The Geopolitics of Natural Gas

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					   RICE
UNIVERSITY
                 International Natural Gas Market
                       Developments to 2030


                                        Peter Hartley
                               Professor, Economics Department


                                  Kenneth B Medlock III
             Fellow in Energy Studies, James A Baker III Institute for Public Policy
                     Adjunct Assistant Professor, Economics Department




                          James A. Baker III Institute of Public Policy
                                     RICE UNIVERSITY
                                                                                       1
                                    Global Trends in Natural Gas
   RICE
             World natural gas demand doubled from 1980-2004
UNIVERSITY
             Average annual growth of 2.5% is triple that of oil and double the coal growth rate

                                   1980                                           1990                                             2004
                                                                                                                                   Renewables, waste (1%)
                                       Renewables, waste (1%)                 Renewables, waste (1%)                Nuclear (6%)
                        Nuclear (3%)                                    Nuclear (6%)                        Hydroelectric (6%)
               Hydroelectric (6%)                            Hydroelectric (6%)
                                                 Petroleum (46%)                                  Petroleum (39%)                                  Petroleum (38%)


                Coal (25%)                                      Coal (26%)                                   Coal (26%)




                         Natural Gas (19%)
                                                                             Natural Gas (22%)
                                                                                                                             Natural Gas (23%)

                                          15                                             15                                               15
                              283.65×10 BTU                                   347.32×10 BTU                                  446.45×10 BTU

                Source: EIA

             Key reasons for the increase in demand :
                   Environmental pressure, wholesale electricity market competition, technical change
                   (combined cycle gas turbines) and economic growth in Asia
             The gas share may continue to rise if gas supplies transportation fuel
             Possible challenges to a gas future include:
                   Lack of investor confidence, political instability in supplier nations, local opposition to
                   infrastructure, slowdown to electricity reforms, alternative energy technologies perhaps
                   assisted by further improvements in long-distance electricity transmission

                                                                                                                                                                     2
                                                                 Prices 2015, 2030
   RICE
             $6.00                                                                                             3%
UNIVERSITY                                                                                                                   2015 price ($2005/mmbtu)
                                                                                                               2%
             $5.00                                      J
                                                                                                      J
                                  J                                                          J                       J       annual growth 2010-15
                                                                                                               1%
             $4.00
                                                                                                               0%
                                                                  J                J
                                                                           J
             $3.00                                                                                             -1%
                                              J
                                                                                                               -2%
             $2.00
                                                                                                               -3%
             $1.00
                                                                                                               -4%
                        J
             $0.00                                                                                             -5%
                      Beijing Buenos Aires Delhi     Henry Hub   Seoul   Sydney   Tokyo   UK - NBP Zeebrugge



              $6.00                J                                                                           3%
                                              J                                                                                 2030 price ($2005/mmbtu)
                                                                                                               2%
              $5.00
                        J                                J         J                J                                    J      annual growth 2025-30
                                                                                                               1%
                                                                           J                 J         J
              $4.00
                                                                                                               0%

              $3.00                                                                                            -1%

                                                                                                               -2%
              $2.00
                                                                                                               -3%
              $1.00
                                                                                                               -4%

              $0.00                                                                                            -5%
                      Beijing Buenos Aires   Delhi   Henry Hub   Seoul   Sydney   Tokyo   UK - NBP Zeebrugge




                                                                                                                                                           3
   RICE
                                                       Supply 2015                                    Supply 2015, 2030
UNIVERSITY
                                                    Other Asia (3%)
                                             China (2%)               Europe (10%)
                                      ASEAN (7%)

                  Australia, NZ, PNG (3%)
                      Other Africa (3%)
                                                                                       Russia (19%)
                   North Africa (6%)


             Other Middle East (3%)
                  Saudi Arabia (2%)
                           Iran (3%)
                                                                                       Other FSU (7%)
                            Qatar (2%)

                       South America (5%)                                                                                       Supply 2030

                                                                                                                                 Other Asia (2%)
                                                                 North America (24%)
                                                                                                                          China (2%)          Europe (6%)
                                                                                                                   ASEAN (7%)
                                               World total 128.51 Tcf
                                                                                             Australia, NZ, PNG (5%)
                                                                                                                                                             Russia (20%)
                                                                                               Other Africa (5%)


                                                                                             North Africa (6%)



                                                                                         Other Middle East (6%)                                                Other FSU (7%)


                                                                                                  Saudi Arabia (4%)

                                                                                                                   Iran (5%)                           North America (13%)
                                                                                                                        Qatar (3%)
                                                                                                                                 South America (8%)


                                                                                                                        World total 159.80 Tcf
                                                                                                                                                                                4
   RICE                                              Demand 2015                                Demand 2015, 2030
UNIVERSITY                                   Other Asia (8%)

                                      China (4%)                   Europe (18%)

                             ASEAN (4%)
               Australia, NZ, PNG (1%)
                    Other Africa (1%)
                   North Africa (2%)
             Other Middle East (4%)
                 Saudi Arabia (2%)                                            Russia (14%)

