Global Natural Gas Potential

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Why Natural Gas Matters

With world demand for energy growing, natural gas is increasingly seen as a more environmentally friendly option to coal, an alternative to oil and nuclear, and a more mature technology than alternative energy sources such as solar and wind. While coal is cheap and abundant, it is a major pollutant, particularly of carbon dioxide. Low-emission nuclear power is relatively cheap to operate, but it has become the subject of renewed safety concerns in the wake of the 2011 nuclear accident at the Fukushima plant in Japan. And oil prices and production remain volatile, placing consuming countries reliant on it under considerable economic strain.

Longstanding issues such as control of transit pipelines, a lack of access to pipeline routes, and the availability of cheap resources such as coal and oil have constrained natural gas consumption in many parts of the world. International trade of liquefied natural gas (LNG) allowed producers to bypass pipelines, but LNG requires costly infrastructure for producers and the importers, and, while growing, is unlikely to reach the levels of shipments of dry gas. Some analysts see potential in shale gas and other unconventional sources as a way to boost domestic resources of countries once thought to have limited gas resources, lessening the potential for import dependence. And whether U.S. success in shale gas can be reproduced elsewhere is still under debate.

Natural Gas Production and Flows

The world produced and consumed more than 100 trillion cubic feet of natural gas in 2009, representing more than 20 percent of global energy production. About one-third of gas is exported and the rest consumed by the producing countries themselves. North America, Europe, and Eurasia comprise about two-thirds of all natural gas consumption. Current projections suggest global consumption as a whole will rise to 156 trillion cubic feet by 2035. Much of the increases in consumption come from Asia, and increases in natural gas exports come from Middle East LNG. Unlike oil, natural gas production is not dominated by the places with the most natural gas reserves. Iran and Qatar have the second and third largest reserves after Russia, but both provide only a small fraction of the world’s total production. In 2009, both Qatar and Iran represented about 4 percent of global production, according to the U.S. Energy Information Administration (EIA). The United States is the world’s largest producer but represents only a small fraction of global reserves.

Pipelines are the dominant transportation method for natural gas, but they are becoming more expensive to build as commodity and labor prices rise. A proposed pipeline between the United States and Canada is expected to cost between $20 billion and $41 billion. Estimates for a pipeline proposed to run from Caspian gas producers to the EU range from over $11billion to as much as $20 billion (IHT).

Pipelines can also be affected by geographic and political issues. There is almost no inter-country natural gas trade in Asia via pipeline, in part because several of Asia’s most prosperous and populous countries are islands, including Japan, Indonesia, and Malaysia, and because of access to other resources such as coal. Social or political unrest, or pricing disputes, can disrupt supply. Russia, for example, must rely on some pipelines through the Ukraine, once a Soviet-state and now a sovereign country, which has led to a tense relationship over transit fees.

Looking to LNG

LNG currently accounts for about 30 percent of all natural gas trade (PDF). LNG capacity is expected to more than double between now and 2035 to about nineteen trillion cubic feet per year, up from nearly nine trillion cubic feet in 2009. But while LNG--shipped via large ocean tankers--provides countries with trade flexibility and helps avoid some of the geopolitical and geographic issues associated with pipelines, LNG has its own limitations. The technology has been around for decades, but until recently it was not price-competitive against pipelines. LNG requires a port to accommodate tankers and processing plants. On the export side, the process requires a liquefaction facility, which can cost several billion dollars, and large tankers, each of which can cost between $200 and $400 million (Bloomberg). A facility to gasify LNG on delivery is also required on the importers side costing in the hundreds of millions into the billions.

Despite tremendous global growth in LNG, an EIA 2010 global energy assessment found that pipelines, not LNG shipping, will remain the dominant mode of gas transportation for the next two decades. Currently, because natural gas is mostly traded by pipelines--in some cases with years-long contracts--prices are often regional. "In time, this LNG trade will lead to a global market for natural gas similar to that for oil," writes energy expert John Deutch in Foreign Affairs. "If trade is freely permitted, a difference between $4 per thousand cubic feet in New York and $10 per thousand cubic feet in Tokyo, for example, simply cannot survive."

