Amid all the talk about peak oil the debate about natural gas is getting snowed under. But not for ever, if you take a new research report into the upcoming scramble for natural resources seriously. The report, issued by global consultant Booz & Company, predicts that tightened CO2 regulations in the next few years will lead to a run on natural gas by US companies.
US industry will likely direct their demand to the natural gas suppliers that currently sell to Europe. And the competitive picture that’s set to emerge won’t look pretty. Is this a scare story? Only for those who support the policy by the incumbent US government not to start out with drawing up regulations for mandatory CO2 limitations.
But common sense dictates that the decision by the Bush administration to steer clear of even starting to draw up regulations is bound to cause massive problems for the next US government.
The Booz & Company report underscores this too. “A new US government is likely going to tighten up on regulations for CO2 emissions, which will have a big influence on the balance between demand and supply of gas,” write the analysts at global business consultancy.
They deliver razor sharp analyses of the extra costs involved with stricter regulation of CO2. The information is most transparent when Europe’s involved, because Europe has most of its rules already in place. For the US data the researchers relied on their own prognosis and on figures from independent agencies. The US government simply doesn’t have the data available despite the dramatic impact any regulation is bound to have.
The most important conclusion of the Booz & Company calculations is that subjecting industries to mandatory regulations on CO2 emissions will overturn the natural gas landscape completely. First of all, there’s going to be a major increase in demand for the stuff in countries around the Atlantic Basin. This in turn will have an accumulated impact on the world’s gas markets. These are currently rather localized, but they will likely become more global as the scramble for resources continues.
“Liquid natural gas (LNG) from the Middle East and North Africa will possibly go to the US instead of to Europe. Investments in European LNG terminals could land in trouble because of this”, says Booz.
The knock-on effect will be that Europeans will start to rely on gas supplies that come via pipelines, notably the Russian pipelines. Russia already is Europe’s largest gas supplier, but its relationship with its EU clientele likely will change. For one, European energy companies and governments will start to want to secure their access to Russia’s gas in the medium term.
The analysts call for a new approach to the three traditionally independent regional gas markets, saying developments need to be regarded in a more integrated way. “Until now the linkages between gas markets in these markets have been viewed as limited. But the competition for access to gas in the Atlantic Basin will intensify, especially between Europe and the US”, according to the Booz vice president Otto Waterlander, one of the authors of the report.
When more LNG hits the market in the next ten years, this competition for LNG might even become more prevalent than the competition with fast growing Asian countries. What’s more, the current world focus on what’s happening in the oil markets has a slowing effect on necessary investments in new gas production. “The production of oil is prioritized, which hinders the development of new gas reserves,” Waterlander says. “The availability of gas could turn out to be way lower than is anticipated.”
Even though at Federal level little is done to make sure that the battle plans are ready to combat fuel scarcity, the first efforts by sub localities are being seen. For instance, Connecticut passed a law last June establishing a task force to draw up a scenario accounting for long-term petroleum and natural gas scarcity, steep price increases and supply disruptions.
Europeans already are incorporating this into their models. They are expecting a massive switchover from coal to gas for electricity generation due to massively increased costs due to CO2 regulation. But US predictions for gas consumption lack this anticipation. Booz & Company say CO2 regulation is the most important factor determining demand for gas in the next ten years. They cite International Energy Agency (IEA) figures which predict that European gas consumption will increase by 2.9% annually until 2015. The same agency puts this figure at 1.5% for the US. “The US market [..] is bound to be confronted with an increasingly big demand for gas for electricity generation, in view of the alternative resources like clean coal and nuclear energy won’t have been developed in time to meet the demand for electricity”, the Booz & Company analysts predict.
The result will be a massive run on the available liquefied natural gas. “Local North American gas producers won’t be able to handle the increased demand and this will result in increased competition for LNG.” The report shows that the increased US demand for LNG will impede on European supplies. Countries that traditionally supply Europe, in the Caribbean, North Africa and the Middle East, will likely start to supply US markets as well. The size of gas supplies will be affected and of course prices will increase too.
Booz & Company’s models indicate that US demand for natural gas until 2015 will increase to 84 bcm (= billion m3). That equals around 12% of the gas supplies of Organization for Economic Cooperation and Development (OECD) countries located in Europe. The European import infrastructure could be affected too. The economic viability of some of the 30+ European expansions of import terminals with a capacity of around 130 bcm by 2015 might be at risk.
All this is, of course, great news for the gas exporting countries. A better integrated and more global gas market offers great opportunities for them. However, the market will get more complex and this requires better strategies and planning. The increase in complexity could lead to the acceleration large gas exporting countries’ plans to launch the Gas Exporting Countries (GECF), an informal club of 15 countries similar to the Oil Exporting And Producing Countries (OPEC).