Golden Age of Gas – Geopolitical Implications
By Haydn I. Furlonge, Associate Editor IAEE International Energy Online Forum
There is no gainsaying that world energy supply and demand is at the heart of world geopolitics. If a recent report of the International Energy Agency (IEA) is correct in its extrapolation of current energy trends then we are in for a major shake. In particular, IEA’s 2012 World Energy Outlook report suggests that natural gas is expected to play a much more significant role in the world energy matrix than ever before. We touch very briefly on the geopolitical implications of such a development.
Firstly, the overall supply matrix for energy will see a greater share for non-fossil fuels, rising from 19% in 2010 to 25% by 2035, with renewables (including hydro, biomass and waste energy) accounting for much of this change. Whilst there is short-term resistance to nuclear due to safety concerns, this may ultimately yield to demand with a revamping of the risk distribution model in the industry. Nonetheless, the nuclear industry is losing serious ground, which other energy sources are covering. In the meantime, coal will continue chipping away at its issues and could gradually surpass oil as the majority single fuel by 2035.
IEA notes that natural gas is the only fossil fuel that will experience an increased share, regardless of policy scenario possibilities. How is gas able to rise above all odds? Two reasons – unconventional gas and LNG. Shale gas as well as coal bed methane have sent shock waves across the industry, with the epicenter being USA. Unconventional gas is surpassing half of the global natural gas resource base, and its production share will increase from 13% in 2009 to about 20% by 2035.
LNG’s impact has been just as dramatic to the extent that, despite its complex and capital intensive value chain, it is now perceived as an easily moveable competitively-priced energy commodity. Once rigid LNG sales contracts are almost all but completely replaced by flexible arrangements, with arbitrage and short-term deals now part of the regular business model. Markets are opening up quickly due to the reduced time (from 3 years to about 1 year) for new import infrastructure as a result of the growing popularity of floating technology. The only limitation in the current environment is shipping, although the issue is not so much capacity shortage, but players holding onto excess capacity for capitalizing on arbitrage, and due to vessels crossing paths to move volumes to the highest priced markets.
The faultline between pipeline gas and LNG is becoming stressed as LNG continues to penetrate existing and new markets. This may be overshadowed by competition within the pipeline industry. The epic pipeline debate between South Stream (Russia to Europe) and Nabucco (Caspian region to Europe) is still unfolding. The latter would diversify supply source away from Russia, which in itself has value (energy security and political). Turkey and Azerbaijan’s recent memorandum of understanding on a less grandiose pipeline to the southeastern gate of Europe seems to be ahead of the pack.
Another classic geopolitical tussle is India’s thrust for more natural gas; however, its northwest transnational pipeline strategy (involving countries such as Pakistan, Iran, Turkmenistan and Afghanistan) is complex to say the least. Yet still, its partner in the BRIC alliance, China, seems to be out-maneuvering India for pipeline as well as LNG supplies. Recent announcement by Turkmenistan to supply China 65 bcm/year is but the most recent example.
Where will new global gas supply come from? IEA notes that non-OECD countries will account for 70% of global gas production by 2035. The demand poles are also expected to shift since about 90% of energy use increase over the period 2010 to 2035 will be attributable to non-OECD countries, driven by population and economic growth. Regions such as the Far East (China), Asia (India and Indonesia), Middle East and South America will attraction more attention than North America and Europe.
Further, IEA estimates that US$ 38 trillion is required (for power, E&P and other infrastructure) over the period 2011 to 2035 in order to meet global energy demand needs. What is noteworthy is that two thirds of that investment is likely to take place in non-OECD countries. Early signals are that BRIC countries are leading the way. In South America, Brazil is expected to surpass Argentina as the region’s largest producer and possibly become a major gas exporter. The African continent is also sending early signals of a major upheaval. It is fast emerging on the energy scene with relatively recent entrants such as Equatorial Guinea (working on its second LNG Train) and Angola (to commence LNG production in 2012). Increasing investment and hydrocarbon finds on the other side of the continent (such as in Mozambique and Tanzania) are facing lucrative Asian markets to the east. As tensions eventually dampen in the Middle East and North African (MENA) countries, even more can be expected of non-OECD countries. On the flip side, unabated instability could further agitate global supply and bolster energy prices.
Given the promising future for natural gas and the revamped energy supply-demand matrix that is unfolding, a new geopolitical realm is evolving before our very eyes. Energy security in the “OECD world” is almost taking second stage to resource exploitation and procurement in the “non-OECD world” to meet growing demand. This begs the question as to which entity or entities will act as power broker in this new gas era. Much can be said of why a “OPEC/GECF” type entity can be feasible and equally why it has not materialized. In the interim, however, contract-by contract deals and the odd bi-lateral and multi-lateral arrangements seem to be order of the day.
Finally, it is worth mentioning that a key factor of world energy supply/demand balance according to the IEA report was carbon dioxide; however based on more recent events or lack thereof at the Durban Conference of the Parties, the seismograph is undisturbed. For certain, this will remain in political circles before carbon dioxide and the global climate change agenda forces another major shifting of the plates in the energy world.
Contact: haydnfurlonge@yahoo.com
