‘‘   Global Themes               an issues brief series of the Dallas Committee on Foreign Relations                      ...
2It now represents just 4% of their energy   (LNG), and in the near future Papua       gas long distances is expensive. It...
3JW: What are the political implications    “Gas is more complex and difficult than oil. With gas, there are relatively ex...
4                                                                                                               May 24, 20...
5demand growth. Growing gas use will        Australia, Indonesia, and possibly                    work with. They’re inten...
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Global Gas: Changing Trade Routes and Geopolitics


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From the first of a three-part series about global gas, sponsored by ExxonMobil, DCFR President Jennifer Warren interviewed panelist Mikkal Herberg, research director on Asian energy security at The National Bureau of Asian Research (NBR).

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Global Gas: Changing Trade Routes and Geopolitics

  1. 1. ‘‘ Global Themes an issues brief series of the Dallas Committee on Foreign Relations DCFR Dallas Committee on Foreign Relations Issue No. 1 May 24, 2011 Global Gas Changing trade routes and geopolitics By Jennifer Warren, President of DCFR “‘The question is whether we are entering the golden age of gas—or is gas going to be Introduction the fuel of the future, and always will be?’ In order for gas’ potential to be realized in this The narrative of global gas begins golden age, we need huge steps forward in finding new supplies, infrastructure develop- in Texas. But what started in Texas ment to move that gas, and developed markets.” didn’t stay in Texas. Who benefits from expanded gas to other regions and that’s because In fact, the fairly recent discoveries supply, and for how long? What is the gas is expensive to transport over and production of shale gas in North future outlook for past, present, and Asia’s long distances. Gas accounts America have led to more self- future trading partners? for only 11% of Asia’s energy use sufficiency in the U.S. We will no compared to 24% globally. If Asia longer need to import liquefied natural From the first of a three-part series can expand its gas use, then hopefully gas (LNG) to the degree that we once about global gas, sponsored by this reduces the expected growth did. This has been called a gas rush, ExxonMobil, DCFR President in coal consumption and even oil gas gale, a black swan event, a game- Jennifer Warren interviewed panelist consumption, particularly for power changer… Mikkal Herberg, research director on generation use. Gas diversifies Asia’s Asian energy security at The National energy slate and diversification of the A robust U.S. supplied with its own Bureau of Asian Research (NBR). energy slate means stronger energy natural gas resources has implications The interview with Mikkal Herberg of security. Gas is a reasonably priced, for Europe and Asia. Europe benefits April 8, 2011 follows. cleaner, and a readily available fuel from this in several ways. Its that improves Asia’s energy security relationship with Russia as a primary and leads it toward a lower-carbon supplier might change in the future. Natural Gas and Energy Security energy future. Top importers such as Japan and JW: How does the increased use of Korea also benefit from greater U.S. gas in Asia change energy security China’s Statecraft resources. China and India are aided equations? JW: How might the use of natural more from U.S. technical know-how gas in China impact their pursuit of as they learn to exploit their own MH: Asia is deeply dependent on both relationships with large oil-producing potential resources with global energy oil and coal. There are many historical countries? firm’s knowledge, partly gained factors related to this. Oil is easy to from U.S. shale developments and move around and easy to use; coal MH: I think oil is viewed very innovations. is in abundant supply in Asia. The differently in Beijing. From my biggest and fastest growing markets perspective, they view oil consumption The market for natural gas is said to are China and India, but also Southeast as a particularly acute energy security be evolving into a global one versus Asia. With respect to electric power issue, which relates to economic the original trading blocs of the past. generation, oil and coal conveniently security. Gas is relatively new to the Natural gas prices are quite low in the fit the bill. In particular, natural gas Chinese, but they are expanding gas U.S. utilization is relatively low compared use rapidly, which is a good thing. 4925 Greenville Ave, Suite 1025 | Dallas, Texas 75206 | 214.750.1271 | dallascfr.org
