This is a transcript from a session at India Energy Forum by CERAWeek where Atul Arya, Senior Vice President, IHS Markit orchestrates a discussion on the energy landscape with a number of IHS Markit experts including: Gauri Jauhar, Director, Energy Research & Analysis; Michael Stoppard, Vice President & Chief Global Gas Strategist; Paul Markwell, Vice President, Upstream Oil & Gas Research & Consulting and Ravi Narayanaswamy, Vice President, Oil Markets, Midstream & Downstream, IHS Markit. Watch the full video.

Atul Arya:

I want to start with Gas. Michael, and Gauri, you may want to come in on this. Gas and renewables, this seems to be a common question, some people, and I think I would agree with them, that gas is the loser. Because of renewables, policy, incentives and coal. Because it's cheap.

Michael Stoppard:

That's one possible outcome, but I think of it as slightly different where I think of thermal generation as the loser. Every kilowatt hour of electricity that's produced by renewables, by wind or by solar, is a kilowatt hour less that will be produced by thermal generation. But here's the key. Here's the rub. As you bring in more and more renewable generation into the mix, it actually turns out that there's a strong case for gas acting in unison with renewables. A very good source of backup, very flexible, minimizes the emissions, and reduces the capital cost of the backup. So, I think we need to slightly question or revisit the idea that coal is cheap if coal is not in the long term going to be operating on a base load basis.

Atul Arya:

Yeah, and Gauri, you always remind me there is captive power and there's grid power. And that makes a big difference. So, what is the difference?

Gauri Jauhar:

Sure. The big difference Atul, if you look at grid-connected power, you are looking at a capacity of 315 gigawatts, but if you start looking at captive and diesel-backup gen sets, you're looking at another 100, 120 gigawatts, there are several ranges, estimates based on different sources. This is a segment which is paying three to four times the cost of coal-based electricity, which is the lowest in the merit order. So, the merit order will clear coal, but will not clear gas in many instances. So, I think the idea here is to see, at least in the captive, let's start, and I'll pick on the term which Kurt used earlier in the trucking side, the fragmented nature of the industry. This captive industry, this, especially the diesel gen set industry is highly fragmented. The gas industry has a challenge to go and actually deal with that fragmented industry and can work those customers either from diesel gen set backups into gas-based gen sets based on an economic advantage. And increasingly we set up a lot of foreign multinationals, for instance, who are in India, in cities like Bangalore, who have global targets for meeting their own commitments to investors on climate change.

Gauri Jauhar:

And they can meet those targets if their global centers in India, their knowledge centers, for instance, similar to the RE, 20-22 companies, actually meet those targets by making these choices. And we've increasingly seen that demand come up from the consumers to make those choices.

And to Michael's point on gas renewable integration, I think in India we still haven't seen the impact of what high-penetration of renewables will do. We have huge targets, and the IHS Markit, our research shows that with about four years going to be out of achieving those targets, so we will not achieve it within the timeframe that has been set out. So, we still really don't know what impact a high amount of renewables is actually going to have. And there are estimates that to have a high penetration of renewables that is being looked at, you need somewhere about 15 to 30 gigawatts of spinning reserves in the system, at least, at the penetration rates we're seeing right now.

Atul Arya:

So, there is hope for gas in India?

Gauri Jauhar:

There is hope for gas.

Atul Arya:

Michael, a lot of questions about the gas hub in India.

Michael Stoppard:

Just a word on the renewables, and then I'll come to the gas hub. A quick word on the renewables. If you want to look at what happens when you bring in a lot of renewables into a coal-based system with cheap coal dispatch, have a look at what's happened over the last 15 years at Spain in Iberia, that's a good case study, and I'm afraid it's a story of non-performing assets on the thermal side. And it's quite clear that investment in gas would have been a better bet than investment on coals. I'll just leave you with that provocative thought.

Gas hub, there are plans to get gas hubs going across Asia, and of course a big focus here in India. The motivation and the driver for that is to get transparency of pricing. Transparency of pricing is always a good and helpful thing to optimize a market. We wait to see the details. The challenge and the issue is when you have a different set of pricing in place of how that can operate. There are experiences around the world where once you get a hub and you get a transparent spot price, it will cause some tension and strain when you have different regulated prices in the mix. So that's the challenge that we see here in India.

