Michael Stoppard, Chief Gas Strategist at IHS Markit leads the conversation with industry leaders at CERAWeek 2018. Here’s an excerpt of the interview with Honorable Matthew Canavan, Minister for Resources & Northern Australia, Jack Fusco, President & CEO of Cheniere and Rainer Seele, Chairman of the Executive Board & CEO of OMV.

Michael Stoppard: Okay, thank you very much. I'd like to, I think, start pressing on the demand side, and then we'll come back to those comments on supply. But let's think a little bit more about demand, and you mentioned the competition with coal. Matt, I'd be very interested in how you as your vantage point looking out on the Asia-Pacific, how do you see demand for gas and indeed for Australian coal, and how do you think about the two?

Matt Canavan: Yeah, look, I suppose I'm always wary about making forecasts because probably the only certain thing is your forecast is going to be wrong, but perhaps the best way to look at this, I think, is what's going to happen tomorrow is probably a little bit like what happened yesterday. You know, in this century, the last 15, 16 years, coal demand across the world's increased 56%. We've never had a sort of increase in coal demand like it at all in any time in history. Indeed, even if you accept the IEA or BP projections, which have coal demand stagnating or possibly falling, certainly falling in some locations in Europe and the US, we're going to have to produce as much coal in energy terms for the first 40 years of this century as we had for the previous 200 years in world history. It's that size. Like the size of the energy task for the world is just so huge that we're going to, in my view, have to push on all levers to meet the task, and that includes coal.

We in Australia view very much that we've got very high-quality coals, and we can bring down emissions by further greater use of them, by greater use of ultra-supercritical and high-efficiency, low-emission technologies, and also promote the use of gas as well as an even cleaner technology that can help bring down emissions further. Now, in terms of the increase in demand for gas in the region, I think there are challenges given the price has been a little high at the moment in Asia, but the U.S. supply possibly will help bring that down, and there's also an infrastructure task.

I think we've got to accept that to boost gas demand takes a fair amount of capital expenditure relative to perhaps other energy sources with LNG receivable terminals, pipelines, et cetera, and that's at the core of what we're trying to work with the US government in that agreement I mentioned. I'll also note that that's partnering also with the Japanese government's $10 billion fund to build up the infrastructure for gas receivables in Asia. Fundamentally, I think energy demands are positive, so there's going to be increased demand for all types of energy. It's an exciting time to be involved in these markets.

Michael Stoppard: Jack, it's very striking how many countries have imported LNG from the Sabine Pass facility. How do you see demand around the world?

Jack Fusco: Well, Michael, it's very interesting, so if you look at the first cargo that we shipped two years ago, it went to Brazil. If you look over the past two years where the cargoes have went, it looks pretty well even between Asia, Latin America, and then the rest of the world. But if you look recently, just about every drop of LNG that Cheniere has produced that doesn't go to a foundation customer has went directly to Asia, and more specifically directly to China. So, we don't see that changing. We see a secular shift in what China is trying to do to clean their air and to generate electricity for society. So, it's more of a social issue in China, where they need cleaner air, and we see that shift being longer term in nature, and I think that's why we've been very successful there. I don't see that changing any time soon, Michael.

Michael Stoppard: It sounds as if you're very focused on the Asia-Pacific area.

Jack Fusco: We are extremely focused on Asia-Pacific. We opened an office in Tokyo. We've always had a Singapore office, but we opened Tokyo. We opened an office in Beijing. The amount of growth there just year-over-year is the size of all of Cheniere. So, we could double the size of the company if we're successful there in Asia.

Michael Stoppard: How do you think about developed markets versus emerging markets?

Jack Fusco: We like them both, you know.

Michael Stoppard: I thought you might say that.

Jack Fusco: Having said that, though, we can finance off of some better than others.

Michael Stoppard: Right.

Jack Fusco: So, for us, it's more of term, and market, and payment structure on some of the more riskier countries.

Michael Stoppard: Okay. Well, let's jump back from Asia back to Europe. I'd like to press you, Rainer, a little bit more. I mean, I'm intrigued by ... You said we'd been through a tough time in gas in Europe, but do you see us as turning around? It's been difficult to push coal out of the mix so far. What's changed, and how do you see gas in this long-term roadmap that we have in Europe?

Rainer Seele: I think we don't have to convince any politician that gas is the cleaner fuel as we speak about all the ecological benefits arriving. I think it was triggered by the automotive industry, the diesel scandal we have seen in Europe, which is changing the mind dramatically, you know? I'm a little disappointed because I'm also refiner, a very important refinery in Europe, and therefore I'm really disappointed because it's a great technology, and what I do see is that Europe is now changing, switching from diesel to gasoline cars. Well, it might impact the NOx and SOx emissions, but it will not impact positively CO2 emissions. So, CO2 emissions are becoming a major priority, and the only solution we have is natural gas from my point of view if we would like to manage it as an industry.

But what I have seen, and I take Germany as an example, that Germany has the dream that they can save their climate by moving to 100% renewables. Instead, we have seen a dramatic increase of renewables in power generation, but CO2 emissions increased because we stepped out from natural gas-fired plants, and we invested more into coal-fired plants so that the overall balance was not in favor of CO2, and that's why the German dream end up as a nightmare, yeah? We have increasing CO2 emissions, and that's why I think this is coming on the agenda of the politicians, and if they really listen to the industry, and we do know how to manage, then natural gas is the short-term option to really meet with the CO2 targets.