  2. 2. 2It now represents just 4% of their energy (LNG), and in the near future Papua gas long distances is expensive. Itmix, but is growing dramatically. New Guinea and Timor Leste will also includes both LNG and long-distance become LNG exporters, meaning less pipeline gas, with a whole different setNatural gas doesn’t really compete global reliance on the Persian Gulf. of geographical issues. I believe it willwith oil directly in most marketplaces. Greater use of natural gas offers a be very difficult for the gas producersExpanded gas supply is unlikely to more diversified slate of suppliers as to develop a cartel similar to OPEC.impact oil demand significantly, at well. Much of the global oil supply isleast in transportation, which is where coming from places that are unstable, Asian Gas Consumption: China and Indiaoil is the key fuel source. My guess is often unfriendly, or are members JW: Why has pipeline gas developmentthat the Chinese will continue to push of OPEC, which restricts supply to been more limited in Asia versus inhard in acquiring oil fields, mergers, maintain high prices. the U.S. and North America? Is it justand acquisitions to expand their supply the money?portfolio and sources of oil. Much of JW: Do you think there will be awhat drives this kind of apparent state balance of power shift eventually from MH: It’s what’s often called “thepush to invest abroad is driven not by OPEC oil to the gas producers? tyranny distance”. There are hugestrategy or political leadership, but maritime distances around thereally by the national oil companies MH: I don’t think so anytime soon Pacific region to transport gas. This(NOC) themselves. They are pursuing given long-term trends. Oil demand is means either sub-marine pipelinescommercially- and competitively- are required, which are particularlydriven strategies that make sense forany large oil company. Then theseNOCs often bring the governmentalong to provide extra trade, aid, andloans that help the NOCs seal the deal.So often it’s the companies leadingthe states, not the states leading thecompanies. It is a collaboration.Diversification and SecurityJW: What are the implications forUS and European security given thisparadigm shift with gas usage?MH: For many countries, giventhe extent to which gas becomesa bigger part of the energy mix,countries have a global energy slatethat is more diversified. That’s goodfor everybody. The most importanttrend relative to energy consumptionis that gas can help slow the growth going to grow another fifteen million expensive beyond 600-800 miles, orof coal consumption which is rising barrels a day over the next twenty gas must be cooled to an extremelydramatically in Asia. Gas can really years. The supplier base is still going low temperature to liquefy it formake a material difference because to be very narrow. We will still rely transport in expensive LNG tankers.coal and gas compete in power on OPEC for a major share of world Long pipeline distances in Asia andgeneration, heating, and industrial use. oil supplies. The OPEC share of the Middle East tend to slow gas 40% today will probably be 50% in development and use. In China andAdditionally, greater use of the future, particularly the supplies India, the barrier has been more policycompressed natural gas, such as coming from the Persian Gulf which oriented. Until recently they have notnatural gas used for transportation, will increase OPEC’s power over been sufficiently incentivizing thecan help diversify energy use. Natural pricing. Gas is a very different game. private or state sectors, or providinggas comes from a slightly different There is a loose gas coordination the types of investment terms thatset of producer countries. For the group called Gas Exporting Countries will encourage building pipelines andAsian region, Australia, Malaysia, Forum (GECF). But gas is a much developing the markets.Indonesia, and Brunei are major more complicated industry; marketsexporters of liquefied natural gas are complex, and transportation of
  3. 3. 3JW: What are the political implications “Gas is more complex and difficult than oil. With gas, there are relatively expen-of natural gas as a base-load power sive pipelines, which require market development, tariffs and regulation—thesource in countries such as India and software of market development.”China? want to rely on Pakistan as a transit have recently been moving towardsMH: Natural gas is a vital state. The potential for Turkmenistan more realistic pricing, both China anddiversification of their supplies to gas flowing to India faces the same India have kept wellhead gas pricesa cleaner source. Right now coal problem—it has to cross Pakistan and extremely low.dominates the market for electricity also a very unstable Afghanistan. Newgeneration. About 80% of China’s Delhi had hoped to access Myanmar There are also pipeline securitypower is fueled by coal, and electricity gas from the East, but the Chinese issues. Will pipelines be built wheredemand is expected to double over offered Myanmar a better deal and they need to be built? Additionally,the next 15 years. Anything that that gas will go north to China now. pipeline infrastructure tends to bebrings gas into the picture offers There’s more gas being developed dominated by state companies. Thereboth diversification and pollution in