World enters into new natural gas era

The world is entering a new era in which natural gas is becoming an energy driver, as crude oil has been for more that a century-but there are issues and obstacles to reaching that potential.
That is the view of Patrick D. Daniel, president and CEO of Enbridge, Calgary. Daniel was keynote speaker at a Ziff Energy conference on natural gas outlook. The Enbridge CEO said the main issues facing the gas industry are a lack of global marketing mechanisms, price volatility, lead times for development, and location of resources.

On global marketing, Daniel quoted energy expert Daniel Yergin that a crude oil price drop in 1986 was significant because for the first time there was no price-setting structure. Yergin wrote that the market was "victorious" because the price was not set through arduous negotiations among OPEC's members, but through thousands and thousands of individual transactions. Historically, Daniel said, the US and Canadian gas markets have been continental-and that was fine until supplies became constrained, and there was nowhere else to look for additional supplies.
"Now, as more countries begin to export LNG, and more companies start to buy and sell gas globally, market forces will become global," Daniel said. Eventually, gas prices, too, will hopefully be set by "thousands and thousands of individual transactions. Right now, however, the sources of supply from outside North America are limited," he added.

Daniel said supply constraints have contributed to price volatility and oil went through a number of price crises and price spikes in the 1970s and 1980s, but has been more stable recently. He said it was relatively easy to drive a Volkswagen Beetle if you don't like gasoline prices but harder to tell people, "Don't heat your home," if you don't like the price of natural gas.
The key on price volatility, Daniel suggested, will be industrial switching, which is the best control feature for gas prices. Without that, he said, the market wouldn't work efficiently and governments would be pressured to step in to the market.

Daniel said long lead times for development and slow, often unpredictable approval processes are an even bigger concern for gas development. He said it is getting harder and harder to gain access to land in the US and Canada and to build new infrastructure without lengthy hearings and considerable vocal opposition.
"With the advent of the ['Not In My Backyard'] syndrome, many resource projects are being delayed, or even killed by local, but very vocal, opposition groups, he said.

The Enbridge executive said there is an urgent need for streamlining regulatory approvals and for removing approval barriers-which could be the Achilles heel of gas development. He said governments and regulators in Canada and the US have identified the need for regulatory streamlining and are working on it, but many barriers still exist.
Daniel said real leaders for tomorrow will have to emerge to solve current conflicts. He said it would probably take a charismatic, practical environmentalist to have the credibility to lead society in the direction of an efficient balanced approach to resource development and environmental stewardship. Either that or a "green" CEO, he noted. Without that kind of leadership, Daniel said, there will be a high degree of volatility in the gas business-and a lot of acrimony.

Daniel said location of gas reserves is a major issue for the industry. Historically, he said countries have sought to be self-sufficient in oil by controlling reserves and oil embargoes and price increases have been politically driven as "countries have sought to force changes to the market or punish "have-not" countries. These factors have led to relations between Western nations and Middle East nations, oftentimes fraught with conflict.
"The same concerns will be an issue for gas importers. With Russia and Iran having the bulk of the world's proved reserves of natural gas, [US and Canadian] buyers are likely to be more than a little nervous about the security of their supply," Daniel said.
The Enbridge CEO said there is no easy answer to locating new resources, but lessons from past oil conflicts could ensure a relationship with Russia more harmonious than the Middle East relationship on oil has been. He said, corporations need to be citizens of the world, share benefits of gas development, and better understand other cultures and religions.

Turning to possible solutions to major issues, Daniel said the oil markets had OPEC as a market regulator, but a similar body is not needed for the global gas industry and he is strongly opposed to that. He said a gas "OPEC" is unlikely, but if it happened it would probably be Russian-led. He said there should be enough diversity-different countries and different big players-in a global gas market to avoid an OPEC-type situation.
Daniel said if new initiatives and leadership don't happen soon, "the natural gas industry will be an exciting business in the next few years, but possibly for all the wrong reasons."