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:

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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

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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

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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

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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]

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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

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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

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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

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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

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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

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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

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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]

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Long-term Crude and Gas Prices