The big question in the energy sector today is whether the world will move to a zero-carbon policy in which fossil fuels have no place, or a world in which natural gas is part of the solution, says Robert Johnston, CEO of US-based consulting firm Eurasia Group, in an interview with World Energy Focus. Johnston advises companies to “take a seat at the policy table and advocate for gas” to counter “growing demands to exclude natural gas”.
As CEO and head of the Energy Practice of the Eurasia Group, one of the world’s leading political risk advisory and consulting firms, Robert (“RJ”) Johnston talks to business leaders and investors on a daily basis. And he has seen a “significant change” over the last 12 months when it comes to climate risks. “The debate around the carbon bubble, the risk of stranded assets, has moved from background noise to something that is increasingly paid attention to”, he says.
People in the energy sector have taken notice of the fate of the coal companies, Johnston notes. “The decarbonisation folks have been pretty effective in dealing with the coal companies. They have waged influential campaigns among investors. The economic outlook for coal companies is now quite negative.”
According to Johnston, it is likely that these same activists groups will increasingly target unconventional oil and gas. “They will try to repeat what they did with coal and the Keystone pipeline for the Alberta oil sands and US shale gas.”
Significant signpost
But the risk of stranded assets is also part of the wider policy context in which energy companies operate. And it is not clear yet in which direction that will move. “The most significant signpost where we go on climate after Paris will be the US presidential election”, says Johnston.
If Hillary Clinton wins the election, we will likely see a continuation of present US climate and energy policies, says Johnston. “This will be focused on international agreements such as the accord with China and domestic policies along the lines of Obama’s Clean Power Plan.”
Who is Robert Johnston?
Robert (“RJ”) Johnston has been Chief Executive Officer of Eurasia Group since 2013, after seven years as founder and leader of the company’s Global Energy and Natural Resources Strategy Group. Prior to joining Eurasia Group, he served as managing director of equity research at Medley Global Advisors, where he was responsible for providing political and strategic insights to clients in the institutional investment community and served as the lead analyst for global energy equities. A native of Canada, he holds a PhD in International Relations from the American University in Washington, DC.
If however the Republicans win, then “we could have a significant changing of the trajectory at the US level and a lot less interest in playing a global leadership role in climate talks.”
In the first case, a Clinton win, two scenarios are possible, says Johnston. “Will we see momentum for a zero-emissions type of energy policy where there is no role for fossil fuels, even natural gas? With a strong focus on much more renewables, energy storage, energy efficiency? Or will we move to a world where oil and gas companies will have a seat at the table, where gas is seen as part of the solution, not the problem? A world where we may actually see a new golden age of gas driven by coal-to-gas switching in Asia and growing gas demand to back up the growing shares of renewables.”
Growing risk
Johnston adds that although the Eurasia Group is “policy-neutral”, “our clients who argue that gas will be needed as bridge fuel for the next 20-30 years are probably right, because it will be difficult to achieve such an aggressive ramp-up renewables as we have seen proposed in some of the 1.5 degrees scenarios post-Paris.”
“Being a champion for natural gas seems to me the best strategy”
Johnston, then, believes “gas will most likely be around for a while”, but he does see “growing political risk in increasing demands to exclude natural gas”. The best policy for oil and gas companies who want to counter this risk is to actively engage with policymakers and the public: “Interestingly, at Paris European oil and gas companies took a strategic decision to be involved in the process, to face their critics and advocate for gas. Whereas US companies were less active. They are still uncertain about how they want to participate in the climate talks and what policy they want to see for the US market. They are also not unified and coherent as a group.”
According to Johnston, the US companies “need to figure out whether they want to follow the example of European companies” or whether climate policy is something “they want to push back within the US political system”. “Being a champion for natural gas seems to me the best strategy”, he adds.
Alternatives
Given the drive towards a low-carbon economy, are oil and gas companies also considering investing in renewable energy or alternatives like hydrogen, biofuels or electric cars? “Publicly, no”, says Johnston. “But privately yes.”
