Q&A: Eurasia’s Raad Alkadiri Talks US LNG Risks, Geopolitical Issues

Raad Alkadiri, Eurasia Group’s managing director for energy, climate and resources, spoke with Pietro D. Pitts, Hart Energy’s international managing editor on April 20 during a roundtable discussion with Reed Smith partner Leigh T. Hansson at the conclusion of Reed Smith’s private Energy and Commodities Conference in downtown Houston. Conversation moved from topics such as the Russia-Ukraine war to the “Harry Potter” world of energy, Europe’s long-term appetite for U.S. LNG exports, gambling on Asia and the LNG market in general.

Pietro D. Pitts: Has the energy transition been slowed by the Russia-Ukraine conflict, and how impactful has it been on the world reaching the Paris Agreement targets?

Raad Alkadiri: I’ll tease out the questions to touch on various topics around your question.

The first one is about the availability of energy. The bit that’s missed about Russia is for all of the focus when the invasion happened, the focus was on the loss of oil. What we've lost is gas molecules—oil just redirected itself—and you have as much oil on the market now as you did, OPEC aside, from Russia as you did prior to the war. And that matters in terms of the energy transition, because what it meant is the world was dealing with 110 [billion cubic meters]-120 Bcm less of gas availability. That spiked prices, and the impact there wasn't one where necessarily you've got emerging markets wanting to slow down their energy transition; they were priced out of the energy transition debate. For countries like China, India, some of the countries of Southeast Asia, they made their energy security decisions just the same way Europe and the U.S. did. Everybody did what they needed to do, which again, makes sense if you look at the real world rather than the ‘Harry Potter’ world. The ‘Harry Potter’ world of energy is: somehow we're going to magically move towards energy transitions and it's not going to be disrupted even if we say “no more fossil fuels.” The reality is, it's going to be a process of adaptation and a process of supply and demand.

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The second thing isn’t going to slow it down, but where it starts to get in the way again is about countries being able to reach common agreements on what the priorities are and how you achieve them. The priority of 1.5 degrees [Celsius] is all well and good. How you achieve it has never really been addressed. And this makes it more difficult because it makes energy security and therefore economic concerns more acute. Governments are elected or stay in power by hook or by crook on the basis of what they can deliver. Energy is a critical part of that economy, and you're not going to see any emerging markets step back….How you get to 1.5 [C] is in many ways an even bigger question; it's difficult to see how you get to 1.5 [C]. And that in many ways is a question about the development and cost of technology and what we see over the next 20, 30 years in terms of that. And that's why the 1.5 [C] debate in the current context is a little bit of a miss—it looks at the woods rather than the trees, so it misses the trees in terms of this, and the trees are important.

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PDP: Is it a good idea for Europe to potentially rely on the U.S. for LNG imports?

RA: Europe isn't dependent solely on the U.S. in terms of gas, and is depending on more gas from Norway and North Africa, and it’s looking for gas from Central Asia. It will look to the east, the East Med[iterranean]. [Europe] has become a big market for the U.S., but I suspect it partly depends on the success of U.S.-EU energy transition policy, because you could argue the market that’s making a mistake over dependency is not the EU, but actually U.S. LNG producers and wannabe U.S. LNG producers who see this massive new market in Europe and believe that it will extend for a significant period of time. Europeans are already balking at signing long term purchase contracts with existing LNG producers: 15 years appears to be the maximum they’re going to consider, and they would probably rather somewhere between 8 [years] to 12 [years]. If Europe can continue reducing its demand on gas over time, if some of those energy efficiency measures become structural, if other supplies do start to materialize, there is a question as to how long the Europeans are willing to tie themselves in to gas purchases.

If you are a pre-FID [final investment decision] LNG project in the U.S., is Europe really what you are going to gamble on to secure your project economics as much as it is Europe over-relying on the U.S. or anywhere else. The other thing in Europe is that LNG requires infrastructure at both ends. Clearly the Germans have invested and have led the way in terms of investing in regasification capacity. That will determine in part what your market options are. But there’s going to be a certain amount of redundancy there. So [again], if I was a U.S. investor, I wouldn’t be counting on the fact that Germany’s moving ahead with six regasification plants and has already delivered two and go that’s my long-term market.

PDP: What’s your take on Australia, the U.S. and Qatar and their ability to supply LNG to Europe and growth markets in Asia?

