand, maybe decades down the proverbial road, or is it a destination in and of itself?
Odum: I think it’s an interesting link that you can see eventually making more business sense. But we don’t try to make that link now. The good news now is that LNG in heavy transportation makes perfect sense on a stand-alone basis. There’s plenty of incentive to go into the business just on that basis. Whether there’s a link then into the smaller transportation, it’s just not perfectly clear that LNG is a better fuel for cars than CNG. And right now, I’d even venture to say it’s not. But it is for the big engines.
FuelFix: On the issue of exports, I wonder if you think there are risks if the Department of Energy doesn’t start making decisions on the non-FTA export applications soon. Is there a window of opportunity that could close if regulators don’t start moving on these swiftly?
Odum: Certainly in a macro sense, over time, I think there is, there’s a lot of competing projects around the world, which is what I think you’re pointing to. And there are more global competing projects than most of us in the industry would have expected at this point in time.
I think seeing some window of opportunity is a fair way to look at it. I think there’s a baseline of LNG projects from North America that will make sense almost under any scenario, but then you ask a fair question in terms of how many will continue to make sense. While there’s a baseline of a few projects, both from the Gulf Coast area and the west coast of Canada that will make sense in any global picture that I can see going forward, how many of those actually make sense will depend on how LNG is being developed in other parts of the world.
It’s interesting, when you go to other gas-producing parts of the world, you can just feel the sense of competition with North America, and in most cases, that takes on the form of a lot of concern. In those countries, North America is about to come on strong and is a very serious competitor to those other projects.
While we certainly see … uncertainty around non-FTA permits being approved, one of the nice things about being the largest LNG suppliers in the world, the largest IOC suppliers certainly, and having a trading business that works around those volumes, and even with an FTA permit now, of course, that gives us a lot more options. For example, the Elba project, which has an FTA license, has applied for a non-FTA license. We already supply LNG into FTA countries like Korea. We can actually take that Elba supply and send it to Korea, an FTA country, and take the supply we’re currently sending to Korea and send it to somewhere else. So having that global portfolio and that trading capability gives us options that could be difficult for others.
FuelFix: I recognize you can leverage your existing FTA export approval on Elba, but is there an opportunity for the Energy Department to take the Elba application out of order, ahead of others in the queue? Right now, it’s pretty far down the list. Is your understanding that sure, it’s 11th in the queue, but once you get approval, you can hit the ground running, because you have this FTA permit in hand and because you’re going to be doing these modular pieces?
Odum: That’s right. So as soon as we finish the FERC permitting, which I actually don’t expect to be the bottleneck here, we just continue down the path while we’re waiting on the decision around the non-FTA. The non-FTA bin in that case just gives us more flexibility, but the project itself flies completely on an FTA basis.
To your point about does it have the chance to jump the line, it’s really hard to say. All I can tell you is that we would clearly make it very visible to regulators and others that our project is completely done, — completely ready, we’ve answered all the questions around it — and at least make that opportunity to consider it earlier if it’s available. Whether or not they take that opportunity, I don’t know.
FuelFix: The sense being that the Energy Department is only going to approve a certain number of these, and there are obviously some projects that are much more speculative and less grounded in reality and financing than others.
Odum: You hit on an expectation of mine, where, I don’t want to sound naive, but I do have an expectation that a regulator is capable of looking at the viability of a project as well as the timing of when a permit was applied for. I think, you’re getting to the key point: Doing a large scale LNG project for export is not an easy thing to put together. You can put a permit application together fairly easily, but to be an exporter, to have a buyer, to do the financing around these very large projects, to have the international shipping capability, and so forth, these are difficult elements to put together, and all projects are not created equal.
FuelFix: Do you have any expectation of where export levels might settle out?
Odum: There’s a lot of talk about what sort of caps the government should put on exports. I myself have talked about the fact that I thought a reasonable approach would be phased levels of export approval, to satisfy the concerns that are out there around natural gas prices and so forth. I personally believe, for any reasonable level of exports, allowing any certain level of export, it’s going to the be market that limits that number.
