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Geopolitics of Natural Gas
A joint study from PESD Stanford University and the Baker Institute Rice University
David G. Victor and Mark H. HayesPESD, Stanford University
Energy & Resources Group, UC Berkeley3 December 2003
2
Program on Energy & Sustainable Development
• Established with EPRI gift to Stanford, 2001• Focus: Politics, Law, Institutions• Four Research Platforms
– Futures for gas– Electricity Markets in developing countries– Low-income, rural energy markets– Futures for climate policy
• Network operation; half Stanford, half overseas
3
Introduction to the Problem:Expected Gas DemandThe Need for Infrastructure
Our approach
Initial FindingsMethodological & Substantive
Major Points
4
0%
10%
20%
30%
40%
50%
1990 2000 2010 2020 2030 2040 2050
OECD
Latin America (LAM)
China (CPA)
India/Pakistan (SAS)
Non-OECD Pacific (PAS)
Africa (AFR)
Increasing Role of Gas in all Regions: Gas as Fraction of Total Primary Energy
IIASA-WEC A3* (1998)
IEA-WEO (2002)
*Note: A3 is a high growth scenario that emphasizes renewables, nuclear, as well as gas
Latin AmericaIndia/PakistanChina
5
0
2
4
6
8
10
12
1990 2000 2010 2020 2030 2040 2050Year
Tcm
/yr
Global Gas Consumption: IPCC “Illustrative” Scenarios & IIASA-WEC A3
IPCC SRES (2000)
100
200
300
400IIASA-WEC A3
Tcf /
yr
6
Supply and Demand
Red: flow: WEO (2002) estimated gas demand, 2030Green: stock: EIA Current Reserves (rough)
7
World Gas Trade
0
100
200
300
400
500
600
700
800
1970 1975 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001
Year
Bill
ion
Cub
ic M
eter
s (B
cm)
by Pipeline
LNG
Total World Gas Movement
8
1. Historical Case studies
Look to the past for insights into why some projects are built, and their consequences.
2. Gas Market Modeling
World Gas Trade Model
Political Economy Applications
Geopolitics of Natural Gas Study Two Research Tracks:
9
Six Historical Case StudiesBuilt Projects Author
1. Indonesia LNG to Japan Lewis & von der Mehden
2. Algeria to Italy Hayes
3. Russia to Poland and Germany Victor &Victor
4. Turkmenistan (to Iran, to Russia, to Pakistan & India)
Olcott
5. Qatar to Japan Hashimoto
6. Southern Cone (Bolivia to Argentina; Argentina to Chile; Bolivia to Brazil)
Mares
10
1. Context: Project Economics and Technology
2. Other Key Explanatory Factors:
1. Political and Policy Drivers
2. Investment climate in host countries
3. Transit countries
4. Offtake quantity and price risk
5. International institutions
Research Protocol: Why are Some Projects Built, others not?
See: Hayes & Victor, Working Paper #8, at http://pesd.stanford.edu
11
Seven Initial Observations
1) Methods2) The “gas weapon”3) Transit countries4) State control vs. markets5) The roles of long-term contracts and short term
markets6) Regional Institutions and the “peace dividend”7) Spillovers benefits to under-served
12
Observation #1: Methods
• Research Question: Why are some key projects built but others not?
• Danger: Focus on built projects only– Built projects are visible; failures usually not– Case “selection bias”
• Our solution: studies of “alternative projects” (APs)
13
Observation #2: The Gas Weapon
• To date, very few political interruptions– Non-commercial markets many interruptions (e.g.
Ukraine 1990s)– The only severe example: early 1980s Algeria
• Why?– Gas pipelines are fixed infrastructures, costly to leave
empty– Unlike oil using the weapon is usually costly– Severe effects on reputation
• Long-term damage to Algeria’s export potential
14
Transmed Gas Pipeline
Tunisia
France
Spain
Sicily
Sardinia
transmed
“direct”(not built)
“Mag
rheb
”(n
ot b
uilt)
Dispenza (2002)
15
Algeria Gas Exports to Italy
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992
bcm
DeliveredContracted 1977
$5.5
$3.5
$4.4
$3.7
*Price in $/mmbtu
16
Observation #3: Transit Country Risks
• Project design vs. project operation. • Example: Soviet/Russian gas exports• Project design:
– Soviet era: zero concern for transit “countries”– Today: transit country concerns dominate new project
design• Project operation:
– Transit country risks remarkably low– Mainly about rent allocation (Are there credible alt.’s?)
