Gas returns to the forefront
In the early 2000s, the main issue raised in discussions about gas was the fear of becoming increasingly dependent on sources located outside the OECD. There were two kinds of responses around the world, which in large part structured developments in the international gas scene over the next several years.
The first response, which was Europe’s preferred option, is based on demand. For the European Union, the relentless growth in gas dependency (cf. fig. 1) and the signs that Russia was planning to rebalance their export policy in favour of China undeniably encouraged proactive policies aiming to reduce gas consumption, especially in the electricity generation sector1. Combined with the effects of the recession and the slowing down of industrial activity, these policies effectively succeeded in curbing growth in gas consumption, which has remained below the peak seen in 2010 (cf. fig. 1).
The second response focuses on supply. The high prices prevalent in the early 21st century boosted investment, notably in exploration and extraction techniques innovation. In terms of exploration, there were successes in new regions (Eastern Mediterranean, Mozambique, Tanzania, Senegal and associated gas in pre-salt petroleum reserves in Brazil), which contributed to a shift in perception that gas resources are necessarily geologically scarce2. As for technology, the greatest development was seen in the United States, with the swift and unexpected boom in unconventional gas production – true Schumpeterian innovation spearheaded by entrepreneurs.
This technology revolutionised American gas production, which until that point seemed destined for an inevitable decline. The boom enabled the country to first become self-sufficient, then an exporter of liquefied natural gas (LNG). Beyond the immediate effects on the American energy sector (premature downgrading and reconversion of infrastructure intended for importing LNG, drop in gas prices which stimulated consumption, specifically replacing coal for power generation), many disruptions in the economic and geostrategic spheres accompanied this upswing.
An international trade revolution
From an economic standpoint, the American LNG boom had a profound effect on the way that international gas trade was organised, by accelerating its “commoditisation”. Historically, this sector was dominated by long-term contracts (10 years or more), which were relatively inflexible and specified restrictions on import destinations, fixed volumes, prices that were in large part indexed to gas prices, and rigid naval logistics along set routes. Due to the unexpected increase in American production, the international LNG market experienced excess supply, which strengthened importers’ negotiating power. They were able to obtain more adaptable contractual terms (such as the possibility to redirect cargo or greater volume flexibility) and index the market prices of natural gas. This new set-up provided a favourable environment for intercontinental arbitrations. Consequently, the LNG market became more globalised3.
The American shale gas boom also had serious geostrategic repercussions, beyond simply putting the plan to create a gas version of the Organization of the Petroleum Exporting Countries (OPEC) on the back burner. In the Middle East, the big Qatari LNG export chains that planned to export to the United States had to find new prospects. For Iran and its immense reserves, the excess supply situation made developing export projects difficult. In Asia, American LNG allowed for diversification, providing alternatives to resources located in the Middle East, South-East Asia and Australia. What’s more, it is well-known that for certain Asian import countries (particularly South Korea and Japan), defence and national security considerations played a role in the decision to import American LNG. With China an LNG importer, the gas issue has also sparked trade disputes with the United States.
American LNG plays a role in Europe as well, even when it’s not imported. For example, after a new regasification terminal opened in Lithuania, Russian company Gazprom (their dominant supplier) chose to reduce its prices to avoid the risk of America moving in. Therefore, excess supply strongly curbs the market power of dominant suppliers outside the EU.
In a well-known study from 2011, the International Energy Agency (IEA) predicted the dawn of a “golden age of gas”. They supported their contention by highlighting the abundance of reserves, the low cost of American gas (less than $4/million Btu) and the flexibility of gas-generated thermoelectricity, which makes it a good counterpart to renewable energy.
But is the future of gas really so bright? It is true that natural gas currently represents nearly one quarter of international primary energy consumption, and this proportion is growing4. But beyond the next decade, the role of gas in the transition to a low-carbon world remains uncertain, and it’s important to remember the pros and cons when discussing this source of energy.
In the pros column, at least three things support maintaining this source of energy. The first is its versatility – gas can be used for a range of applications, including electricity production, heating residential and tertiary buildings, supplying industrial furnaces, fuel for transport, and as a raw material in the chemical industry. The second is the fact that a significant reserve of transport and distribution infrastructure exists, which could be used to obtain short-term emission reductions. The carbon footprint for gas is smaller than oil’s, coal’s and lignite’s. Replacing these bigger polluters with natural gas on a large scale would therefore reduce greenhouse emissions. The third argument is that this infrastructure can also be used to support the development of renewable gases (such as bio-methane and hydrogen). In this regard, natural gas is often presented as a “transition fuel,” which could assist in moving away from petroleum or coal products and towards “green” gases.
Opponents of natural gas point out that it remains an overall contributor to global warming and should be eliminated as quickly as possible from the energy mix. If climate objectives are to be respected, the gas industry’s capacities must be reduced.
Recent policies in Europe and Japan fall in the second camp, aiming to gradually move away from natural gas. However, these two large economies cannot influence the future of gas demand alone. The “centre of gravity” of international consumption is now located outside of OECD countries, and we will need to track which path these economies choose.
At the same time, separate to these discussions on demand and the future role of gas, it will be interesting to keep an eye on supply. While scarcity no longer seems to be an issue for now, questions remain on the developmental conditions for certain recently discovered reserves. Concerning shale gas, we might ask whether the American model, based on extracting unconventional gas, can be replicated. Increased American production is currently raising hopes that this could be reproduced in other countries, particularly China and Argentina. However, the examples of Poland and Algeria – where initial enthusiasm has died down – show that having access to the right geology do not necessarily correlate with success. A collection of other factors, including industrial infrastructure, water resources and pipelines, are also necessary.