There’s probably been over 100 million tones per annum in (submitted projects’ export plans). Whether half of those are really viable, that may be a reasonable way to look at it. Just getting a permit application or even getting a permit, is just a part of many steps to actually get a project together. I think the market will limit that and probably should limit that.
FuelFix: In terms of the project in Canada, I know you just filed some of the environmental plans. Can I assume the regulatory reviews will move quicker there? Do you have expectations that process will be any smoother than what happens down in the U.S.?
Odum: It’s going to be a different process. but I don’t have the expectation that it’s going to be particularly quicker. The difference between the countries in my mind is that they’re dealing with different elements. For example, where in the U.S., it might mainly be a question of what level of exports to allow or some political debate around that whole arena, I think the concern in Canada is more around First Nations and making sure the First Nations’ rights are protected. That’s my way of saying I think I see them on similar timelines.
But I think you do see some pretty strong encouragement in Canada, particularly in this case with the British Columbia government, which has come out very strongly in favor of LNG export. And that’s important, because of course it’s British Columbia’s coast, and it’s pipelines built across the province that make these projects happen. It’s a very positive sign that they’ve come out so strongly.
FuelFix: Obviously there’s a lot of competition in Canada too.
Odum: There’s a lot of competition there too, but as you watch those develop, it’s important to see who has the right port position, the right land position, where people are in terms of their negotiations with the First Nations, and then how well connoted they are with customers. Our projects, basically there are four of us who are partners on the project. It’s Shell of course, (Korea Gas, PetroChina Investment) and Mitsubishi. That’s a powerful connection between both source and liquefaction but also with the customer and use side all partnered up in one project.
FuelFix: Given the fear about domestic use of natural gas being affected by exports, one of the things that Sen. Joe Manchin has floated on Capitol Hill is an idea of taking a 5, 6, or 7-year timeout on exports to grow domestic demand and then revisit exports. Is there a way to efficiently grow demand, protect manufacturers and not close a window of opportunity for exports?
Odum: I think — and I feel very strongly about this — that’s taking very much the wrong point of view on how to address what’s perceived as a problem. There’s plenty of room for the domestic demand to grow as fast and as much as it wants to within any realistic realm of imagination, and the supply can keep up with that.
The natural gas drilling rig count in the US is down maybe 40 or 50 percent simply because natural gas prices are where they are. There’s tremendous supply ready to come online at just fractionally higher prices than what we’ve seen over the last year, so the supply is not the issue. You can add in exports to that same equation and come up with exactly the same answer.
Where I try to steer everybody is rather than try to determine what is this tradeoff, let’s go back to the fundamentals of understanding what does supply actually look like. And even under challenging supply questions — meaning don’t make it easy for anybody, it’s a challenging industry, tell everybody they have to do it the right way in terms of all the environmental protections and so forth — but really truly honestly answer what is that supply question. I think that by itself answers the domestic use and the exports.
Probably the best way I can say it is if you look at the portfolio that we’re investing in — and we’re clearly investing in LNG exports — and LNG export, if you’re on this side of the equation, depends on very low cost of gas to export, but we’re also putting money into the gas in transportation projects, w’ere looking at a gas to chemicals project in Pennsylvania, we’re studying gas to liquids on the Gulf Coast, those projects require very low domestic prices as well to be viable, and in that case the end product actually stays in the U.S. So we’re investing on both sides of that equation. That’s the clearest answer I can give anybody in terms of the fact we believe there is plenty of supply to pursue both of those things.
FuelFix: If you don’t see exports right away and if the transportation sector doesn’t grow at a good pace, is there any danger in not being able to sustain current drilling? Is that a real problem, a real concern?
Odum: Well, it’s a real market dynamic. It depends on where you sit whether you call it a concern. As a company drilling for natural gas, if you stop drilling because prices are very low, yes it’s a concern and yes it will continue. But it is a completely self-regulating market in that sense in that you get such clear and near immediate signals back from the market via the natural gas price, that it directly impacts the pace of development. At the same time, when the market says through natural gas prices we’re feeling a little tight now on supply relative to where demand is going, the thing about these unconventional resources on the supply side is they respond so quickly.