RA: Certainly the Qataris learned long before anyone else that the Chinese will pay more for energy security. The Qataris have always maintained a certain amount of spot capacity and that they’ll direct to Europe and they’ll sort of make a mint off of it when they can. For them, Asia is the long-term play and China is the long-term play, which brings you to U.S.-China relations. It’s much the same question as why a Canadian gas producer is in a hurry to get to the Gulf Coast to try and get to Europe as opposed to looking west, where given the arbitrage play, there is money to be made? The Chinese are willing to sign long term contracts and arguably, the [Canadians] are geographically better suited to deliver to the east coast of China, [which] would make sense under these economic circumstances. There’s always U.S. LNG, and U.S. politicians have long been fascinated by the notion of freedom molecules and trying to get the Europeans to take U.S. LNG as opposed to Russian gas, irrespective of price issues. They now have an opportunity, but that window may not be as open as long as they think it is.

PDP: TotalEnergies’ CEO Patrick Pouyanné recently said that western companies were more concerned about “returns than growth.” How should we digest his comment?

RA: One of the things European super majors have learned is that dividends and returns are very important. The big difference—and this is one that’s going to be tested under energy security circumstances—that was seemingly differentiating European and North America companies is that the Europeans were being encouraged by shareholders to put less investment in upstream to accelerate energy transitions and become energy providers. They were beginning to look further downstream and to change their profile right up to the point when investors went, “but we’d also like dividends too, please. The U.S. super majors appear to be getting great dividends, where are ours”? From a U.S. perspective, there’s a seemingly clear strategy they are pursuing. Part of it is de-risking that portfolio, part of it is getting back to short cycle projects. But a key element of it is what can broadly be called decarbonizing hydrocarbons. How do you use technology to reduce your Scope 1 and Scope 2 emissions? How do you clean your barrel and create two things out of that?

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This as carbon becomes more of an issue and lengthening that time over which hydrocarbons will be used. So you want to see demand extend further into the future. But even if that demand is reduced, you want to be in a competitive situation in terms of [your] carbon footprint to be able to take advantage of tighter competition. That's a very clear strategy, and it's one the IRA rewards and encourages. European super majors are caught between hell and high water in some sense. They’ve made some significant promises in terms of how they’re going to change the nature and strategy of their business. They’re beginning to run into the issues of returns that come out of that, and it now puts them in a position where they have some awkward decisions to make, both in terms of whether they continue with that strategy or go back to a more traditional strategy, but in a much more challenging environment. And again, Europe has become litigious when it comes to climate. Europe isn’t a litigious block or litigious continent. They’re happy to use the law, but primarily it’s regulation, it’s government measures that are used.

Now what you’re seeing are activists on a whole host of levels, both with governments and companies trying to use legal measures, trying to use a broad definition of issues like human rights, etc., to force companies to take measures on emissions. U.S. companies are facing that. And that goes beyond ESG and that goes to sort of some bigger issues about what the legal framework will be for some of these companies to operate and what they will be considered liable for in terms of their operations. So it's a much more difficult environment for the Europeans, partly as, say, from the company's own making. They were very smug on how they approached energy transitions and tried to benefit by positioning themselves as being more green. But it isn’t about growth and returns, that's not the case. Where Europe was going was based far more on a desire, and again it goes back to license to operate and reputation risk on a desire to green themselves and green their operations in a way that U.S. companies haven't followed. And so the question is, ‘do we see European companies shifting more towards the type of technology that U.S. companies love to promote?’ I mean Oxy [Occidental Petroleum] promotes itself as a technology company in the energy industry. It's an oil and gas company that uses technology to reduce its emissions and actually uses that technology to enhance its production. So let's not get too cute, but I think European companies are now stuck in a difficult middle ground.

PDP: Could we see a pullback, or not even a push by the Europeans to invest in the upstream to get that supply they need to feed their LNG import facilities?

RA: LNG projects take a long time to deliver. Companies like Shell, none of these companies don't have LNG, but you don't invest in LNG for a European market right now, not if you're starting now. If you are just starting on that road there are developments that are taking place, you have Mozambique, and other areas that are going to come online. Europe is a market, if you're looking at it over the next 25 years, Europe doesn't necessarily make sense. And, you won't necessarily get the best returns there. Again, if you're going to make [a] gamble on LNG, look to Asia.