Myanmar, so it is quite possible is a lack of coordination among thereduction advantages. This is where that India may yet be able to access various governments’ bodies. Finally,gas can make such a difference. Until Myanmar gas supplies. But so far China and India’s respective domesticrecently, a key barrier has been that their efforts in trying to access the gas markets have not been sufficientlygovernments want to keep electricity big regional gas supplies have been developed by their governments to aprices very low, which makes it frustrated. LNG is going to grow large extent. Tariffs, transportation,difficult for gas to compete with cheap gradually in India, but much depends regulation, and distribution systems tocoal. This continues to be a problem on continuing to reform energy pricing move gas into large urban areas needin both China and India. But they are to justify relatively expensive LNG. to be addressed. Market developmentin the early stages of addressing these is complex and has been slow.problems. JW: So how do Beijing and New Delhi incentivize their national oil Both countries have only begun toJW: You discuss India’s gas, regional companies and foreign investors? understand the great potential for gas.pipeline and competitive constraints What kind of challenges do you see Building the pipeline infrastructurein your recent paper on natural gas in for them in expanding gas supply? takes time and investment andAsia. India has a tough road ahead. production returns have not been veryDoes that add tension for India as MH: In my view, the problem is first attractive. Put that all together, and youothers countries increase their gas the wellhead price being paid for gas. have very limited activity. Shell is oneconsumption? For a producer the wellhead price is exception with a large sour gas project critical to making the investment in in China and new gas development isMH: They recognize they need to new supplies possible. Although they beginning to accelerate. Some activityuse more gas, for all of the beneficialreasons we have discussed. They havehad a major recent discovery offshorein the Krishna Godavari Basin on theEast coast, which will help them boostgas use in the future. But inevitablyIndia will rely increasingly onimported gas; currently they alreadyimport 30% of their gas. For Indiato increase gas use, they will need toincrease their imports of LNG andneed to access large regional gassupplies via pipeline like China hasdone with Turkmenistan, potentiallyIran, and Myanmar.India’s problem is that of being in ageopolitical box. The effort to accessIranian gas via the Iran-Pakistanpipeline is blocked for a number ofreasons. Most importantly, they don’t
  4. 4. 4 May 24, 2011exists in China, where Chevron and IEA is releasing a major new report Personally, I believe we are headedother firms are developing China’s on this in June. My response, during for tremendous growth in gas use,sour high-pressure gas, for which the our recent conference: ‘The question particularly in China. But it’s goingChinese lack the technology. is whether we are entering the golden to be slower than people might think. age of gas—or is gas going to be the Firms need investment terms thatGas is more complex and difficult fuel of the future, and always will be?’ make sense; governments to followthan oil. With oil, the resource can be In order for gas’ potential to be realized through on promises; stable contracts,put on a tanker and transported pretty in this golden age, we need huge steps and confidence in sustained marketmuch anywhere in the world for less forward in finding new supplies, development.than $3 per barrel. With gas, there infrastructure development to moveare relatively expensive pipelines, that gas, and developed markets. JW: If Beijing continues increasingwhich require market development, its gas use, with China relyingtariffs and regulation—the software of JW: So are parts of Asia like the oil traditionally on coal for electricity andmarket development. Gas is infinitely markets in the U.S of the 1950s, say huge employment in the coal industry,more complex. Producers can’t invest six decades ago? how might this affect social stability?in exploration and developmentif the market is not developed. MH: In a lot of ways, yes, in most MH: In a sense, gas use in China willIf the supplies are not sufficient, of the developing countries around be largely incremental demand forthen governments don’t move to the world, and in developing Asia. power generation and residential anddevelop the market. These things However Japan and Korea are commercial uses. China is growing atall must be done simultaneously and different with their more developed such a rapid rate on such a huge scalerequire strong coordination between markets for gas. But the real growth that even with a significant expansiongovernment policymakers and the forecasted is in developing Asia, in of gas use in power generation and anindustry investing in new supplies. China and India particularly. Indonesia expansion of nuclear and hydroelectric, has been a