Atul Arya:

Paul, I'll start with you on two questions. One is digital technologies, you showed a wonderful chart. I think there's a degree of skepticism as to hype versus reality.

Paul Markwell:

Yes. At CERAWeek last year, we termed it like there was a tsunami of opportunity for innovation. But it's very hard to pick the winners, the winning technologies. And I think I still would say that that's true. The winners in this new opportunity from digitization are probably those that quickly sift through and identify where they can add value and focus on those. Otherwise, with the amount of information and ideas available, you could spend all your time trying to absorb things. I think in the industry, though, there are some real nuggets of application. It will take a bit of time, but I think the industry will start to be able to adopt new practices.

If I could just pick one as an example, the whole idea that you can develop the field based on a digital model, let's say of a development, it'd be like a digital twin. Meaning that it just makes it easier to, each time you go through development, use an existing design, look at what's been done before, quickly adopt it, you've already got your standards there, and get on and do it. It sounds straight forward, but it hasn't been the practice of how the industry's operated for a long time. And now we're seeing more and more, particularly in the offshore situation, the North Sea, for example, is becoming the norm and helping to speed up development.

So, I think that there's ... and we see it. We study case examples in digitalization because to us that's the only way that we can get our heads around what's valuable and what isn't. But I think that's the way forward.

Atul Arya:

I think offshore is a good example. Because offshore has seen, and we can see in the North Sea a large number of innovations, both in Norway and well as in UK North Sea, right?

Paul Markwell:

Right. And I wanted to say, one of the challenges, let's say you crack that nut, so that you get smart at figuring out the right practices and getting focused, then the next challenge is deployment. Because it's all very well to have a practice and an approach that you can apply in one country with one set of regulations and say for a development type. Well the successful companies will be those that can replicate that across their portfolio. And if you've got a very wide portfolio internationally, a whole different range of local content, or local regulation about getting approvals, that just makes it more complex. I think that makes it very interesting as well.

Atul Arya:

Yeah. So, there is a question on supply, and we are fortunate we have three of our top experts here sitting with me. So, with the sanctions in Iran, and then Venezuela in decline, do we feel that Saudi Arabia, US, and Russia (the big three) can then make up that decline? Maybe Ravi, I'll start with you.

Ravi Narayanaswamy:

Sure. I think, if you look at it from a shorter-term perspective, like I said, the US, it's not so much about the producing capability, it is more of the off-take of the production to the market. That is where the constraint is. What's happening in US market currently is that people are drilling wells and then also more or less it is completed and just waiting to produce. So, they are in the stage where they are ready and once the off-take capacity comes online, they'll be able to ramp up production in a very short period of time.

So, until that production volumes are ... or the off-take capacity constraints are relieved, we will still see that the market will remain in time. Once that off-take capacity comes online, we do see, yes, the market will start coming back to balance.

Atul Arya:

Paul, one other question related, maybe you can answer that, is sort of how do we see the maximum potential from US unconventional, not in the next 18 months, but beyond that. How high could it go?

Paul Markwell:

Well, we showed a very rapid buildup of US unconventionals out through about 2020, where the bottle-necking of the infrastructure and then quite rapid ramp up. I think our global outlook for tight oils, so it's mainly North America, but including Russia and Argentina and so on, we have it peaking more or less around 12 million barrels a day, as I recall, around 2022, 2023 level. Now that doesn't mean that ... that's an estimate, of course, there's a actually very high up-side on that. But it does reflect, I think, that recognition that in North America, the mature plays start to play out. It gets harder to find new plays. So, you're really squeezing more from the existing ones if you want to increase that.

I think the way the technology has developed in the last few years has surprised anyone. And I think at almost any point, if you'd been asked to look forward at future growth, you would have underestimated. It's very hard to say how much further that can go, but I'm always one that says there's a lot you don't know yet in innovation, and there's a lot more up-side. I think there's also a lot of up-side in lots of different countries that have hardly started yet on tight. And India, of course, has its own share of tight rock to work with.

Posted 2 January 2018

This is an excerpt of a conversation from the India Energy Forum by CERAWeek and has been professionally transcribed as accurately as possible. Please note, some words and phrases may have been unintentionally excluded.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.