[add points here]
18
Observation #4: States and Markets
• Today: Great Transition from “states” to “markets”– Poses difficulty for case selection
• One (of many) issues:– Will shift to markets speed or slow the diffusion of gas
technology?• UK example: markets accelerate dash to gas• Most other countries: state itself created gas niches
– Contrast Russia and Poland– Not obvious what the impact of liberalization is
on gas use
19
0
50
100
150
200
250
300
350
1965 1970 1975 1980 1985 1990 1995 2000
Bcm
Gas
Equ
iv
Coal
Oil
Gas
Hydro
Share of Final Consumption
0%
20%
40%
60%
80%
100%
1965 1975 1985 1995
Coal
OilGas Hydro
Poland: Primary Energy
20
FSU: Primary Energy Production, 1913-2002
0
200
400
600
800
1,000
1,200
1,400
1,600
1,80019
13
1917
1921
1925
1929
1933
1937
1941
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
Mto
e
0%
20%
40%
60%
80%
100%
1922
1932
1942
1952
1962
1972
1982
1992
2002
Gas
Oil
Coal
Biomass
Hydro
Nuclear
biomass
coal oil
gas
21
Observation #5: Contracts and Spot Markets
• First Projects: Always Anchored in Long- term contracts – What is a “contract?”
• Renegotiation clauses, price & quantity– Enforcement of contracts
• Self-enforcing contracts (esp. pipelines)• Outside enforcers (World Bank, western firms)
– A shift to merchant markets?• Example of U.S. gas market and LNG
22
0
2
4
6
8
10
12
2/1/89 2/1/91 2/1/93 2/1/95 2/1/97 2/1/99 2/1/01 2/1/03
$/M
MB
tu
Henry Hub SpotCushing, OK Crude
Gas and Crude Prices
23
Observation #6: A Peace Dividend from Pipelines?
• Analogy: European Coal and Steel Community and the Treaty of Rome (1957)
• Same true for pipelines?– Southern Cone example– No evidence supports this hypothesis– Causal arrows run opposite direction—peace
and institutions allow gas, not vice-versa
BrazilPeru
Bolivia
Paraguay
UruguayChile
Venezuela
Argentina
Gas pipelineBolivia-Argentina
1972
BrazilPeru
Bolivia
Paraguay
UruguayChile
Venezuela
Argentina
Gas pipelinedel Pacífico
1999
Atacama1999
Gas pipelinePaisandú
1998
Gas pipelineMercosur
Gas pipelineBolivia-Chile
Gas pipelineSanta Cruz-Sao Paulo
1999
Norandino1999
GasAndes1997
Gas pipelineUruguaiana
2000
Gas pipelineBolivia-Paraguay-Brazil
Bermejo-Rámos1988
Southern Cone: Gas InterconnectionsBefore 1990 Current and Future
Gas pipelineMethanex
1996de la Vega, 2000
25
Observation #7: Benefits to Under-served
• Do large-scale infrastructure projects generate spillover benefits and public goods?
• Results: as theory would predict– State-driven projects assembled through political
negotiations: spillovers are key• Southern Italy example
– Market-driven projects: private benefits and scalability dominate decision-making
• GasAndes example
26
What Next?
• Refining the results– And, new questions
• E.g., does the “resource curse” apply to Gas?
