The increasing need for LNG could support a global pricing mechanism for natural gas
Jason Reimbold, The Theseus Group
In a time when global oil supplies are in question and the demand for energy is continuing to increase, natural gas is becoming an increasingly important fuel type in the energy mix. At present, natural gas accounts for approximately 25% of total energy consumption in the United States, and consumption is projected to outstrip domestic production through 2030. The combination of unyielding demand and relatively flat US gas production could lead to greater dependence on natural gas imports in the form of LNG, but what are the implications of expanded LNG operations?
In recent years, several factors have slowed the development of LNG facilities, including safety concerns and economic feasibility. However, both US and global consumers are rapidly approaching a time when the necessity for energy could nullify these issues. Furthermore, LNG introduces a new dynamic to the global natural gas trade. The mobility of LNG establishes the possibility of a global pricing mechanism for gas similar to that of oil, and the ability to manipulate pricing could inspire a new cartel for the natural gas trade.
The EIA projects a fairly consistent gap of five tcf per year between US production and consumption through 2030. Just as today, future imports will be required to balance this deficit. The US imports nearly 19% of the total natural gas consumed, and the majority of this gas is sourced by pipeline from Canada. However, this is expected to change in the next several years as LNG plays a greater role in providing energy to the United States.
Canada supplies about 86% of US imported gas, and LNG accounts for the remaining 14%. However, the EIA projects that US LNG imports will exceed Canadian imports by 2015, but in order to do so, the US will need to further develop its capacity for receiving liquefied natural gas. Fortunately, this is already in the works.
Currently, there are only five LNG terminals servicing the United States, but this number should change significantly in the coming years. As of January 2008, the Federal Energy Regulatory Commission had approved sites for 21 additional LNG terminals in the United States. As the US and other nations prepare for expanded LNG operations, natural gas may well become a global commodity—this could be the catalyst which solidifies the formation of a new cartel under the Gas Exporting Countries Forum.
GECF was established in 2001 to promote the mutual interests of some of the world’s most significant natural gas exporting nations and includes Russia and Iran, which possess the world’s largest and second-largest natural gas reserves, respectively. There has also been speculation that GECF is exploring the cartelization of the global gas trade similar to that of OPEC.
Currently, Iran is not a significant exporter of gas, but the continued development of its immense reserves and an investment in LNG facilities could increase exportation volumes considerably. Combined, Russia and Iran possess nearly 43% of the world’s total estimated gas reserves.
However, the formation of a natural gas cartel would face several obstacles. One of the most difficult challenges to overcome is related to storage issues. At present, LNG storage is a costly and complex operation, and an inability to store significant amounts of gas presents an immense challenge in achieving the excess capacity necessary for influencing prices.
Other obstacles include existing long-term contracts for LNG, difficulties in allocating production quotas, and varying political and economic interests among member nations. Nevertheless, GECF continues to explore the advantage of formalizing their unity. Since 2001, GECF has held six ministerial meetings with the next one scheduled for June 2008 in Moscow.
It is unlikely that the successful execution of a cartel for natural gas could be achieved in the near-term, but it is not outside the realm of possibilities on a more distant horizon. Remember, OPEC was initiated years before coming into prominence, and the combination of increasing demand, elevated natural gas prices, and the accelerated growth of worldwide LNG operations could enhance the feasibility of an OPEC-like cartel for natural gas.
About the author
Jason Reimbold is vice president of The Theseus Group (www.thetheseusgroup.com), an energy M&A consulting firm based in Tulsa, Okla. In 2005, Reimbold founded www.GlobalOilWatch.com, an energy research portal for industry analysts and investors. In 2007, he co-authored The Braking Point: America’s Energy Dreams and Global Economic Realities with Mark A. Stansberry. Currently, Reimbold serves as membership vice president for Energy Advocates (www.energyadvocates.org).