I think you’ll see much more moderation in the variability of price. You’ll see variations of course. Those signals have to play through the response in the market, but at a much more moderated level than I think we’ve ever seen in the U.S. before.
FuelFix: Those fears of volatile prices haven’t gone away.
Odum: I can completely understand that. If you’re a company whose viability depends on low-cost energy, and you look back at over the history of natural gas, you see a lot of volatility there. We have to have some patience with people. And also to help people understand the supply side has changed so dramatically, unlike anything we’ve seen ever in this country. It takes a while for people to take that on and believe sit, but it is actually very true.
FuelFix: There is still regulatory risk and uncertainty as to the abundance of natural gas. How concerned are you about what we’re likely to see out of Washington, including the Department of Interior rule on hydraulic fracturing and drilling on public lands?
Odum: I take the risk very seriously. If you sit in my shoes, what you see is a tremendous amount of personal time and effort spent on this topic. It’s why almost two years ago, we came out with what we call our five onshore operating principles, which go directly to saying here are the things you have to get right in development of these unconventional resources in order to avoid the kind of backlash or problems that might show up in regulations or might show up in terms of society just not wanting to develop these resources.
These five operating principles were designed to not only guide our company …but they were also meant and put out there as a very public signal to say this is the way we think the industry should do it. We don’t make any hidden game about the fact that we think these are the elements we think should show up prominently in regulations, primarily in the state level, because that’s where most of this is regulated. Certainly as federal regulations are contemplated as well, we think we’ve provided a blueprint. And I think that’s been tested and proven to be accurate by some very challenging external parties.
We’re in a transition, I think, discovering these resources and having particular regulations that reflected the way it used to look as well as some modifications based on these new resources, but we’re heading to a point where I think you’ll see more harmony in terms of regulations between the states … and there will be more designed specifically to address unconventional resources. We’re participating in that process, because I think that’s key to answering the risk question you asked. You have to get the regulations right, and you have to get the trust level right to allow these resources to be developed so the U.S. can take advantage of all these resources.
FuelFix: At the federal level, are regulators listening to industry?
Odum: I always resist commenting on (rules) before they come out in their final form, but the (Department of Interior) has taken quite a lot of input from us in the industry around the rule that they’ll soon come out with. So I’m optimistic that it’s going to be a balanced approach. And that’s the thing we will continue to need, both from DOI and also (the Environmental Protection Agency).
There’s a lot of negative talk about unconventional oil and gas development. But my sense in working with regulators in the administration is that they do understand the benefit that are being provided, particularly on natural gas and the competitive advantage it brings this country. I do think they understand that. If I get away fro the words and I look at the actual actions that are being put in place, I start to get a little more optimistic.
FuelFix: We haven’t talked about oilfield or upstream use of LNG. What kind of transition would you expect to see in your equipment upstream, and what kind of impediments are there?
Odum: The hurdles are actually very small. I say it humorously inside, but some people don’t realize I’m very serious: Let’s get this mini LNG plant built in the Gulf Coast, and then I, meaning Shell, will likely be one of its biggest customers, because we’re running rigs of course throughout the area, we’re running trucks, we’re running all sorts of equipment. There’s such a price advantage to using LNG and all of the emission advantages to running these drilling rigs on natural gas and running frac units on LNG versus liquid fuels. My expectation is I will drive this into that business as quickly as it’s available.
So we’re doing that now. There’s some LNG available on the market now. Where it’s available. we’re already pushing natural gas to drive our rigs and our fracing (units). That I expect will expand very rapidly once these units are available. It’s fairly easy to do retrofits, to do an engine change or a front end modular add on to a drilling rig to let it run on natural gas. It’s not a big deal.
It will help on the emissions front. And as you think about the complications of a developing market, particularly if you’re in the business of selling LNG — the whole chicken and egg thing — the other thing it provides is a real buffer with the pace of market development. We can clearly see the benefits in using this fuel. We will use it. And then that fuel then is also available as the market starts to come on and there’s more demand in other places. It gives you a bit of a buffer as well as that market begins to develop.