the emerging geopolitics of the globalizing natural gas ... geopolitics of the globalizin… · –...

37
The Emerging Geopolitics of the Globalizing Natural Gas Market and Ramifications for the North American Producer Amy Myers Jaffe James A. Baker III Institute for Public Policy, Rice University Peters & Co. Energy Conference Lake Louise, Alberta January 29, 2009

Upload: others

Post on 09-Aug-2020

17 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

The Emerging Geopolitics of the Globalizing Natural Gas Market and Ramifications for the North American Producer

Amy Myers JaffeJames A. Baker III Institute

for Public Policy,Rice University

Peters & Co. Energy Conference

Lake Louise, Alberta

January 29, 2009

Page 2: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •
Page 3: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

State of the Market

Many of the risks that were driving the so-called “terror premium” eased in 2008, removing a key psychological support to high prices. (Syrian-Israeli dialogue; Iranian elections; reduction in violence in Iraq; weakening of Al-Qaeda’s international coordination structure; improved emergency hurricane response in US)

Similarly, extreme co-movements in global financial markets remain a key threat to the smooth operation of global energy markets and will drive severe volatility in oil prices for the foreseeable future.

The first effect was a dollar flight-led bubble rally in oil as an asset class in late spring and summer.

Second effect is the bubble liquidation as financial players had to repatriate assets in August and September.

Lasting effect is the impact on oil demand from slowing global economy and U.S. consumer response.

Credit squeeze impacting operation of over-the-counter oil trading markets. Official paper markets still functioning because exchange guarantees counter party risk but market liquidity could emerge as a challenge for off exchange trading, limiting speculation.

Credit issues also impacted the amount of physical oil refiners would hold in advance over the autumn, creating contango in spot market. Speculators holding physical oil on the water and in storage.

Longer term, outlook is more bullish…

Uncertainty about climate policy and problems in global credit markets are dampening the investment response.

Moreover, NOC investment is also thwarted by civil unrest, government interference, corruption, inefficiency, and diversion of capital to social spending. As a result, many NOCs will have stagnant to declining production profiles.

Page 4: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

US Oil Demand• Demand is influenced by a number of factors.

– Income, Price, Weather (heating load), Vehicle efficiency– Short run elasticities estimated as:

• Price = -0.0508 … Thus, a 1% increase in price would result in a decline in demand of 0.05%.• Income = 0.3518 … Thus, a 1% decline in GDP would result in a decline in demand of 0.35%.• Fuel Efficiency = -0.7906 … Thus, a 1% increase in efficiency would result in a decline in demand of 0.79%.• HDD = 0.1654 … Thus, a 1% increase in HDD (colder weather) would result in an increase in demand of 0.17%.• Majority of adjustment occurs within a decade (lag coefficient = 0.4567)

• The last four years and what we might expect for 2008-2010…

Page 5: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Arab Gulf Economic and Geopolitical Interests

• Meet Budget Requirements• New Attitudes that Financial Surpluses Might be Squandered or Mis-

invested Anyway• Ensure long term demand for oil• Slow down shift to more fuel efficient cars, discourage massive

investments in alternative energy• Protect dollar asset holdings and promote a shallow and short

recession• Protect geopolitical influence through power in oil market, playing an

important role in stabilizing global financial crisis– Saudi Arabia: 4th largest asset holder in the world at $575 billion– Largest current account surplus and trade surplus in the Middle East at

$150 billion, ranking it in surplus terms in the top 5 worldwide– Saudi Arabia is among the top five largest creditors to the international

financial system• Reduce the influence of Russia, Iran and Venezuela

Page 6: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

HIGH OIL PRICE STIMULATES: BIOFUELS, UNCONVENTIONAL OIL, EOR AND NEW FRONTIERS –MAJORS WON’T CHANGE QUICKLY

The Marginal Cost of Supply is Changing

0

10

20

30

40

50

60

70

80

90

100

110

120

130

1000 2000 3000 4000 5000 6000 7000

OPEC Middle East

FSU

EOR

CtL

Mideast OPEC

Heavy Oil

EOROther OPEC

Other Conventional Oil Venezuelan

Heavy Oil

ArticFrontier

Deep Water

Biofuels ( Sugar Cane Based)

Oil Sands (mining)

Oil Shale

Oil Sands (In-Situ)

GtL

Biofuels US (Corn Based)

Renewable PowerConventional Power

US$/b

bl

Barrels of Oil Equivalent (Billions)

Conventional liquid sources

Non-conventional liquid sources

Emerging sources of transportation energy

Source: Booz Allen/IEA - Assumed average vs. marginal costs; 10% return for conventional and 13% return for unconventional technologies; no subsides for biofuels; no carbon offset costs; after severance and production taxes

Producing basins by marginal cost

Base marginal cost used to be $10 to 20, unconventional oil sands push to new highs last year but now deflation is changing the picture.

