In matters of energy security, gas could be the new oil
Written by James Osborne
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WASHINGTON – In July, the Greek tanker Maran Gas Appollonia set off on a monthlong voyage from the Louisiana Gulf Coast, filled with more than 3 billion cubic feet of liquefied natural gas from Cheniere Energy’s Sabine Pass terminal.
Bound for a port in southern China, the gas – which equaled about half the daily output of Oklahoma – was scheduled for delivery at an auspicious time for the Chinese government. Two years earlier, Beijing had signed a major pipeline deal with the Russian energy company Gazprom, but with economic growth slowing, so were the nation’s energy needs. Chinese officials eyed LNG shipped from abroad as a flexible and lower cost alternative to Russian gas.
This competition for China’s business is part of a dramatic change in the workings of natural gas markets and potentially the beginning of fundamental shift in the way the world buys, sells and consumes energy.
For decades, natural gas has been bought and sold in a murky realm in which prices are determined in long-term contract negotiations between buyers and sellers and supplies essentially limited to what could be produced in areas close enough to be connected by pipeline.
But with the development of liquefied natural gas projects here and abroad, countries are gaining access to gas supplies long out of reach, in some cases forcing long-time suppliers to compete on price in a way they never had to in the past.
That has raised the promise of something that American political leaders – Republicans and Democrats alike – and U.S. allies have sought for years: a global, free-flowing and transparent gas market like the one for oil. In the process, that could reduce prices for trading partners in Asia and Europe and cut carbon emissions by replacing coal-fired electricity with gas – all while undercutting the stranglehold that petro-states such as Russia, Saudi Arabia, and a handful of countries in Middle East, Africa and South America have on energy markets.
“We have tended to think of energy security as synonymous with oil supplies,” Paula Gant, principal deputy assistant secretary of the Department of Energy’s Office of International Affairs, told natural gas executives at a conference in Washington last month. “Oil supplies remain core to our thinking, but we also have the opportunity to meet our energy security challenges with a variety of resources, including natural gas, renewables, and efficiency.”
The world has run almost exclusively on oil and coal for more than century. Both are abundant and cheap to transport and store – important factors for countries with limited energy sources of their own. But with climate change regulation taking hold internationally, oilgiant BP is projecting that demand for cleaner burning natural gas will increase at twice the rate of oil over the next two decades.
Gas is forecast to make up about 25 percent of the world’s energy supply by 2035, exceeding the share of coal and only a few percentage points below that of oil. For Houston and Texas, such a shift could mean an ugly fallout for those oil companies that don’t take steps to adjust. But for those that do, it could create incredible opportunity.
The Eagle Ford and the Barnett are not the only shale deposits in the world – China, Argentina, Algeria and Mexico are among countries with significant fields containing natural gas. With so much of the world’s brain power on freeing gas from rock concentrated in Houston and Texas, companies here could play a significant role in helping those countries tap their deposits.
“We’re just about the only country in the world with the necessary infrastructure to provide all the things you need to frack, like chemicals, equipment, expertise and sand,” said Charles McConnell, executive director of Rice University’s Energy and Environment Initiative. “We have a tremendous lead on the rest of the world.”
To gauge the growing importance of gas, look no further than the nearly $50 billion Shell paid this year for the LNG giant BG Group, formerly known as British Gas. Or to the $36 billion Exxon Mobil paid for the Fort Worth-based gas giant XTO Energy in 2010.
“In terms of future resources there’s probably more gas than oil, and climate policy impacts gas differently than oil,” said Edward Chow, a former Chevron executive and now a senior fellow at the Center for Strategic and International Studies, a Washington think tank. “So, there’s a lot to be said for gas in the long run.”
BP estimates the world’s proven gas reserves at more than 600 trillion cubic meters, enough to run the world at current consumption for more than 50 years. But what worries U.S. officials is where the natural gas is located.
By far the largest share of those reserves are in Russia and Iran, two countries that have strained relations with the United States. Tensions reached their peak in early 2014, when Russia sent troops into neighboring Ukraine, eventually shutting off a natural gas pipeline that not only supplied Ukraine but much of Europe as well.
Swimming in gas
In May of that year, leaders from the U.S., Canada, France, Germany, Italy, Japan and the United Kingdom met in Rome to discuss the problem of Europe’s outsized dependence on Russia for gas. The countries signed an agreement to improve global energy security by both diversifying the mix of countries from which energy comes and developing “flexible, transparent and competitive energy markets, including gas markets.”
Fortunately for Europe, the United States and some allies were swimming in natural gas. With the advent of hydraulic fracturing, U.S. production has increased 50 percent since 2005. Even as domestic prices remain at historic lows for years, U.S. production keeps increasing, hitting a record high last year.
In addition to Sabine Pass, which opened earlier this year, three more U.S. LNG terminals are under construction on the Texas and Louisiana Gulf Coast – in addition to one on Maryland’s Atlantic coast. With more under construction in Australia and Malaysia, countries in Asia and Europe have a an increasing number of gas sources from which to choose.
The shift is already having an impact across the world’s highly regionalized gas markets – where prices have historically been determined by the price of oil or long-term contracts negotiated between buyers and sellers. Three years ago, the average price of LNG on markets across South America, Europe and Asia ran close to five times that on the U.S. Gulf Coast. By last month, the spread had narrowed to less than two times the Gulf price.
In 2014, the Baltic nation of Lithuania, which had long relied on Russia for all its gas, announced it had renegotiated a 20 percent rate cut with Gazprom – not coincidentally at the same time Lithuania was awaiting delivery on a new floating terminal that would convert LNG back into gas for use by factories and power plants.
“Even before Sabine Pass opened, the prospect of U.S. LNG exports had already enabled European and Asian purchasers to renegotiate contracts,” said Tim Boersma, director of global Natural Gas Markets at Columbia University’s Center on Global Energy Policy. “What we’re hoping is natural gas becomes a global commodity, and you’ll have a global market, more like crude oil.”
But that is likely a long ways off, experts say.
Right now LNG represents about 10 percent of the global gas supply. Even with all the new LNG terminals coming online in the years ahead, that share is only expected to reach 15 percent by 2020.
The challenge is that liquefying natural gas and putting it on to a tanker is fairly expensive And between all the new LNG and a weaker economic forecast for China, the high prices in Asia that set off the LNG construction boom are moderating.
Even with increased demand due to climate change regulation, any LNG project not already under construction will struggle to find investors for at least the next few years, said Robert Ineson, managing director of global LNG for the research firm IHS Markit.
“Oversupply, especially as it grows, will put a lot of pressure on everybody in the market,” he said.
In the meantime, countries are rushing to establish future markets for their gas. Despite U.S. opposition, plans for Russia’s Nord Stream II pipeline, which would run beneath the Baltic Sea connecting Russia with Germany, have the support of Western European countries eager to get as much available gas supply as possible. In addition to the pipeline to China – the future of which remains in question – Russia is constructing its own LNG export facility in the northern reaches of Siberia.
As competition for gas customers intensifies, Cheniere is investing in an LNG import terminal in Chile to support a new power plant project there. In a presentation to investors in September, the company said it would pursue “similar LNG to power projects to stimulate new LNG demand,” pointing to small but developing markets as diverse as Panama, Bangladesh and Ireland.
Written by James Osborne
Click HERE to Read the Article by the Publisher.