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Geopolitical risks are at their highest level in half a century, the head of one of the world’s biggest oilfield services companies has said, raising concerns about energy supplies and helping to fuel a boom in liquefied natural gas.
“From a historical context I’ve heard people say, you go back to the oil embargo of 1973 — that being somewhat similar,” said Lorenzo Simonelli, chief executive of Baker Hughes, in an interview with the Financial Times.
“But in my tenure, no [the geopolitical climate has not been this fragile],” he added. “This is, from a political standpoint, very fluid.”
His comments come as the conflict between Israel and Hamas in the Middle East adds to an already febrile geopolitical environment as Russia’s full-scale invasion of Ukraine nears the end of its second year.
Baker is one of the world’s three leading providers of oilfield services alongside SLB and Halliburton, responsible for drilling wells and laying pipes across the world, from Texas to West Africa. It is also a top supplier of LNG equipment at a time when demand for seaborne gas is surging, as Europe weans itself off Russian gas and global energy demand rises.
Oil prices jumped to more than $130 a barrel last year after Russian troops entered Ukraine. They spiked again last month to almost $100 a barrel after Hamas militants attacked Israel. They have since eased, to around $80 on Friday, as concern that this could spark a wider Middle East conflict has receded and bearish economic data have damped demand outlooks.
Israel is not a significant producer of crude, and Simonelli said the conflict there had not “changed the outlook” for supply or demand. Analysts have said a major intervention by Iran, which has ties to Hamas, could propel prices upwards.
“Base case is that this is hopefully contained within the situation that it is currently — sad as it is — and things continue to be tight,” he said. “But clearly, if there’s a worsening and deterioration and an escalation of the situation, things will change.”
Russia’s weaponisation of its gas exports over Ukraine has spurred European demand for LNG exports — in particular from the US — with an uptick in the buildout of facilities for which Baker supplies equipment.
Baker forecasts it will book almost $9bn of LNG equipment orders across 2022 and 2023, more than three times the amount in the previous two years. Global installed capacity will need to rise to 800mn tonnes per annum by the end of the decade from around 410mn tpa this year in order to meet demand, it said.
Simonelli said Baker has a backlog of LNG contracts that extends out to 2050 and Russian pipeline gas has little prospect of re-emerging in the short term as a competitor to LNG, even if the Ukraine conflict ends.
“I think Europe has been shown the difficulties of being so dependent on one energy source,” said Simonelli, who lives in Houston but is originally from Tuscany, Italy.
European gas prices rocketed to more than €300 per megawatt hour after the Ukraine invasion and the market has remained jittery as the continent scrambles to replace cheap Russian imports. A warm winter last year and successful efforts by European nations to build up stocks have helped.
“There was a sigh of relief I think last year, there was a milder winter. There is a slight sigh of relief right now, because it seems still like a relatively mild winter at this moment,” said Simonelli. “But if there’s a serious winter, it’s still going to have an impact on Europe.”
He said the build-out of LNG projects on the US Gulf Coast would continue as American exporters look to meet the boom in European demand.
“What you’re seeing play out is exactly those final investment decisions associated with the incremental production, that’s going to be required to meet the need,” said Simonelli, pointing to 65mn tpa worth of projects being greenlighted this year, with a similar volume next year.
Europe’s LNG boom has attracted criticism from climate campaigners, who warn it could derail the continent’s emissions reduction efforts. But Simonelli said the fuel has helped cut emissions by replacing coal as a provider of baseload power and it would continue to be part of the energy mix for years to come.
“You still have a lot of coal usage in Europe as well, so there’s plenty of opportunity as we go forward to continue to displace coal,” he said. “Eventually, you’ll continue to see the cleaner aspects of natural gas, if you think of net zero LNG, the application of Carbon Capture Usage and Storage — and so there’s a long lifeline we see for natural gas and LNG.”
“This is a good moment for LNG,” he added. “If you look at affordability, security and sustainability, natural gas and LNG is not just a transition fuel but a destination fuel.”