Page 7: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Outlook for Tar Sands and unconventionals

• Tar Sands cost outlook (Credit Suisse) $30 current mining operations; $80 for new projects to generate a 10 % after tax return

• Company announcements of delays –Game of chicken?• Exploration budgets haven’t really been cut. Stock buybacks have been

cut. • Majors committed to unconventional plays. Major spending cuts not

likely. Long term average prices matter more than “today’s price,” ala the so-called ExxonMobil world view.

• Current market conditions seen as opportunity to pick up acreage from weaker financed players.

• Companies don’t believe in permanently low prices. • Even if OPEC plays open up, unconventionals remain a key part of the

strategy, maintain assets with lower geopolitical risk.• IOCs have cash and markets are recognizing their superior capital

positions.• What will ExxonMobil buy??• Majors shopping for shale…

Page 8: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

•Proposes $7,000 tax credit on the purchase of fuel-efficient cars

•Proposes that new vehicles sold in US are flex-fuel by the end of his first term: $4 billion in loans/ tax credits to U.S. auto plants

•Supports extending tax credit for renewable energy production

•Proposes creation of green energy jobs in the stimulus package•As a candidate, proposed selling 70 million barrels of oil from reserves to lower current gasoline prices (4Aug2008)

•Call for eliminating need for oil from Middle East & Venezuela in 10 years)

•Supports limited offshore drilling (1Aug2008)

•Prioritize the Construction of the Alaska Natural Gas Pipeline

25% by 2025

•Increase fuel economy beyond 35mpg•52 mpg by 2025

•Yes: reduce emissions 80% from 1990 levels by 2050

•100% permit auction

•Supports Low Carbon Fuel Standard

Tax CreditsGreen EnergyDrill Offshore?

Renewable Energy

StandardHigher CAFE

Cap-and-Trade

Obama on energy policy

Page 9: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

New U.S. Efficiency Standards Will Reduce U.S. Oil Demand

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

200

6

200

8

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

m illion b/dU.S. Motor Fuel Use under 3 Scenarios

6.7 m illion b/d savings

5.6 m illion b/d savings

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

200

6

200

8

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

mpgU.S. Light Vehicle Fuel Efficiency

under 3 Scenarios

50 m pg for new vehicles by 2020**

35 m pg for new vehicles by 2020*

Notes:*CA FE ph a sed in a ccor din g to Sen a te bill by 2 02 0** Efficien cy im pr ov em en ts a cceler a te in 2 01 5In both ca ses, n ew v eh icles pen etr a te th e stock a t 6 .5 % per y ea r

• Fuel efficiency improvements have significant benefit, but are offset by growth in vehicle stocks and miles driven (income and “rebound” effects)

– High prices are revealing a demand response as recent U.S. miles driven data are slightly lower

• Similar arguments hold in all countries, with potential for efficiency improvement varying across countries

• Policy is multi-pronged in its approach– A technological breakthrough, such as with plug-in hybrid vehicles, could push demand lower into

the future. Once these alternatives are adopted, the market is forever changed

– Biofuels can induce even further reductions in demand

Page 10: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Globally, Demand for Natural Gas Has Been Growing Rapidly

• Natural gas use doubled from 1980-2005– Natural gas demand growth rate of 2.75% per annum– Comparatively, coal grew at 2% per annum and oil at 1% per annum– As a result, the share of natural gas in primary energy supply has been

rising.– 2009 will see a setback in this trend, with estimates that US “demand

destruction” could exceed 2 Bcf/d this winter. (Natural gas demand among steel and iron producers down 35% year on year. Industrial demand alone could be 1.3 Bcf/d lower this winter giving idling of plants by Dow, Dupont, and automakers, etc).

– Longer term, environmental pressures could mean natural gas use could overtake oil. As gas’ share grows, it is becoming more “geopolitical.”