                         Iran (3%)
                         Qatar (0%)
                  South America (4%)

                                                                         Other FSU (7%)


                                                                                                                    Demand 2030
                                            North America (28%)
                                                                                                                 Other Asia (9%)
                                              World total 126.00 Tcf                                                                          Europe (16%)
                                                                                                      China (5%)

                                                                                               ASEAN (5%)
                                                                                  Australia, NZ, PNG (1%)
                                                                                       Other Africa (1%)
                                                                                      North Africa (2%)                                                      Russia (13%)

                                                                              Other Middle East (4%)

                                                                                      Saudi Arabia (2%)
                                                                                               Iran (3%)
                                                                                                                                                       Other FSU (7%)
                                                                                               Qatar (0%)
                                                                                          South America (5%)



                                                                                                                        North America (27%)

                                                                                                               World total 154.61 Tcf

                                                                                                                                                                            5
                                                                                                                                   RICE
                                                                                                                      UNIVERSITY




                                                0

                                           -5

                                     -10

                               -15
                                                    5
                                                               10




                         -20


                -25
          Europe                                                      15
                                                                       Tcf per year



           Russia


        Other FSU


      North America


      South America




           Qatar



            Iran

       Saudi Arabia

    Other Middle East



       North Africa


        Other Africa

    Australia, NZ, PNG
                                                                                                                                      Natural gas trade

                                                                                Overall Exports (+) and Imports (-)




          ASEAN


           China

         Other Asia
                                                               2015

                                                        2030




6
                                                                                                                                                                 RICE
                                                                                                                                                    UNIVERSITY




                                                                                                                0
                                                                                                                                        10




                                                                                                                        2
                                                                                                                            4
                                                                                                                                6
                                                                                                                                                    12
                                                                                                                                                                 14




                                                                                                                                    8
                                                                                                  US Atlantic & Gulf

                                                                                            Remaining Americas Atlantic
                                                                                                                                                                   Tcf per year




                                                                                                           UK


                                                                                                        Belgium



                                                                                                          Italy


                                                                                                        France

                                                                                                    Rest of Europe




                                                          7




                0
                        1
                                        5




                                3


                            2
                                    4
                                                   6
         Australia                                                                              North America Pacific

        Indonesia                                             Tcf per year


         Malaysia
                                                                                                         Japan
      Other SE Asia
                                                                                                                                                                             LNG Major Importers




                                                                                                         China
      Russia Pacific

                                                                                                     South Korea

            Iran
                                                                                                  Remaining Pacific

           Qatar


           UAE
                                                                                                         India
       Saudi Arabia

    Other Middle East



       North Africa
                                                                                                                                                       2015

                                                                                                                                             2030




          Nigeria
                                                                      LNG Major Exporters




       Other Africa

      South America



        Greenland


          Norway

     Russia Atlantic
                                                                                                                                                                     LNG trade




                                                   2015

                                            2030




7
   RICE
UNIVERSITY




             Natural Gas Demand: Short and Long Run
                           Substitution




                                                      8
                                    US Natural Gas Demand: 1984-2005
   RICE       The US experience provides evidence of fuel switching
UNIVERSITY
              The demand driver has also changed from industrial activity and space heating to
              power generation
             25                                                                                                                                                                                                                                             $9
                                                                                                                                                                                                                                                        J
                                                                                                                                                                                                                                                            $8
                         J
             20                                                                                                                                                                                                                                             $7
                                    J                                                                                                                                                                                                        J
                                                                                                                                                                                                            J                     J                         $6
                                               J
             15                                                                                                                                                                                  J
                                                          J          J                                                                                                                                                                                      $5
                                                                                J          J                            J                                       J                                                      J
                                                                                                  J          J                     J                     J                                                                                                  $4
             10                                                                                                                               J                            J          J
                                                                                                                                                                                                                                                            $3

              5                                                                                                                                                                                                                                             $2

                                                                                                                                                                                                                                                            $1

             0                                                                                                                                                                                                                                              $0




                                                                                                                                                                                          2000




                                                                                                                                                                                                                                                 2005
                                                                                                                                                                                                                                      2004
                                                                                                                                                                                                                2002

                                                                                                                                                                                                                           2003
                                                                                                                                                                                                     2001
                                        1986




                                                                         1989




                                                                                                                                                                    1998
                  1984




                                                              1988




                                                                                                                                                  1996




                                                                                                                                                                               1999
                                                                                                                            1994
                                                                                                      1992
                             1985




                                                                                    1990




                                                                                                                 1993




                                                                                                                                                             1997
                                                   1987




                                                                                               1991




                                                                                                                                       1995



                                                      US Natural Gas Consumptin (Tcf)                                                               J          US City Gate Price ($2005/Tcf)


                                                    Average Annual Growth Rate approximately 1% per year
                                                                                                                                                                                                                                                                 9
                    Linkage of crude oil and natural gas prices
   RICE
UNIVERSITY
                   US markets show strong evidence of a link between natural gas and oil
                   prices:

              $/mmbtu
             $18


             $16


             $14


             $12


             $10


             $8


             $6


             $4


             $2


             $0
               1992     1993   1994      1995       1996       1997      1998   1999     2000   2001    2002       2003       2004      2005       2006


                                      Diesel Fuel          Residual Fuel Oil     Natural Gas     Coal          Refiner Acquisition Cost of Crude



                                                                                                                                                          10
                         What links oil and gas prices?
   RICE
UNIVERSITY   Demand factors
                Substitution in the generation of electricity
                Substitution in industrial processes –refining, electricity cogeneration – but in
                sectors such as chemicals high gas prices cut demand without fuel switching
                Substitution between gas and heating oil for space heating
             Supply factors
                Joint production of natural gas and oil can have positive or negative effects
                    Increased oil production also yields additional associated gas
                    Higher oil prices also raise the value of non-gas liquids often produced with gas
                    However, gas can also be re-injected to enhance oil recovery
                Unconventional oil, such as Canadian tar sands, requires natural gas as input
                Gas-to-liquids (GTL) conversion (as in Qatar) can lead to direct competition
                between gas and oil for providing transportation fuel
             Impediments to substitution
                Environmental factors can affect demand side substitution of oil for gas
                Short run capital costs can slow development of alternative supplies
                Uncertainty about future energy prices limits willingness to invest
                Economies of scale for GTL versus LNG
                    GTL only makes economic sense for smaller scale projects or if oil prices are high
                                                                                                         11
             RWGTM Price Forecast in Historical Context
   RICE
UNIVERSITY     Oil price forecast is from the US Energy Information Administration
               Gas price forecast is the equilibrium calculated by the RWGTM
               The generally rising ratio of gas to oil prices reflects the assumption that
               gas tends to supply more energy as economies develop

             $2005/mmbtu
                $14


               $12


               $10


                $8


                $6


                $4


                $2


                $0
                     1965   1970   1975   1980      1985      1990     1995     2000   2005   2010   2015      2020     2025     2030     2035   2040

                                          Actual US RACC ($2005/mmbtu)                          Actual US Wellhead Prices ($2005/mmbtu)

                                          EIA World Oil Price Forecast ($2005/mmbtu)            Calculated US Gas Price ($2005/mmbtu)

                                                                                                                                                        12
   RICE
UNIVERSITY




             Natural Gas Supply: Geography, Geology
                         and Geopolitics




                                                      13
                                            Supply estimates
   RICE
UNIVERSITY
                                                              Proved            Undiscovered         Share of Total
                                                                     a                    b
                              Region                         Reserves            Resource              Resource
             Middle East                                             2565.4                1294.7                 34.4%
              Qatar                                                   910.5                  41.1                  8.5%
              Saudi Arabia                                            241.8                 681.0                  8.2%
              Iran                                                    971.2                 314.6                 11.5%
             Former Soviet Union                                     1952.6                1611.3                 31.8%
              Russia                                                 1680.0                1168.7                 25.4%
             Asia-Pacific                                             391.6                 688.9                  9.6%
              Indonesia                                                97.8                 107.7                  1.8%
              Australiac                                               27.6                 338.4                  3.3%
             Africa                                                   485.8                 330.1                  7.3%
              Nigeria                                                 184.7                 123.2                  2.7%
              Algeria                                                 160.5                  49.0                  1.9%
                            c
             North America                                            265.1                 451.5                  6.4%
             Central and South America                                250.8                 421.0                  6.0%
              Venezuela                                               151.4                 101.2                  2.3%
             Europe                                                   200.7                 312.4                  4.6%
              Norway                                                   84.3                 183.0                  2.4%
                          d
             World Total                                             6112.1                5109.8

             a - Oil and Gas Journal as of Jan. 1, 2006
             b - Compiled from USGS, ABARE, and other national sources
             c - Includes assessed non-conventional natural gas resources
             d - Does not include future growth in existing fields. USGS estimates the World Total at 3305 tcf.



                                                                                                                          14
             Linking supply with demand
   RICE
UNIVERSITY




                                          15
   RICE
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             Concluding Remarks




                                  16
                               Concluding Remarks
   RICE
UNIVERSITY
             Modeling illustrates the key roles Russia and the countries of the
             Middle East will play in the world gas market
             Prices will be linked through global arbitrage
                Trade need not actually occur, there simply needs to exist the ability
                to trade – LNG provides this capability
             Long distance international gas trade provides opportunities for
             countries to gain from cooperation, but also to lose from conflict
             Absent political constraints, there appears to be substantial gas
             available to satisfy demand at a reasonable price
                Political constraints may, however, present the largest impediment to
                globalization
                Such political constraints may encourage alternative sources of
                supply and ultimately alternative sources of energy
                The development of alternative energy sources later this century will
                likely mean that substantial natural gas resources will not be
                exploited for a very long time, if at all
                                                                                         17