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.

“LNG has become an increasingly important supply source in meeting the world’s energy needs,” says Andrew Walker, BG group’s head of LNG Strategy, in a commentary this summer. “Of all natural gas consumed in 2011, 10 per cent was transported between producer and market in the form of LNG.”

He says in 2011, total trade has increased nearly five times from the 1990 level, to just over 240 million tonnes. “There are 18 exporting countries and 25 importing countries spread worldwide, with many more aspiring to enter the market. We have seen the emergence of new technologies including shipboard regasification and floating production open up new markets and new supplies respectively.

The LNG trade is now truly global.

“Cargoes routinely move between the Atlantic and Pacific regions. The proportion of trade contracted on a short- term basis (defined by GIIGNL, the LNG importers group, as four years or less) has risen from around four per cent in 1990, to 18 per cent today. Multiple buyers in different regions often compete for the same supply, while multiple sellers in different regions often compete for the same buyer.

In short, LNG has been instrumental in driving the globalisation of the international gas trade.”

THE VOLUME GAME

It is now clear that the extent of the volumes of natural gas available to US shale gas producers has had game-changing implications, and that the entry of the US into the global seaborne LNG market would appear to be only a matter of time. The race is on in the US to take advantage of the swelling realisable stocks of shale gas on offer.

One of the key tasks facing the second Obama administration is clearance for the removal of restrictions of the export of natural gas from the US. As of November 29 2012, the Department of Energy had received 20 applications to export domestically produced LNG from the lower 48 states for the equivalent of 28.7 bcf/d.

Still, the construction of export terminals will take years and cost billions of dollars.

US unconventional gas will also change the way increasing proportions of the US truck fleet, as well as cars, will be powered in future, affording the US the ability to remove reliance on oil and power its roads with cheap unconventional products. Henry hub natural gas futures were quoted December 14 at a high of $3.36 per mmbtu.

The flip side of the US situation is that Qatar has seen the wind go out of its sails as the need to divert millions of tons of LNG away from the US market to new destinations has led to a market glut. Qatar made a point of coming to Japan’s aid in the aftermath of the Fukushima nuclear disaster, supplying spot cargoes quickly and without price gouging, to ensure that Japan’s gas-fired power stations could increase output.

Still, the battle lines are set for the next decade. On the supply side, Qatar will face the emergence of Australia as a new power in global LNG, while the US will also challenge its dominance.

“Asia-Pacific is becoming the new global battleground for gas suppliers from around the world,” says a Bain and Company article on the outlook for global gas markets published in December 2011. “We expect demand will grow substantially beyond traditional buyers (primarily Japan, Korea and Taiwan). That growth will come primarily from China, as well as from India and other rapidly growing Asian economies such as Thailand, Singapore and Vietnam.

“New gas supplies from West Africa, the Middle East and Australia also are arriving in Asia. Asia potentially could even import LNG from North America, though that will depend on how long it takes Australian supply to develop – and how much it costs. Asia also contains a number of potential wildcards – most important, whether China’s ability to generate its own gas supply from indigenous shale and other sources can keep up with its growing energy demand.”

To expect the dominance of pipeline gas to diminish in future seems obvious. But the enormity of the costs of seaborne LNG infrastructure will act as a break on its challenging the dominance of global pipelines.

What the emergence of global LNG will do, however, is to challenge the regional pricing differentials that are now so apparent in the world’s three major regions. Whether global LNG prices will one day drag up pipeline gas costs to their level, or vice versa, is a question for another day.