“There is no question”, he says, “that the business model of high-risk-focused, upstream-focused, high-growth focused projects, such as ultradeepwater, oil sands, and mega-LNG projects, is being reviewed.”
In the current economic conditions, companies are already much more cautious in investing in these projects. The problem is that “at a time when they are massively slashing budgets, it’s going to be difficult for them to find money to invest in areas like solar power that are not their core outlooks and face their own economic and political uncertainties”.
“The decarbonisation folks have been pretty effective in dealing with the coal companies”
Still Johnston knows that some – not all – oil and gas companies are seriously looking at alternatives. “Over three to five years they will be looking at this more and more.” There is precedence for this, he notes. “In the early 2000s, BP rebranded itself as Beyond Petroleum, in reaction to the idea of peak oil. And in the 1970s and 1980s oil companies became active in coal, nuclear and solar power, because they were worried about access to reserves.”
Whether some of the alternatives can be profitable will partly depend on how high carbon prices will become, says Johnston. “This is where political leadership comes in.” To the Eurasia Group CEO it “probably makes more sense for them to invest in the transportation side. There seems to be more synergy between their downstream business and things like biofuels, electric charging, and hydrogen. They have not done that well in solar and wind.”
Breakthrough
Eurasia Group sees an oil price recovery in 2017, “but not back to the $100 figures we saw before. Around $60 seems more likely. The deep cuts in investment, the need to replace depleting resources and some demand growth should take care of the current surplus in the market.”
Johnston does not believe Saudi Arabia will cut back production any time soon. “If they cut production now, it would help Iran and Russia most of all and that’s what they don’t want. I am not saying this is their main motivation – their primary drivers are their own economic security and fighting competing supply sources like in the US – but it does enter into it. They can hold out for a couple more years.”
This will continue to put international oil companies in a difficult spot. “They are cutting spending, derisking portfolios, reducing headcounts, deferring investment decisions. But such measures do not really give them a breakthrough. They are looking for answers right now but have not found them yet.”
One trend that Johnston sees emerging is that US companies in particular focus more on putting their efforts into their domestic business and shunning overseas political risks. “They focus on trying to make shale plays work at $30-40 a barrel. There is a lot of pressure on the technology side to make these plays work at these lower prices. That’s where they put their best people, rather than in letting them get oil out of the ground in places like Libya and Kurdistan.”
For energy companies, it is important “to stay the course in North American oil and gas sector in the short term”, says Johnston. “Geopolitics will come back in a few years.”
For the longer term, “politics around climate will impact fossil fuels most of all, in terms of market demand, support for alternatives and impact on investor behaviour. That’s the new politics companies need to keep their eye on.”
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Editor’s Note
This article was first published in the February issue of World Energy Focus, a free monthly publication of the World Energy Council produced by Energy Post.
S. Herb says
A major problem with gas is that, except for carbon emissions, it is ideally suited to space heating. Abundant gas will make it even more difficult for northern users such as Germany to achieve the large reductions in consumption necessary if stringent mid-century carbon targets are to be met (especially as this is tied up with the long time-scales for renovation and replacement of the building stock). So ‘going for gas’ must be accompanied by firm and long-term policies to move towards alternatives for heating (not an easy business).
Jan Veselý says
That is simple, house construction codes. Low energy or even passive houses are becoming a new ‘normal’.
Aloysius Fekete says
The efficacy of passive house technology and similar low-energy methodologies is beyond doubt. More doubtful, however, is the ability and willingness of nations to adopt higher quality building standards rapidly enough. I’m speaking from the UK experience, although I’m aware other northern European countries have had more success here.
I’d be interested to explore if and how solar thermal and interseasonal storage could provide a bridge to a longer-term high-efficiency vision. Gas could play a role here and it’s important to emphasise that a zero carbon world where fossil fuels are abandoned does not exclude gas. Zero carbon really means zero net carbon and gas derived from anaerobic digestion and methanation could perhaps form a durable part of the sustainable energy complex.