Michael Stoppard: You seem to be nodding strongly at that, Jack.

Matt Canavan: Yeah, sorry. I was, too, but go, Jack.

Jack Fusco: No, just I've been in power generation for the first 35 years of my career, so it pleases me to hear about your expectations for natural gas-fired generation because the UK and Western Europe have struggled between gas and coal, and what we saw early on is when we were delivering LNG, U.S. LNG, into Europe at around five dollars, we were displacing coal. But as Asia has demanded more and more of the product, and there's less for Europe, and prices have expanded, then that's switch back. So, I, for one, would rather look for secular structural shifts in markets to continue to grow our business rather than betting on the weather or on price only.

Michael Stoppard: So, Matt, how are you seeing the coal/gas dynamic in Australia?

Matt Canavan: Yeah, look, I was nodding my head at what Rainer was saying because we've had similar issues in Australia where there's incentive schemes for an uptake in renewables, and we've seen that in some parts of Australia where renewable penetration's gone of 40%, say, of South Australia's market. But what's happened is it's displaced gas in terms of the bid stack in Australia. Gas is above coal in terms of cost, and therefore renewables has pushed gas out of the market, so you've got the same sort of situation where emissions haven't really fallen. You're left with coal-fired power stations that aren't running as efficiently as they used to be, and it has led to a reliability issue as well as not meeting, really, the environmental targets.

So, what we're trying to do, as the Australian government, is post-2020, when some of these renewable energy schemes finish, is to move away from the situation where we're trying to pick winners, to move way from subsidizing renewables directly and move to a model which is technologically neutral, which tries to do all of the above, which tries to say, "Yes, we want to lower emissions." Our target is to lower our carbon emissions by 26 to 28% by 2030. But we can do that in a variety of ways. Gas is obviously ... Replacing coal with gas gets you 50%, well above our target. Even going from supercritical or less coal to ultra-supercritical gets you 20, 25% off. So, we think we should look at this with the end objective in mind, not the process. I don't care if it's, as Deng Xiaoping said, a yellow mouse, or a black mouse, or a white mouse, as long as it ... oh, sorry. A yellow cat, a white cat, as long as it catches mice, that's all we need.

Michael Stoppard: Okay, you raise the issue of renewables, so I want to bring Rainer back in here. I mean, you mentioned the coal/gas dynamic, but say a little bit about how you see the renewables playing out in Europe in the dynamic with gas.

Rainer Seele: Oh, come on. The landscape of Europe is changing. You see so much windmills coming up, and I think we have done a great progress in the technological development in renewables. They are competitive, yeah? Windmills are competitive in Europe, but I think we shouldn't build too much solar power capacities. It's what we heard yesterday. It's better placed in the Middle East because the sun is shining more there, and that's a very good reason to do that, and we shouldn't invest it into the north of Germany where we have such low sun hours, so it makes sense. But what I think what we should have is not discussion of extreme positions. When I talk to politicians, they think that renewables is the only solution for our climate, and therefore they are striving in their climate strategies for 100% renewables.

I don't know which economy can consume such a high cost level, especially taking into account that we are internationally in a competition, and all my customers are asking me for cheap energy prices. Yeah? Well, that's the reason why I like to import gas. It doesn't matter where it comes from. If Jack delivers with a low price, I take his LNG. That's how the market works, and that's what my customer needs. They all say to me, "Rainer, please give me the Henry Hub price because I have to compete with American companies." I can't do that. I always answer, "Well, why don't you compare with Asia? Asia has higher prices than in Europe." That's the reason why Jack is sending his cargoes now and bypassing Europe. But that's the way it is, and therefore I think we need to have cheap energy, and we shouldn't have only an ecological discussion with ignoring the economic effect because we have to stay competitive.

Michael Stoppard: Very good, thank you. I don't know, Jack, do you have a comment on that?

Jack Fusco: No, I would just say I agree. I think the feed-in tariffs, the subsidies on renewables, have created this lopsided system. I also think that there's no better technology than gas-driven technology and natural gas-fired generation to complement the variability of renewable power. I think the two go hand in hand. I do think there's, at some level ... And I think California here in the States is learning a valuable lesson that the grids can't support too high of a concentration of any one type of power generation.

Matt Canavan: Yeah, just to follow on from that, I fully agree when you get to an unrestrained or uncontrolled penetration of renewables or intermittent power ... It's not renewables. That's not the problem. It's the fact that it's intermittent. That causes negative spillovers because somebody's got to be there in the background to fill in when the wind's not blowing or the sun's not shining, as it's occurred in Australia. We had a situation where an entire state had a blackout because some turbines tripped, wind turbines tripped, and there wasn't the back-up thermal power in the system to stabilize the frequency, and the whole state tripped.

As a policymaker, as a politician, I'm concerned sometimes that the policy settings are often set by people who are good at politics and elected to parliament who are not engineers, and we really don't know how complicated and fragile an electricity system, an energy system, can be. So, that's where all you guys come in, and it's really important, and I think people who actually understand how these systems work speak up when they see things like this happening because it's easy to ... you know, in the public's mind, renewables are great. They sound fantastic, but no one can tell me out there in the public what frequency the electricity system works at in Australia, and what might intermittent power mean to the stability of the system.

This is an excerpt from CERAWeek 2018 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.