Source: EIA

1980

Coal25%

Natural Gas19%

Petroleum46%

Renewables4%

Nuclear6%

Total Energy = 284 Quads2005

Nuclear6%

Renewables8%

Petroleum37%

Natural Gas23%

Coal26%

Total Energy = 455 Quads

Page 11: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

LNG will grow in share of global gas trade

• North America will become an increasingly influential influence of a global market! What we do here will influence developments elsewhere.

– Geopolitics and US energy policy will have a big impact on global gas market

• Key areas to watch

– US gas shale likely to continue to limit opportunities for LNG imports to the US; majors will pick up prime properties from weakly financed players.

– Impact of lifting of US access restrictions would dampen or delay demand for natural gas from Iran, Russia and other Middle East latent suppliers.

– US carbon policies also likely to have large influence on global trends, creating extra demand for natural gas.

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

tcf

Data com piled from RWGTM-Base Case (2/16/2006)

Pipe line Flows

LNG Flows

2010 ……. 117.8 tcf …………… 24.1%2020 ……. 140.3 tcf …………… 31.1%2030 ……. 161.9 tcf …………… 41.4%2040 ……. 177.3 tcf …………… 48.0%

GlobalDemand

InternationallyTraded Share

Source: Papers and presentations available at www.rice.edu/energy

Page 12: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Structural Factors driving the global commoditization of natural gas

• Baker Institute model illustrates scenarios for a world market of expanding depth and geographical extent

• Transition to a world market could be rapid– An expectation of new market dynamics encourages moving

away from bilateral trading• More potential trading partners lowers the risk of

investing without complete long-term contract coverage• A decrease in average distances between suppliers

and/or customers increases arbitrage opportunities• Bilateral contracts can be fulfilled by swap agreements as

increased market depth increases the number of profitable alternatives– Contracts can be viewed as financial arrangements that do

not necessarily constrain physical trades

Page 13: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Key Trends in the global commoditization of natural gas

• An integrated global gas market is emerging in which events in any individual region or country will affect all regions

• This market integration will have major ramifications for both large gas consumers and producers and increase the visibility ofgeopolitical influences on gas market fundamentals and pricing

• Price impacts are being transmitted through contract for differences and shifting destinations for LNG

• A Gas OPEC will be hard to organize over next decade or so because of fringe producers and higher substitutability of gas with other competing fuels

• The fate of exploration and production policies in the US and Russia will have major bearing on the level of dependence key natural gas consumers will have on Middle East natural gas exports

Page 14: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Developments in Shale Gas• Very active area of exploration and development

– NCI assessment indicates 275-840 tcf of technically recoverable shale gas• Differences driven primarily by producer reports for the Haynesville and Marcellus.• Even low end is higher than EIA’s 125 tcf (AEO2008) or the 131 tcf cited by PGC (2006)• Do not include Canada (Montney, Horn River) which might be as high as 71 tcf.• These are technically recoverable estimates. Costs may be an impediment.

– Breakeven estimated at roughly $4-7/mcf in most plays. Favors Appalachian developments.

Haynesville

Page 15: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Developments in Shale Gas (cont.)

• Shale plays in Canada are also being developed.

• Most active areas are in the Horn River and Montney plays in BC and Alberta.

• Supply potential in BC, in particular, has pushed the idea of LNG exports targeting the Asian market

– Asia is a premium market.– Competing projects include

pipelines from Russia and the Caspian States, as well as LNG from other locales.

• BC is a basis disadvantaged market, but selling to Asia could provide much more value to developers.

• Utica Shale in Quebec has been compared to the Barnett in Texas, and price is even more favorable.

Horn River

Montney

Page 16: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

0

10

20

30

40

50

60

XOM RDS BP CVX TOT ENI COP STO REP OXY

Spending Capacity of IOCs

2009E Operating Cash Flow (Source: Morgan Stanley)($Bn)

Source: Wall Street Research

Dividends Capex Additional Operating Cash Flow

Page 17: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

IOCs may have less cash available but share buy backs, not exploration, likely to be cut: Still shopping for attractive assets

0

50

100

150

200

250

2005 2006 2007 2008 2009 2010 2011 2012

Spending Capacity of IOCs (2005 – 2012)($Bn)

Source: Wall Street Research

Free Cash Flow of IOCs (2005 – 2012)($Bn)