massive LNG exporter for this is unlikely to undermine relianceFuture of Global Gas decades, yet Indonesia is experiencing on coal and the coal industry. China’sJW: So it’s a huge infrastructure gas shortages (which also happened problem is that of mining enough coal.undertaking to use more gas for these in the U.S. during the late 1970s). They must transport coal on alreadycountries? There are many reasons for shortages, overloaded rails and build power often prices are too low to justify new plants fast enough and efficiently toMH: The crux of this issue is the supplies. keep up with economic and energychallenge of domestic developmentto expand gas use, especially forelectricity generation. LNG receivingfacilities have to be built; pipeline anddistribution systems must be built,and market prices and regulatorysystems must be created. All of thesethings have to fall into place in arelatively coordinated fashion. Oil isdifferent and fundamentally easier andless expensive to transport and use.That’s why oil use grows rapidly indeveloping economies and why gasuse tends to lag.JW: So these are all of the practicalissues and obstacles that must beconsidered by the supporters of naturalgas expansion?MH: Fatih Birol, chief economistof the International Energy Agency(IEA), recently suggested we may beentering the golden age of gas and the
  5. 5. 5demand growth. Growing gas use will Australia, Indonesia, and possibly work with. They’re intent on holdingslow the growth of coal use—but not Russia’s East Siberia, probably post- on to their share of the Europeanstop it. 2020. The Chinese are building 12- market. They are building other gas 15 LNG receiving terminals along projects and promising more gasJW: How long do you think it will the east coast and three are currently supply and pipelines to Europe in thetake India and China, respectively, to operational. So there is massive future. However, the investment is notraise their gas use toward much higher incremental growth in LNG supply, forthcoming for the new fields thatinternational averages? Is China one coupled with rising domestic gas can fulfill the promised supply. Theirdecade off and India two? development that is moving quite fast. old fields are mature, and maybe even Over the next decade, China’s gas the largest in decline; they have toMH: I think the big story is that China usage seems likely to boom. India’s start developing the new fields. Thisis ramping up its gas consumption on gas usage will grow strongly as well, is a big worry for the Europeans—area scale that’s hard to believe. In 2009, although somewhat more slowly. they investing enough to meet theirthey consumed about 90 billion cubic Domestic gas production will help and future commitments? The Russiansmeters (bcm) or roughly 3.2 trillion both LNG and pipeline gas imports express that they have never missed acubic feet (tcf). Their consumption are likely to grow. commitment yet.rose by 18% to 105 bcm in 2010, andthe target for the 12th Five-Year-Plan JW: How does Russia fit into this The Russians have worked very hardis to reach 250 bcm in 2015, a two- global gas market that’s expanding? to control Central Asian gas, makingand-a-half fold rise in just five years. sure that gas supply travels throughThey plan to increase gas usage to MH: As you know, Russia is a big Russia, which also supplies Europe.about 400 bcm (14 tcf) by just 2020. supplier to Europe, and that’s the big While Russia is a major supplier,Growing from 3.2 tcf to 14 tcf of story. They are the world’s largest gas the uncertainty is whether they areannual consumption in the space of exporter, supplying about a quarter investing enough. Their pricingone decade is ambitious. Consumption of Europe’s gas, half of which is policies tend to be tough as well, againin the U.S. is only 23 tcf, and we are imported gas. Russia has the potential reinforcing the challenges of workingthe largest consumer in the world. to be a much bigger supplier if they with the Russians.Chinese gas use targets have risen develop new fields in the northerndramatically in the past few years. Yamal peninsula region. They haveThey will be supplied by imported huge reserves in East Siberia. But thegas from Central Asia, Myanmar, Russians are extremely difficult to GeoEdge The Dallas Committee on Foreign Relations takes no institutional positions on policy issues. The views expressed and facts presented in DCFR publications are the responsi- bility of the author or authors. BLOG Exploring the frontlines of For additional information about DCFR, please visit our website foreign affairs at www.dallascfr.org. Dallas Committee on Foreign Relations is a non-profit organization focused on explor- ing leading-edge developments in foreign affairs. Our mission is to promote knowledge http://geoedge.org/ of global affairs and a better understanding of the people and events impacting impor- tant policy choices of the future.For more information contact:Dallas Committee on Foreign Relations4925 Greenville Ave, Suite 1025 Dallas, Texas 75206(email) dcfr@dallascfr.org (tel) 214.750.1271