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Gas: part of the environmental solution

THE WORLD'S natural gas markets are in a state of flux. Last summer, Russia's Gazprom, the world's biggest gas supplier, boasted it would be the biggest company of any sort by market capitalisation by 2015, with a value of $1 trillion. Then, the market valued it at $300bn. Now it's a mere $90bn. Then, Gazprom was worrying about finding enough gas to meet seemingly unstoppable demand growth in its main markets. Now, demand at home and even in the gas-crazy EU is falling. So are prices (see p18). Development schedules for projects such as Shtokman LNG (liquefied natural gas) and those in the high-cost Yamal peninsula are slipping and no-one in the EU seems to be panicking.

Ironically, at a time when the EU is less in need of gas, Norway is thinking about offering it another gas pipeline (see p8), partly to compensate for the country's declining oil production and partly because of the abundance of gas in its northern waters. But it is also worried that Europe will come to view gas as an unreliable fuel, in light of the latest Russia-Ukraine gas conflict, which resulted in prolonged supply stoppages to several European countries.

Any such move by Norway would dilute Russia's dominance of the European market. So it is no surprise that Russia is fighting back: Surgutneftegaz is buying a stake in Hungary's Mol (see p4), which could make it easier for Gazprom to push ahead with its South Stream pipeline. The Russian gas monopoly also remains determined to expand into new markets – in Asia and the US – with investments in LNG, as well as pipelines. In March, it signed a memorandum of understanding calling for Russia to begin importing Azerbaijani gas in 2010; this could kill off the 31m cubic metres a year (cm/y) Nabucco gas pipeline project, which would rely principally on Azerbaijani gas.

Worldwide, large capital-intensive gas projects are under threat because of the fall in prices. Last month, in Asia, the world's biggest LNG market, spot LNG cargoes were trading at around $4/m Btu – about a third of their level 18 months ago. In the US, the Henry Hub spot price began April below $4/m Btu and, says the Energy Information Administration (EIA), is unlikely to pick up much until next year.

Energy demand in general remains flimsy because of continued weakness in the wider economy: US oil stocks, commercial and government, are at all-time highs, while demand is at its lowest level since 11 September 2001; energy cover for the OECD is well above normal for this time of year; and demand from the industrial sector is weak. Steel producers, for example, are frantically reducing production, deferring plans for new projects and cutting jobs.

Lower energy prices mean less exploration. In the US, upstream activity is in a slump. The American Petroleum Institute says gas drilling was down by 23% in the first quarter – the worst quarterly year-on-year decline this decade. In mid-April, the Baker Hughes US rig count was down by 852 on the year, at 975. Such is the slow-down in drilling that the EIA suggested US gas supply might fall behind demand in the short term, prompting price rises. But this is unlikely: the EIA has also raised its forecast for LNG imports in 2009, which should even things out – and persistent economic weakness should also keep prices down.

Cheaper supplies of gas – as of oil – are good news for consumers and should assist economic recovery, although consumers should not return to old habits, where rich nations gorge on cheap energy. That would lead back to runaway energy-price inflation, setting the market for another crash. But even with improved energy conservation, there is potential for tightness in LNG and gas markets to return quickly.

A large amount of new LNG supply is due to come on stream by 2011 – around half of it in Qatar, with additions also being made in Indonesia, Yemen, Australia and Peru. Including Qatargas 2's first train, which was inaugurated last month, around 70m tonnes a year (t/y) of capacity will be added over the next two years, according to Petroleum Economist's LNG Data Centre.

However, the LNG supply glut – if it can even be called a glut – will not last for long, assuming demand begins to recover. After 2011, LNG-supply growth will slow down, for at least two years. Only five final investment decisions have been taken on LNG projects since the start of 2006, representing just 19m t/y of new supply.

The outlook for growth beyond these volumes is, at best, uncertain: the three countries with the largest gas reserves – Russia, Iran and Qatar – are unlikely to make much of a contribution in the 2012-15 time-frame. The best prospects for substantial new export capacity in this period are in sub-Saharan Africa and Australia. But projects proposed in these areas are likely to face similar constraints to those that have troubled export-plant developers in recent years and may not proceed as planned or hoped – especially if low gas prices persist for some time.

Meanwhile, new supply and demand centres continue to emerge. Although its focus is on oil, Iraq plans to raise gas production to 70bn cm/y, with exports beginning after 2012 (see p14). And, although world gas demand may be depressed, Latin America – long seen as a source of LNG supply, not consumption – is emerging as a substantial buyer to compensate for the failure of Bolivia's upstream sector (see p12). And if gas can be priced competitively enough with other fuels – removing indexation to oil would be a helpful start – suppliers could develop the embryonic Chinese and Indian LNG markets, which would transform the demand side of the gas business.

A catalyst for change

The biggest catalyst for change could be unconventional gas. Despite the recession, mergers and acquisitions activity has been booming in Australia's coal-bed methane (CBM) industry (see p16), where costs are reasonably low and the resource is an attractive alternative to conventional gas. Several other countries with big coal deposits, such as China, Russia and Canada, think they might have CBM reserves. The US CBM industry is well established. Meanwhile, the successes of shale-gas explorers in the US could be replicated elsewhere – ExxonMobil is exploring for unconventional deposits in eastern Europe, for example.

The improved outlook for global gas supplies is a good thing – for the energy security of individual countries, because of the wider distribution of gas resources that it implies; and for the environment, because it should reduce the amount of coal being burned. Indeed, policymakers should do what they can to encourage gas development, which should be seen as part of the solution to the climate problem.

President Barack Obama is determined to curb US greenhouse gas emissions, through the introduction of a cap-and-trade scheme, and encourage the development of renewables to improve energy security and reduce the environmental impact of US energy use. Last month, his government took the significant step of empowering the Environmental Protection Agency to regulate CO2 emissions under the US Clean Air Act (see p28). This is unlikely to happen; the government would prefer to put CO2 controls in place through the Congress.

Those deliberations should recognise the special role that natural gas can fulfil in providing energy at scale, from indigenous resources and at a relatively low environmental cost.

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