Source: Wall Street Research

Capex FCF

0

25

50

75

100

125

2005 2006 2007 2008 2009 2010 2011 2012

FCF

Page 18: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

0

2,500

5,000

7,500

10,000

ECA APA DVN CHK EOG HES SWN SD HK XCO KWK WLL PVA GMXR GDP PETD

Many Independents now experiencing cash flow deficits

Operating Cash Flow Deficits (Source: Morgan Stanley)($MM, Total Expenditures)

Source: Wood Mackenzie Research

Operating Cash Flow Funding Shortfall

Page 19: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Under base case, new U.S. Shale finds will constitute an increasing share of the market

• U.S. shale assessment has been expanded by 145 trillion cubic feet to total of 284 tcf

• Additional shale in Canada assessed at 71 tcf

• Shale forecast to be an increasing share of U.S. supply

• U.S. LNG import rates could flatten for a decade or more

• Green policies could influence this trend by buttressing demand and creating an earlier window for LNG flows to grow

US LNG Imports

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

2040

tcf

0.0

5.0

10.0

15.0

20.0

25.0

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

2040

Shale

OCS

Other

Rockies

Alaska

tcf US Production

Page 20: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Energy Security Policy vs. Climate Policy: “Two sides of the same coin?”

• There is tremendous uncertainty in the price of carbon in a tradable permit scheme. This tends to increase the “option value” of waiting to make future investments.

• Carbon prices in core scenarios range across models.– Generally prices increase with restrictions, and technology assumptions are crucial

Carbon Emissions Allowance PricesCore Scenarios

$-

$50

$100

$150

$200

$250

2015 2020 2025 2030 2035 2040 2045 2050

2005 $/metric ton

EIA S.2191: Core

EPA Scenario #2, S.2191 AsWritten (ADAGE)

EPA Scenario #10, S.2191 inHigh Tech Case (ADAGE)

EPA Scenario #2, S.2191 AsWritten (IGEM)

EPA Scenario #10, S.2191 inHigh Tech Case (IGEM)

MIT Core Scenario: 287 bmt

MIT Core Scenario: 203 bmt

MIT Core Scenario: 167 bmt

2030 Average Price Core Scenarios = $ 70.16

Page 21: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

CO2–intensity of fossil fuels

BBBBBB BB

BBBBBBBBBBBB

BBBB

BB

JJJJJJJ J JJJJJJJ

J JJJJJJ JJ J J

HHHHH

HHHHHHHHHHH

HHHHHHH

H

HH

0

2

4

6

8

10

12

0 20 40 60 80 100 120 140 160 180 200

Energy (1018 joules)

B Petroleum

J Natural gas

H Coal

Source: EIA

Page 22: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Reduced emissions spells large upward growth in nat gas demand outlook in the United States

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039

-2

-1

0

1

2

3

4

5

6

USA

Canada, Mexico

EU15

Other Europe

Japan, Korea

Other Asia/Pacific

Russia

Other FSU

Middle East

Africa

India

China

ASEAN

South/Central America

Page 23: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Geopolitics of Natural Gas

• First mover advantage has dictated market dynamic until now, promoting supply growth

• Russia seeking coordination, flexing its muscle

• So far, Middle East suppliers are an important alternative supply to Russia but might that change over time?

• Latent supply in Iran, Iraq, and Saudi would kick in earlier if Russian problems create a window; Qatar has been first out of the gate.

• In the short run, there’s lots of alternative suppliers but over time, market concentration could look more like oil, with more potential for coordination.

Page 24: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Russia

• Russia is dependent on natural resource exports for its well being and growth. Energy policy has been core foreign policy vehicle for asserting itself on the international stage.

• Resurrection of a strong state with government control of the “commanding heights.” This especially true of energy sector.

• Russia wants to regain its status as a super power and reassert its influence in the FSU. Populist pressures at home, politicians play to public sentiment even if some threats aren’t realistic (shifting exports to China) or are counterproductive (cutoffs that damage Russia’s reputation as a reliable supplier).

Page 25: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Europe has responded to Russian saber-rattling with lower purchases

Russia Natural Gas Exports Share of OECD Europe Consumption

20212223242526272829

199019911992199319941995199619971998199920002001200220032004200520062007

Perc

enta

ge

Page 26: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Russia - USA

• US policies toward the FSU conflict with Russian ambitions:– Promote pro-western democracies– Expand NATO and EU– Establish ties with Central Asian republics– Promote alternative pipeline routes for

central Asian oil and gas resources

Page 27: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Russia - Europe

• Is Russia in a pincher movement over energy supply?

