This year, the idealistic goals of the energy transition squared off with the brute-force reality of geopolitics. And as author Robert A. Heinlein might have put it, reality is a harsh mistress.

Whether the Russian-Ukraine war hastens the energy transition or prompts a shift toward energy security, the clear winner of the 2022 global energy crisis has been coal.

At a Nov. 10 energy conference hosted by the Federal Reserve Banks of Dallas and Kansas City, Toby Rice, president and CEO of EQT Corp., said that in the past 12 months, the use of foreign coal has skyrocketed and “wiped out 15 years of solar and wind investments here in the United States.”

In a July report, the International Energy Agency (IEA) said that despite a slowing global economy and lockdowns in China, soaring natural gas prices following Russia’s invasion were propping up coal use worldwide and would rise slightly in 2022, “taking it back to the record level it reached nearly a decade ago.”

Rice has emerged as a prominent champion of natural gas—his company’s product—to replace coal as a cleaner energy source for the world.

“Twelve months of not addressing foreign coal has wiped out everything we’ve done in solar and wind here in the United States” to reduce emissions, Rice said. “I think it’s going to accelerate the energy transition [away] from hostile energy sources to American energy and American production.”

Russia’s February invasion also laid bare Europe’s vulnerability of relying on a hostile foreign power for energy supplies. With EU countries unwilling to develop their own fossil fuel resources, the bloc remains reliant on outside suppliers, increasingly the U.S., to keep the lights and heat on.

Toby Rice EQT headshot“We are not the lambs waiting to be sacrificed to weather. I mean we are the lions in this and we have a real major league opportunity. We just need some cooperation to help get some pipelines built.”—Toby Rice, EQT Corp.

The war’s disruption to energy supply lines has also demonstrated that renewables are unable to meet Europe’s demand, whether from wind and solar or by generating power by burning trees, which in the EU taxonomy are classified as “biofuels.”

As Europe’s winter struggles come into clearer view, some E&P leaders believe they are seeing the same policies and mindset taking hold in the U.S. Some, like Rice, have pushed for the U.S. leaders to address critical infrastructure needs. Others want to see permitting reform implemented both for hydrocarbons as well as renewables.

LNG no longer ‘dirty’

The view of shale production remains tainted but begrudgingly acknowledged as necessary in Europe. 

In 2020, the French government killed a contract with a U.S. LNG provider because it was deemed too “dirty.” In June, France quietly allowed a similar contract as supplies from Russia became increasingly erratic, said Morgan D. Bazilian, director of the Payne Institute and Colorado School of Mines professor, at the Nov. 10 energy conference.

Also at the conference, Pickering Energy Partners founder Dan Pickering said a key obstacle for U.S. E&Ps is that the world still doesn’t trust the industry.

“You’ve got the president of the United States that stands up and talks about how the industry’s not doing the right thing,” Pickering said. “So, somehow, we’ve got to find a way that the world trusts our business again. But delivering energy security I think will help rebuild that trust amongst the world in general.”

President Joe Biden’s energy plan is, in part, meant to accelerate the nation’s “transition to clean energy, and [protect] Americans from fossil fuel price spikes.”

That strategy has missed the mark.

Parts of New England face a European-style price crisis due to a lack of pipelines as well as century-old maritime regulations that effectively prevent domestic seaborne LNG from offloading elsewhere in the U.S., according to the Cato Institute. That’s despite pleas made earlier this year by the governors of Connecticut, Maine, Vermont, Massachusetts, New Hampshire and Rhode Island to waive restrictions of the Jones Act.

The result: on Nov. 18, Massachusetts was due to receive a shipment of LNG carrying natural gas into a $30 per MMBtu market.

A broken market 

Natural gas constraints in Massachusetts are nothing new. In 2018, an LNG tanker offloaded natural gas—produced at a Russian facility under U.S. sanctions—in Boston Harbor.

And they’re connected to a larger dysfunctional marketplace that is unable to respond to price signals, Rice said.

The “problem is right now the market’s broken and the market’s broken because we’ve killed our ability to get the infrastructure built that is going to be able to connect supply with demand,” Rice said. “And that’s serious.”

Dan Pickering headshot“The faster we go, the more volatility we’re going to have and potentially the more risk of destroying capital,” he said. “We saw it in Europe, we’d rather not see it here.”—Dan Pickering, Pickering Energy Partners

The typical tensions between environmental groups and industry didn’t prevent the U.S. oil and gas from becoming a dominate energy producer and the world’s largest exporter. But activists have been extremely effective at killing pipeline projects, Rice said.

“When you look out [over] the last five years … pretty much the overwhelming majority of pipelines have been canceled and this is having significant impacts,” he said.

Rice said EQT’s breakeven cost to generate a profit is a Henry Hub price of about $2.15. At $6 prices, EQT’s 30-year inventory of gas should be meeting that demand and spurring new wells to be drilled.

“Great economics. Biggest gas field in the world. We cannot add production,” Rice said. “The biggest price signal the market could give us and we cannot touch it. Why? Because we’re out of pipeline infrastructure.”