• Three Trials in the World Gas Trade Model
• Real vs. estimated projects in ’90s• Making a market: China• State-owned enterprises: Russia
27
0.00
0.05
0.10
0.15
0.20
0.25
0 20 40 60 80 100 120 140 160 180 200
Former Soviet Union: Exports (billion cubm/year)
Gas
Pric
e (9
6'U
S $
/ cub
m)
0
1
2
3
4
5
6
7
Gas
Pric
e (9
6'U
S $
/ Mbt
u)
1 billion '96US$
20 billion '96US$
5 billion
10 billion '96US$
15 billion '96US$1975
2001
1980
1986
1989
1990
1992 25 billion '96US$
30 billion '96US$
Note: Prior to 1992 FSU export, excludes movements between FSU countries. Data source: BP(1975-1990), EIA (1992-2001)
The Value of Soviet & Russian Gas Exports: The Difficulty of SOE reform
Backup slides follow
29
FSU: Natural Gas Production, Export, Import and Consumption
-200
-100
0
100
200
300
400
500
600
700
800
1955 1960 1965 1970 1975 1980 1985 1991 2001
Bill
ion
Cub
ic M
eter
s
Import
Export
Productionfor internaluse
187
129.3
10.4
544
666
553
Gas Consumption
371
270
47
FSU: Natural Gas Export
0
20
40
60
80
100
120
140
1960 1980 2000
Bill
ion
Cub
ic M
eter
s
30
1970, 3.4 Billion Cubic Meters
1975, 19.3 Billion Cubic Meters
1980, 57.6 Billion Cubic Meters
1991, 105.2 Billion Cubic Meters
2001, 131.06 Billion Cubic Meters
Czech Republic
Austria
Bulgaria
Croatia
Finland
France
Germany
Greece
Hungary
Iran
Italy
Netherlands
Others
Poland
Romania
Slovakia
Czechoslovakia
Poland
Austria
Germany
Poland
Italy
Germany
Poland
Czechoslovakia
Italy
Germany
Poland
Czechoslovakia Italy
France
Germany
Poland
Italy
France
Austria
Turkey
Turkey
31
0
50
100
150
200
250
300
350
1965 1970 1975 1980 1985 1990 1995 2000
Bcm
Gas
Equ
iv
Coal
Oil
Gas
Hydro
Poland Primary Energy Consumption
Share of Final Consumption
0%
20%
40%
60%
80%
100%
1965 1975 1985 1995
Coal
OilGas Hydro
32
Russian Primary Energy Balances
0
250
500
750
1000
1250
1500
1750
2000
1985 1990 1995 2000
Bcm
Equ
ival
ent
Coal
Gas
OilHydro
Nuclear
Share of Consumption
0%
20%
40%
60%
80%
100%
1985 1990 1995 2000
GAS
OIL
COAL
HYDRO
NUCLEAR
33
0.0
20.0
40.0
60.0
80.0
Bcm
1960 1970 1980 1990 2000
Other
Algeria
Russia
Netherlands
Libya
DomesticProduction
Italian Gas Supply by Source
Source: IEA
34
Italian Primary Energy Consumption
-
50
100
150
200
250
300
350
1965 1970 1975 1980 1985 1990 1995 2000
Bcm Gas
Oil
Hydro
Coal
Nuclear
Share of total
0%
20%
40%
60%
80%
100%
1965 1975 1985 1995
OIL
GAS
COAL
HYDRONUCLEAR
35
36
Japan's Primary Energy Balance
-
200
400
600
800
1,000
1965 1970 1975 1980 1985 1990 1995 2000
Bcm
Coal
Oil
Gas
Nuclear Hydro
Share of Total
0%
20%
40%
60%
80%
100%
1965 1975 1985 1995
Oil
Coal
HydroGas
Nuclear
37
Singapore Primary Energy Supply
-
5
10
15
20
25
30
35
40
45
1965 1970 1975 1980 1985 1990 1995 2000
Bcm
Nat
ural
Gas
Oil
GasShare of Total
20%
40%
60%
80%
100%
120%
1965 1975 1985 1995
Oil
Gas
38
Indonesia Primary Energy Supply
-
20
40
60
80
100
120
1965 1970 1975 1980 1985 1990 1995 2000
Bcm
Nat
ural
Gas
Gas
Oil
Coal
Hydro
Share of Total
20%
40%
60%
80%
100%
1965 1975 1985 1995
Oil
Gas
Coal
Hydro
[add points here]
40
Long-term Crude and Gas Prices
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