As Gas Goes Global, Will Qatar Cope?

Although we take electricity for granted, the provision of the energy required to keep power stations going is a difficult task.

Natural gas’ abundance – world reserves were calculated at 7,360 trillion cubic feet by BP in its 2012 Statistical Review of World Energy – makes it the ideal fossil fuel for efficient, clean energy creation.

“World proved natural gas reserves at end-2011 were sufficient to meet 63.6 years of production,” the review said.

“A large increase in Turkmen reserves pushed the [reserves-to-production] ratio for Europe and Eurasia to 75.9 years. The Middle East still holds the largest reserves (38.4 per cent of the world total, compared with 37.8 per cent for Europe & Eurasia) and has an R/P ratio of over 150 years.”

What is becoming increasingly crucial in today’s technologically advanced world is gas’ delivery mechanism. While seaborne liquefied natural gas is gaining in importance as a channel to market, pipelines today still deliver 90 per cent of global gas.

Pipelines have been the traditional delivery mechanism for the important resource, frequently supplying domestic markets and often crossing borders.

Whether it’s via the planned Trans-Saharan Pipeline in North Africa, the undersea Qatar-UAE-Oman Dolphin Gas Pipeline, the South-Wales Gas Pipeline in Wales, UK, or the Iroquois Gas Transmission System that transports natural gas from Canada to the US, the delivery of gas from the wellhead to the consumer is a complex, expensive and arduous task.

In the US alone, there are some 305,000 miles of interstate and intrastate transmission pipelines.

The world’s longest, at 8,700 kilometres, became operational in June 2011, transporting gas from Turkmenistan to Southern China, to help boost supplies to the country’s industrial zones in Shanghai, Guangzhou and Hong Kong.

THE PRICE IS RIGHT

As the global market has evolved, separate regional pricing mechanisms have developed: in Asia, especially Japan, gas prices were indexed to oil, in Europe to both oil and gas, and in the US, a more transparent market, to gas products alone.

Naturally enough, the differentials involved have left traders unable to take advantage through arbitrage because of the fixed nature of pipelines, whose geographically static markets have evolved in different ways around the world.

Today, the OECD produces just over one third of global gas, making the world’s developed economies more reliant on emerging markets.

The former Soviet Union accounts for almost one-quarter of global production. The Middle East produced only 16 per cent of global gas in 2011. The European Union is increasingly dependent on outside resources, making it prey to global LNG pricing dynamics, as well as Russia’s negotiating tactics, which blew up in the EU’s face in 2009 when Moscow’s dispute with Ukraine’s Naftogaz led it to cut supplies to Europe.

Global gas-trade dynamics changed with the growth of seaborne LNG in the last decade, which has expeditiously filled the gap in the market to which pipelines were unable to cater. As early as 1959, the Methane Pioneer, the world’s first LNG carrier, crossed the Atlantic, the first time gas was shipped by sea.

“Thanks to liquefaction, natural gas could now be transported long distance, paving the way for large-scale marketing. This opened new prospects for bridging large distances between consumer regions and production regions. Projects proliferated,” French company Total says.

A new delivery platform means that natural gas delivery, in the form of liquid gas frozen to -260° Fahrenheit and one sixth-hundredth of its original form, is now possible to all points of the compass. Led by the tiny state of Qatar, which has revolutionised not only itself but the seaborne LNG trade, about 20 core nations have built LNG fleets, created the export and import terminals for its delivery and regasification and brought into being a market where, given the enormous costs, gas prices are trading very close to their upper bounds.

Broadly speaking, today in the US market, pipeline gas is selling at under $4 per mmbtu, while it is around $8-9 in European markets, and $16 and above in Asia, where LNG is often employed.

A twenty first century gas market will see LNG gain market share.