Energy transition going too fast

Pickering also worries about attracting talented labor, which the industry used to capture in the 1970s and ‘80s but that now goes elsewhere.

“Now it feels like tech has captured those people … because we’re not trusted, we’re not cool enough,” he said. The solution to maintaining a talented workforce over the next 20 years may be the “coolness and the sexiness of the energy transition.”

“And maybe making money and delivering something that people need will get sexier and that will pull people,” he said. “But talent is, I think another area that we’re constrained or going to be constrained.”

Pickering doesn’t see capital as a looming challenge. Good projects will get funded and the industry is able to generate enough free cash flow that it doesn’t need to rely as heavily on external capital.

“When it does, it’ll be cool enough or the returns will be good enough that money will be there,” he said. “So, capital’s not really a constraint.”

Pickering also sees the state of the energy transition itself as problematic, because it’s simply trying to do too much too rapidly.

“We’re trying to go too fast because what’s happening is the goal and the ambition is really significant and the desire is really high,” he said. “And the faster you go, the more errors you’re going make. Just generally, if you think about trying to deploy tons of capital and get to these goals really quickly by definition you’re not going to be efficient.”

Pickering said the transition needs to find a balance between rational investments.

“And that’s not to say we shouldn’t be making them, we should, but the faster we go, the more volatility we’re going to have and potentially the more risk of destroying capital,” he said. “We saw it in Europe, we’d rather not see it here.”

Rice said that as emissions have soared around the world, people are looking to double down on solar and wind.

“I think people don’t understand the size of the problem that’s out there. I think people don’t understand how much energy demand there is in this world,” he said. “And when solar and wind cannot meet that demand, guess what the world is going to do? The world is going to use coal.”

Reshaping energy markets

Shell USA President Gretchen Watkins said she sees as many opportunities as obstacles in the new energy landscape.

“The energy transition actually offers a lot of opportunity for us to not just bring a small group of people that can afford solar panels on their roof or electric vehicles in their garage, but it has an opportunity to actually bring everybody forward,” Watkins said. “And so, we’re spending quite a bit of time, in addition to making sure that we provide reliable and secure and affordable energy for people and sustainable, but also looking at how can we do that in a way that’s inclusive and actually includes everybody.”

Geopolitics has been an incredibly unpredictable variable in the equation over the course of the last several years starting with unprecedented volatility in the energy markets, oil trading at negative oil prices and the COVID pandemic, she said.

“We saw demand destruction like we’ve never seen before. Then we saw a roaring back, a recovery, a huge demand increase in a very short period of time,” she said. “Supply couldn’t keep up with that.”

Prices had already starting to climb when Russia invaded Ukraine. Many countries and companies, including Shell, cut ties with Russia as a result. Out of that chaos, the way in which energy is moved has shifted, Watkins said.

Gretchen Watkins Shell USA headshot“The energy transition actually offers a lot of opportunity for us to not just bring a small group of people that can afford solar panels on their roof or electric vehicles in their garage, but it has an opportunity to actually bring everybody forward.”—Gretchen Watkins, Shell USA

Hydrocarbons in particular will continue to see a high degree of volatility and unpredictability in pricing.

“That said, coming from the Shell perspective, we have really not changed our strategy,” Watkins said. “We’re very much still focused on I would say, accelerating the energy transition, recognizing that hydrocarbons are still very, very necessary as evidenced by what's happened this year where we now see this trilemma of energy security, affordability, and sustainability coming right to the surface.”

But Watkins said federal permitting for renewable and offshore drilling should be reformed now.

“We can’t get permits for wind installations on the East Coast of the United States. We can’t get permits for wells that we want to drill in the Gulf of Mexico,” Watkins said.

U.S. as dominant energy producer

Rice said that the oil and gas industry has the potential to bring unprecedented energy security to the U.S. and the world stage, with the “energy equivalent of adding 10 million barrels a day of clean energy.”

That gives the U.S. the ability to free itself from the “whims of OPEC when they make their cuts” if policymakers allow American energy and LNG to be unleashed.

“It’s a massive opportunity for us and it’s going to be the biggest energy security blanket for Americans and also … help address the energy shortage that the world is in right now,” he said.

Rice said he’s spent much of the year advocating and raising awareness for people to understand U.S. doesn’t have to be beholden to Iran or OPEC.

“We are not the lambs waiting to be sacrificed to weather,” he said. “I mean we are the lions in this and we have a real major league opportunity. We just need some cooperation to help get some pipelines built.”

Natural gas operators are ready to step up and meet the needs of world while also lowering emissions.

Watkins said that U.S. oil and gas has the smallest carbon footprint of any hydrocarbon available to U.S. consumers.

“When I look at where Shell plays in that, we’re the largest producer of oil and gas in the U.S. Gulf of Mexico. When those barrels and molecules hit the shore of Louisiana that is the best hydrocarbons that can be consumed in this country. Full stop,” she said.