Natural gas is rapidly gaining in geopolitical importance

Natural gas is "rapidly gaining in geopolitical importance," and is just as quickly emerging as the "fuel of choice" for a world population seeking energy resources that will minimize environmental impact. Also, an integrated global natural gas market is emerging from the regionally isolated markets of today.
So says a 2-year study presented May 27 at a 2-day conference at Rice University's Baker Institute in Houston.

Jointly conducted by the James A. Baker III Institute for Public Policy of Rice University and the Program on Energy and Sustainable Development at Stanford University, the study included four broad conclusions applicable to the rapid shift in the world's increasing reliance on gas. These were:
-- The formation of an integrated global gas market "in which events in any individual region or country will affect all regions."
-- In the coming decades, the role of governments will "change dramatically" regarding the development of a global gas market.
-- As the geopolitical importance of gas rises, greater attention will be paid to supply security.
-- The shift to a global gas market "is not a certainty."

An integrated global gas market
Worldwide consumption of gas is expected to more than double by 2030, and natural gas is likely to surpass coal as the world's secondary energy source, the study said.
"About three fourths of the world's proven gas reserves are in the former Soviet Union and the Middle East, but the demand for gas is expected to rise most rapidly in North America and Europe, with new markets developing in China, South Asia, and Latin America," the study said.
The study also found that spending for LNG facilities is expected to double after 2020. Developments spurring the integration of gas markets, the study said, included increasing demand, technological advances, market liberalization, and cost reductions in producing and delivering LNG to markets.

The study's authors reviewed seven historical case studies on the special challenges of investing in large-scale, long-distance gas production and transportation infrastructures in Algeria, Russia, Turkmenistan, Indonesia, Trinidad and Tobago, the southern cone of Latin America, and Qatar.
Rice scholars also developed the Rice World Gas Trade Model, which simulates the development of global gas markets during 2005-30 based solely on commercial considerations of available supply and its development costs, transportation costs, the cost of capital, end-use demand, and interfuel competition.
"The model suggests that Russia will play a pivotal role in price formation in the new integrated global natural gas market, due to the nation's location and sizeable resources and its status as one of the first major gas exporters to the European market," the study said.

By the middle of the next decade, gas from Eastern Siberia is expected to flow to Northern China, the study said.
"The presence of low-cost Russian pipeline gas in both Asia and Europe will link Asian and European gas prices. The model also suggests that Russia will eventually enter the LNG trade via the Barents Sea, providing an additional link between gas prices in North America, Europe, and Asia."
The study continued that although other resource-rich nations such as Iran and Saudi Arabia could become major gas players, these nations "are at a disadvantage because they have to bear the fixed costs of market entry since they lack an existing infrastructure to carry their gas to the European and Asian markets." Neither of these nations, the study predicted, will become a major gas player in the next 2 decades. "[Iran and Saudi Arabia's] entry will be delayed until demand rises enough to accommodate incremental supplies," the study said.

Government's role, supply security
Study researchers found that "as market liberalization takes hold in many major gas-consuming countries and the global trading of natural gas expands, the role of government is changing-away from the traditional builder, operator, and financier of gas projects toward a greater role as regulator and creator of the context for private investment."
In this new environment, "the role of courts as enforcers has grown," the study said. "Legal reforms have given courts and quasi-judicial bodies, such as regulators, greater authority." National security of supply also captured researchers' attention "as the highly structured gas world of government-backed bilateral, fixed-priced contracts has shifted to a new world of private, market-related contracts."

The study said, "Concern for maintaining a secure supply of reasonably priced natural gas will be viewed more and more as a vital national interest, due to the potential formation of a gas cartel similar to [the Organization of Petroleum Exporting Countries]”.
The study did find, however, that "the Gas Exporting Countries Forum has too many members with diverging interests to exert effective constraints on capacity expansion projects in the near term. It is likely to be a decade or more before [GECF] can assert sustained monopoly power in world gas markets, leaving consumer countries ample time and opportunity to adopt countermeasures," the study reported.

Uncertainty abound
In conclusion, the study cautioned that the rapid shift to a global gas market is not a certainty.
"It depends enormously on creating the context in which investors will have confidence to deploy vast sums of financial and intellectual capital; it requires finding solutions to the adverse social and political consequences of developing natural resources in countries where governance is weak; and it assumes a continued pull from the growing world electricity sector."