Roger K Brown says
One needs to asks the question “A bridge to what?” In the long term we need a carbon neutral system of energy production. It is far from clear that a policy of as much renewable energy as we can afford and as much natural gas as we need to enable ‘healthy’ economic growth is going to reduce gross global carbon emissions even if it does increase the ratio of economic output to carbon emissions.
And what are we anticipating is going to happen over the next two to three decades which will allow us to begin rapidly phasing out natural gas at the end of that time period? Electrochemical batteries are reaching cost/performance point where they may be able to complete in the frequency regulation market at very short time scales, but they have a long way to go before they can support an all renewables grid system with long term fluctuations in the availability of electric power. We can potentially to reduce the need for expensive storage by building a HVDC grid which connects together renewable energy sources over a very large geographical area, but the construction of this grid is a very expensive infrastructure project which concerns about maintaining ‘healthy’ short term economic growth rates will strongly opppose.
An of course in the long run exponential expansion of output as the norm of economic ‘health’ must be abandoned. I hasten to add, as I always do when I talk about limits to growth, that I am not suggesting that the poorest parts of the world’s population should be content live in abject poverty forever. Such a thing as healthy growth does exist. We want a child to grow up to be a normal size health adult, but it would be foolish for a fifty year old man or women to moan and tear their hair out because they are not 10 meters tall and still getting bigger. We need to reach an agreement on what constitutes a reasonable, healthy standard of consumption which could be enjoyed by the earth’s entire human population without being destructive to the rest of the biosphere. If and when we achieve such a standard we should concentrate quest for life satisfaction and aesthetic and intellectual pursuits rather than on gross increase of economic output.
Without this kind of long term systems focus we are going to waste our time building bridges to nowhere.
Nick Grealy says
Slightly deceptive headline in that it posits idea that gas is all the solution instead of part of it. No one I’ve ever met in gas proposes gas as the only or ideal technology. That isn’t mirrored by some, but not the grown ups, in the green movement, who sometimes insist that a carbon free future starts now. It can’t and it won’t.
Question of is it a bridge is important
Bridges are only built from two sides at once, and the carbon free side has yet to come up with practical, deliverable solutions. They talk about them endlessly, and unfortunately fight amongst themselves too often instead of integrating their offers. I propose that gas is a tunnel solution: It provides a clear path of travel but we’re not entirely sure where it will pop up above ground.
Finally, to Roger Brown I’d say that gas need not entail long term investments. The gas grid exists in most places and apart from minor tweaks to remove bottlenecks, it doesn’t need big investment, certainly nowhere on the scale a Europe wide renewable electricity grid would. The clear lesson shale gas provides is that there are technologies out there that may rapidly emerge and cause a paradigm shift. I’m sure there are plenty of unknowns out there in green, batteries etc.
The best way to ensure that gas isn’t dominant is to create alternatives instead of simply hoping for them. There is nothing in gas investments today that prevents them disappearing and becoming the Kodak or Blockbuster Video of energy. What people need to do is to invent replacements.
Aloysius Fekete says
It seems to me to be a bizarre, even perverse, notion that the “carbon free side” should be coming up with ways to save shale gas?
Let’s be clear, shale gas is lying prostrate because at these prices they don’t have a business. And now they are asking for help.
Nick Grealy says
No one I know of in the gas industry is looking for help. We don’t need anything more than EU governments allowing us to drill so that we can then give them money: It is after all their resource, not the gas industry’s.
A smart environmentalist would join with the gas industry to then ask governments to invest gas revenue in their industries capital requirements instead of bewailing how government isn’t giving them enough subsidy.
75% of the income Europe spends on natural gas doesn’t get spent in royalties or taxes from a domestic industry. It goes straight to Russia and Qatar. What possible good does that do anyone, especially greens?
The shale industry wants low carbon high tax gas. Russian and LNG is high carbon (almost as bad as coal in some cases) and zero tax.