Breitling Gas and Oil CEO Faulkner: Coal doomed to perish (


Coal has played a major role in advancing industrialization and changing modes of production irreversibly, but it has come to the end of the road as awareness of environmental problems has left countries with no choice but to bid farewell to this old friend.

Coal is rapidly becoming a nemesis in the modern world and the introduction of restrictions on carbon emissions is sending this once-strategic natural resource off-stage.

     When US President Barack Obama prescribed high carbon limits in his carbon bill through higher limits on carbon emissions a few months ago, everyone knew that this was the end of the era of coal.

A well-known spokesperson for the natural gas industry in the US, Breitling Oil and Gas President and CEO Chris Faulkner has shared his assessments on recent issues in the global hydrocarbon market, particularly the fate of the coal, in an exclusive interview in İstanbul.

Recently awarded the prestigious Industry Leader of the Year Award for 2013 from the Oil and Gas Awards, Faulkner, who is famous as the champion of oil and gas industry in the US, said many countries are looking towards the US when it comes to global warming initiatives and that Obama’s carbon bill, or what Faulkner likes to call the coal bill, is setting the standards for
the US, but it also presents a model for the rest of the world in that sense. Current coal plants in the US today do not meet the carbon bill standards, but natural gas meets and exceeds them with their considerably lower greenhouse gas emissions, he noted.

From this point view, Faulkner believes that the major coal users in the world have come to realize that the current picture is unsustainable considering the calamitous effects of the use of coal in running power plants and countries like China that are notoriously heavily dependent on this major air-pollutant are looking to move away from coal and are
considering natural gas a bridge fuel for the future. He believes the death knell for coal has already rung and that natural gas has stepped forward as the most natural alternative to it.

       All these developments coincide with what is happening worldwide with shale gas, Faulkner notes. Even Turkey is hopeful these days of exploring a decent shale gas reserves beneath its soil. Faulkner particularly pointed to China, which probably has far more shale resources than the US. “So, what I think we need to talk about is how to utilize natural gas for power generation and transportation, which are impacting on the environment in a major way,” he asserted. “Frankly, I don’t know why we’re even talking
about coal anymore, when even the Environmental Protection Agency [EPA] has found that plants fueled by natural gas produce half the carbon dioxide as those fueled by coal,” Faulkner added. ‘A transitional period is required’

Faulkner was realistic in admitting that this transition needs time and is not something that can happen overnight. “I think what it will do is to begin this process, because you can’t convert these power plants economically from coal to natural gas. But what you can do is to draw a new line that says all new power generation will come from natural gas,” Faulkner noted. He said retrofitting or building new coal-powered plants to meet the new standards is cost prohibitive, so the bill will compel new power plants to mostly run on natural gas.

For Faulkner, natural gas is a valid option not only for producing countries, but also for those who are largely dependent on foreign
suppliers. He said Turkey likely has some shale gas reserves, albeit not a tremendous amount. Despite this fact, shifting to natural gas and abolishing the use of coal completely in energy generation is a reasonable way to go for Turkey, he said, citing Turkey’s abundant alternative sources of natural gas like Azerbaijan, Iran, Russia, Turkmenistan, etc. “I don’t think just because you don’t have a domestic natural gas supply doesn’t mean you have to continue being married to coal,” he argued. Besides, the liquefied natural gas (LNG) supply is making it possible to mobilize natural gas supply anywhere around the world with ease, leaving no excuse
to rely on a domestic supply to switch away from coal to natural gas. Overdependence concerns are groundless

       Still, countries like Turkey cannot rid themselves of the fears of overreliance on foreign suppliers of natural gas as the main source of energy and fuel for the industry. At present, 43 percent of Turkey’s electricity is generated by power plants running on natural gas and almost all of the natural gas is imported. Faulkner refutes these claims as well, saying that Turkey can still manage a stop-gap by installing underground gas storage facilities, where the country can inject enough gas to meet the country’s needs for at least three months. Moreover, diversification of suppliers is also a possible solution. “The reality is that, when you look at the long-term contracts that Turkey has, the demand of natural gas will not surpass the supply until after the turn of this decade, 2020. Yes, if you switch away from coal, there is going to be much bigger need for additional supply, but part of the transition period is to make sure that supply is available,” he said.

