Natural Gas Markets and Geopolitical Change

Harvard's Belfer Center hosted meetings from May 9-10, 2012 on "The Geopolitics of Natural Gas" with the industry and economic modeling done by Rice University with the support of the James Baker III Institute for Public Policy.  It makes for some very interesting reading, and the model's supply side estimates are based on fairly disaggregated production area data for oil and gas, particularly shale gas.  What's not readily visible are the economic assumptions--like GDP growth-- driving the demand scenarios, but let's look at some of the highlights.

U.S. shale production was virtually zero in 2000, and rose to 10 billion cubic feet per day (bcfd) in 2010.  This is really a gold rush which doesn't make much news.  The reference (baseline) scenario has North American unconventional (shale) gas production quadrupling over the next two decades to more than fifty percent of North American gas production by 2030.  The North American recoverable shale resource is about 25% of the global recoverable shale resource of 4,000 trillion cubic feet (tcf). 

We've always contended that the U.S. has substantial export capacity, and the reference scenario confirms this, as it has U.S. LNG exports growing to 720 mcfd by 2030.  Qatar will however be the dominant global export of LNG, followed by Australia. These producers together will account for 40 percent of global LNG exports by 2040. 

It seems as if U.S. LNG export capacity must be hampered by structural and regulatory  inefficiencies in the global gas markets.  In the Belfer/Rice reference scenario U.S. LNG terminal capacity remains underutilized over the time frame.

The U.S. will enjoy lower natural gas prices than in Europe and in Tokyo in the three sub-decades of these long range forecasts.  There is no natural ability to arbitrage away price differentials in the world gas markets because of regulatory constraints on imports, guaranteed long-term contracts, shipping monopolies, and long lead-times for constructing alternative supply channels.  Hedge funds should have a field day in these markets, which should be more exciting than stocks or bonds.

The other bit of interesting news is that Russia's leverage with a natural gas choke on Europe is dissipating and continues to dissipate under the reference scenario.  Falling demand due to the economic slowdown and ample global supplies of gas, including LNG, are already forcing concessions on indexes used to compute European pricing. Indexes for Russian gas are said to be referenced on market rates for gas rather than on crude oil prices. 

Global gas demand growth comes at the expense of coal, and it almost doubles from 2012-2040.  China becomes a net importer of LNG under this research scenario.

Energy supply changes, coupled with economic slowdowns and pickups in German and American manufactured export production drive some complicated geopolitical changes in the scenarios, particularly Scenario 1 which has high unconventional gas exploitation with low liberalization of national gas markets.

Exxon Mobil's investments in gas projects, according to Credit Suisse, show rising production in 2014 and beyond which dovetails nicely with the scenarios in the Belfer/Baker forecasts. 

What could get in the way of a rosy outlook for the U.S. economy and the energy industry?  Tax, regulatory and environmental changes, including cap and trade schemes, or continuation of the ridiculous mandates for wind, solar and ethanol could all get in the way.  The industry itself should be more positive and open minded about environmental monitoring for protection of water quality. Given how fast shale production has ramped up in a short time, some circumspection is warranted. These future scenarios are quite different and quite a bit more bullish than relatively recent talk about the "end of cheap energy" and "peak oil."  Stay tuned.