• Is a Gas OPEC possible? • How is Europe responding? Russia

taking a divide and rule tactic. European countries have varying levels of exposure to the Russian gas risk. European gas monopolies also block an effective EU response.

Page 28: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Source: The Economist

Page 29: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

2006: Gazprom attempts natural gas swaps agreement with Algeria's Sonatrach

2007: Gazprom signs with ENI for share in pipeline from Libya to Southern Europe

2007: Negotiates multi-year swaps with Qatar to control price of gas in European pipelines

Gazprom Cornering Distribution?

Page 30: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

natural gas supply to Europe—Extreme price impacts but market adjustments

possible starting after a year

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018$-1.00

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$/M

cf

Henry Hub

NBP

German-Austria Border

Tokyo

Sydney

Page 31: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Impacts. LNG impacts mean supply adjustments divided among many

players, not just EU

2005 2010 2015 2020 2025 2030 2035 2040

-4

-3

-2

-1

0

1

2

Tcf

per

year

Russia Ukraine East of Caspian Rest of World

Page 32: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Russia - Iran

• Russia supplies military equipment and nuclear technology and protection against possible UN sanctions

• Russia gets an ally in Persian Gulf –Iran can exert pressure on Saudi Arabia

• Both get reduced US influence in Gulf• End game: Iran can disrupt Persian Gulf

oil flows

Page 33: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

The Geopolitics of Iranian Gas

• According to the USGS, Iran holds the second largest natural gas resource potential in the world. According to the Oil and Gas Journal, Iran holds the second largest oil reserves (not including non-conventional oil). However, much of that resource may never reach major markets. If, for example, nuclear proliferation conflicts escalate, sanctions could effectively strand Iran’s resources. Ironically (or maybe not), Russia benefits from Iran’s geopolitical problems.

• A fugitive resource conflict exists in Qatar’s North field and Iran’s South Pars field. Iranian Deputy Oil Minister Hadi Nejad-Hosseinian in April 2004:

Accused Qatar of overproducing gas at the fringes of the North Field and warned that if Qatar didn’t enter negotiations about slowing its production, Iran will find “other ways and means of resolving the issue.”

More recently, Iran has suggested joint development cooperation, including a possible joint border platform as part of three way talks between Russia, Iran and Qatar. Sharing of facilities and supply swaps have been mooted.

Page 34: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Russian Economic Interests

• High oil and gas prices• Collusion with/influence on OPEC and future Gas-

OPEC– Russia is trying to influence policies of other producers– Russia continues to try to assert control over Central Asian

resources• If oil prices continue to be low, will Russian be more

willing to use military power to defend its interests or to sow geopolitical instability? Foreign adventures to unify domestic population? More desperate attempts to drive prices higher via export cutbacks or pressuring other suppliers or transit countries?

Page 35: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Prospects for a Gas Cartel

• Distribution of gas reserves is concentrated• Gas exports are even more concentrated.

– Russia has 28%– Top 7 have 79% of exports– But Canada, Norway and Netherlands with 30% of exports are not

likely to join– Only significant Middle East exporter is Qatar with 2.6%

• But export concentration reflects underdevelopment of gas deposits in many countries.

• More widespread development can potentially create many sources of supply, thwarting cartelization. (the supply elasticity of non-members of a cartel is large in short - intermediate term)

Page 36: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

Prospects for Gas Exporting Countries Forum (GECF)

• Little power at present– Attempts to prevent European liberalization– Algerian gas for Boston

• Too many members with competing interests to constrain capacity expansion in intermediate term.

Page 37: The Emerging Geopolitics of the Globalizing Natural Gas ... Geopolitics of the Globalizin… · – Geopolitics and US energy policy will have a big impact on global gas market •

In the Long Run

• As in oil, world will become increasingly dependent on few sources of gas after 2030

• Russia and OPEC will have incentives to coordinate pricing of oil and gas

• Consuming nations can reduce market power of exporters by– Promoting competition among energy sources by

• Liberalizing domestic energy sectors• Developing technologies that facilitate fuel switching

– Improving energy efficiency