The US’s emergence as one of the major hydrocarbon producers has had a remendous impact on the industry all around the globe and the shale gas initiative has often been touted as the “game changer.” Faulkner believes the game changed in a couple ways: He recalled the natural gas price level in the US in 2008 — $15 per thousand cubic foot, higher than that of Europe and very nearly correlated to Asia. As of today, it has dropped 80 percent of its value to $3.61, largely owing to the drilling of shale gas.
This reads into the fact that the oil and natural gas prices are no longer indexed to one another, said Faulkner. In 2008 they were somewhat correlated in the US to roughly 7:1, whereas this ratio stands around 25:1 today, a very large disparity. The US was importing annually 56 billion cubic feet of natural gas and this amount fell to zero. This caused a reroute of export channels to the US. For instance, Qatar, which had built all its terminals to send all its gas to the US, had to shift its shipments down to China. For Faulkner, this was a revolution that rose from the toils of the past 20 years and happened when horizontal drilling, or fracking, began to be used on a very large scale.

The other aspect of the change in the rules of the game revealed itself with production beyond the needs of the US. “We have storage of an all time high, we are not using it for transportation in large scale and we haven’t adopted it yet for power generation. So we have a demand that has been flat and we have exponential supply growth that we created this environment where natural gas is almost, in most places it is, uneconomical. We cannot drill for natural gas and make any profits. It costs more to take it out of ground than we can sell it for,” he said.

This has repercussions concerning global price levels as well. Assuming that the natural gas price will stay steady at around $3.5 per cubic foot, Faulkner estimates that gasification, liquefaction and transportation of that gas to Europe will cost another $5 plus 50 cents in fees for passage through the Panama Canal for shipments en route to Asia. ‘Natural gas producers have to re-evaluate prices’

So once the US enters the global market as a provider of natural gas and tries to capture whatever it can, this will put pressure on gas exporters to re-evaluate their pricing models, making the prices a lot lower than their current levels, Faulkner asserts. “It will give Gazprom second thought to re-evaluate the piped gas price in Europe. Because they have cartel pricing, they hold everybody hostage and if their natural gas became less relevant, they would have to wise up and make a change in their price,” said Faulkner.

The explosion in production despite steady demand has also coerced the US into shifting to drilling tight oil instead of focusing on natural gas only. He summed up: “So, it was a good thing and a bad thing: The good thing is that we have a hundred years’ worth of supply and the bad thing is that we are not doing anything with it.”

Whether the US’s shale gas initiative and the ensuing prospect of deep slashes in the revenues of Russia’s natural gas monopoly Gazprom out of the new market conditions can explain the intensifying rift between the US and Russia is a valid question and Faulkner believes that Russia — just like the Middle East — has not been very excited that America is producing more and more oil and natural gas. “I think they became a bit more worried that the US, which is a massive consumer of natural gas and oil, was becoming
more independent and that was not a good thing for their finances,” Faulkner argued. He also asserted that a lot of Middle Eastern countries such as Qatar and Saudi Arabia are no different when it comes to their response to America creating its own island of independence and competing with them in the world energy market. “Ninety-two percent of Saudi Arabia’s economy is hinged on oil. When you look at Russia, a tremendous amount of their revenue comes from natural gas exports. We, on the other hand, have a
more diversified economy; we’re not tied to energy sales. So I think they are looking at protectionism,” he noted.

There is another dimension concerning the possible outcomes of the US’s rising eminence in oil and natural gas production: Shifting its foreign policy focus from the Middle East to the Asia-Pacific. Faulkner nods yes to such theories that the shale gas revolution may be one of the factors that led the US to declare early this year that the Middle East was no longer of primary importance and that the Asia-Pacific region is now its strategic focus. “I think that’s one plausible explanation that the US has begun to
decrease its dependence on Middle Eastern shipments of oil and that’s driving a lot of our foreign policy. If we begin to look three to five years down the road, that relationship will become a lot less relevant than it is today,” he said. “One might ask why would the US want to patrol these waterways [the straits of Hormouz and Malacca] with the 7th Fleet Navy. If we become independent, we don’t need to worry what’s happening in these areas,” he said. ‘Saudi Arabia frets US becoming main oil producer’

“I think Saudi Arabia is concerned that we will be the biggest oil producer in the world in a very short amount of time. By 2017 or 2020, we can surpass them as the biggest oil producer of the world and I think that concerns them and it all goes back to fracking; it all goes back to our abilities to use this technology to unlock all of this oil. The Saudi oil minister was at an OPEC meeting and said, ‘We should be concerned about what is happening in North Dakota.’ And you would think that Saudi Arabia wouldn’t even know where North Dakota is, but because of the buck in this whole massive boom up there, they are starting to stop and take note that
the Americans were not just some flash in the pan, they are really turning the corner. Now, the good thing for them is we still consume massive oil, so we are not a net exporter of oil yet.”