Survey of Energy Resources 2007
Natural Gas - Stakes and Challenges
The gas industry is experiencing a multitude of changes. While a truly global gas market is still a long way off, the increasing inter-regionalisation of flows is definitely opening new trends. The anticipated development of spot and short-term LNG transactions, which accounted for about 15% of world LNG trade in 2006, will play a major role in the gradual establishment of an international gas price. Price arbitrage, consisting in directing LNG cargoes to the highest-value market, was initially concentrated in the Atlantic Basin (US and European markets). The move now inter-links both Atlantic and Asia-Pacific basins, gradually setting a more uniform price for the large importing countries.
Market liberalisation, and the consequent twinning which develops amongst players in the electricity and gas industries, strengthen competition in the markets. The advent of trading hubs, in Europe in particular, is driving the development of a spot market with its own price specificities according to the market structure. Such prices are more volatile than those for gas purchased under long-term contracts, which are largely indexed to oil or oil products.
In addition to these developments inherent in market restructuring, the industry will have to contend with a number of major issues and challenges.
Gas reserves are geographically concentrated. While about 73% of gas reserves are concentrated in two areas - the Middle East and the CIS - the geopolitical distribution of gas reserves is rather similar to that of oil. With nearly 90 tcm, the OPEC countries have about half of total reserves, compared with 75% for oil. The CIS enjoys a more advantageous situation for gas, with 33% of reserves against only 10% of oil reserves. In the OECD countries, the situation is barely different for either energy resource, with less than 10% of gas reserves and 7% of oil reserves. By 2020, non-OECD countries could account for about 88% of world gas trade, including 58% for OPEC countries.
Approximately 44% of total proven reserves is concentrated in some twenty mega and supergiant fields. Out of these, the world's largest non-associated gas field - North Field/South Pars - straddling Qatari and Iranian waters, accounts for some 49%.
This concentration of gas wealth naturally raises questions of security of supply, of transit, of the potential implementation of an organisation of gas-exporting countries (OGEC) and of assets nationalisation strategies. To address these issues, consuming countries will increasingly respond by diversifying supplies.
Gas competitiveness and alternative energies.
The future expansion of energy demand will inevitably entail a broadening of the portfolio of available energy sources. Although natural gas is globally more environment-friendly than most competing sources, its price, should it be maintained at rather high levels, could shrink its anticipated growth potential. Coal, being abundant and currently available more cheaply, could benefit from the situation, particularly in the power sector. However, although new coal-fired plants with carbon capture potentially represent a threat to natural gas, such technological innovations could also translate into higher costs, forestalling a massive trend to this option.
In the longer run (beyond 2020), nuclear power remains in the forefront. Although complex cost factors question just how attractive nuclear power really is against the traditional and emerging power-generation technologies, this option may earn more credit in some big consuming countries.
Renewable sources will also undoubtedly draw increasing attention, as shown by the political and fiscal measures implemented in a large number of OECD countries.
Rising costs throughout the industry.
The recent high energy prices have boosted activity in all sectors. Combined with sustained activity to rebuild facilities in the Gulf of Mexico after hurricanes Katrina and Rita, all sectors of the industry are going through hard times coping with rising costs. Booming upstream operations, labour shortages and rising raw material costs are the key elements in such a trend. Total average oil and gas production costs rose by an estimated 25.6% between 2004 and 2005 to US$ 6.87/boe, according to the US Department of Energy. In addition, the DOE also shows that average worldwide finding costs for the Financial Reporting System companies rose 17% in the 2003-2005 period, an increase of US$ 1.55/boe.
With regard to the LNG chain, the abundance of orders placed for new liquefaction plants and LNG tankers is pushing costs higher and cramping anticipated profits. Today, despite the building of much larger liquefaction trains, production costs per ton of LNG produced have more than doubled since 2004, and are now approaching US$ 450/t/yr. The limited number of licensors, contractors and equipment manufacturers in such a dynamic business, together with rising raw material prices (of steel in particular), explain this pattern. The need to comply with environmental and safety requirements has also spurred higher investment requirements in liquefaction and regasification plants (offshore terminals). The impressive number of LNG tankers currently on order, in a handful of shipyards - more than 140 (all sizes combined) - consequently means higher prices. The price of standard-size (about 158 000 m3) ships has risen significantly, from about US$ 155 million in 2003 to about 210 million today.
While rising costs do not apply to those projects currently under construction, for which investment decisions had already been taken in 2004, they clearly delay FID on future plants due to be built from 2010 onwards. As a consequence, some slippage can be expected between initial and actual facility start-up dates.
Reducing CO2 emissions.
Protection of the environment is growing in importance and because combustion of gas emits CO2 (although much less than other fossil fuels), the gas industry has to comply with commitments signed in accordance with the Kyoto Protocol.
Meeting new environmental standards along the chain (carbon capture, less flaring, Health & Safety Management System Guidelines, etc.) means costly developments for the industry in the short-to-medium term, as new infrastructure investments have to be made. However, long-term benefits are immense. Energy resources are quantitatively limited by nature and thus it is all the more essential to secure the best resources management.
Too great a reliance on fossil fuels may indeed rapidly amplify the risks of climate change. For the gas industry, it is accordingly essential to eliminate flaring. Every year, more than 115 bcm are flared worldwide, including about 40 bcm in Africa. According to the Global Gas Flaring Reduction public-private partnership (GGFR, a World Bank-led initiative), gas flaring adds about 390 million tonnes of CO2 in annual emissions. This is more than the potential yearly emission reductions from projects currently submitted under the Kyoto mechanisms. A reduction in gas flaring can contribute to lower CO2 emissions, while, at the same time, enhancing energy security by increasing available supplies.