Shale Gas Growth

Two techniques--horizontal drilling and hydraulic fracturing, also called "fracking" (injecting liquid into rock formations to push out trapped gas)--have the potential to access large swaths of shale gas, tight gas, and coal-bed methane once thought too expensive to extract. In the United States, shale gas has already jumped from less than 1 percent of U.S. production a decade ago to 23 percent in 2010. After assessing gas reserves in thirty-two countries, a 2011 EIA report estimates that shale gas could increase recoverable gas globally by as much as 40 percent.

Some analysts believe shale gas will be a game changer in the global gas market. Energy analysts, including Amy Jaffe of the James Baker Institute for Public Policy, note that shale will make a natural gas cartel (WSJ) similar to OPEC impossible and could break the stranglehold on gas trade for some big players such as Russia. The EIA report shows shale gas could reduce dependence on imports for countries like China and South Africa and provide export opportunities for other countries. But other analysts suggest estimates on the amount of shale that can be produced economically might be overblown (FP). Still others are concerned about the potential environmental effects of fracking, which some environmental advocates argue fouls water supplies.

Natural Gas Market Regions

Current regions for natural gas production and consumption can be broken down as follows:

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• Russia/Eurasia/Europe -- The region represents about 38 percent of the world’s gas consumption in 2009 and two-thirds of the world’s pipeline trade. The region has a massive network of pipelines primarily running from Russia into Western Europe. Overall, the region represents about 48 percent of global natural gas exports, but nearly all of it is exported between countries in the region. Russia represented 20 percent of global exports in 2009--the highest of any country. Norway is the world’s second largest gas exporter. The Netherlands and Uzbekistan are also high net exporters in the region.

  The region is largely characterized by tensions between Russia and its natural gas clients. The EU, which gets about 40 percent of its gas from Russia, has increasingly looked for ways to diversify access to natural gas, such as the long-delayed Nabucco pipeline project, which would route natural gas from Caspian states to Europe, bypassing Russia’s pipeline network. In 2009, with natural gas demand dropping in Europe and shale gas production increasing in the United States, Russia fell to the world’s second largest producer. However, as EU countries, particularly Germany, pull away from nuclear power, some analysts say the temporary glut in the European market is likely to disappear and put Russian gas back in play (NYT). EU governments are also investing in LNG (PDF) and represented about 29 percent of global LNG imports in 2009. The EU is also looking at shale gas, but the degree to which it can replicate U.S. success is uncertain.

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• North America -- The region, which comprises about 26 percent of global gas consumption as 2009, also has an extensive pipeline system. Canada is the world’s third largest exporter of natural gas, all of it going to the United States. Mexico also ships natural gas to the United States, but overall the country is a net importer and domestic demand is rising. The United States dominates world production and is the globe’s largest gas consumer. U.S. producers have increasingly looked to unconventional gas sources, with shale gas boosting the country’s output considerably. The United States is the only major LNG exporter in North America, almost all of it going to Japan.

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• South East Asia/Oceania -- Though this is the world’s most populous region, it represents only 17 percent of global natural gas consumption. The greatest growth production and demand in the region is expected to come from China, which gets just 3 percent of its energy from natural gas, and India, which gets about 7 percent of its energy from gas, according to the EIA. While both countries import some LNG, much of the consumption comes from domestic production. China has the region’s second largest natural gas reserves and hopes to increase domestic production, which could decrease coal use and lower the country’s greenhouse gas emissions. Some analysts also expect domestic shale gas and coal-bed methane production to begin competing with LNG imports in China.

  In 2009, Indonesia and Malaysia are the region’s biggest net exporters and among the world’s top-ten exporters, almost entirely LNG. Australia is also a large LNG exporter. With limited domestic gas resources, Japan and South Korea account for nearly 60 percent of LNG global imports, and experts say these two countries will remain the dominant consumers of LNG in the near future. And following the 2011 Fukushima nuclear crisis, LNG is expected to be an increasing portion of Japanese energy consumption.

• Middle East and Africa -- The Middle East claims almost half of the world’s conventional natural gas reserves. With exporters Algeria, Oman, United Arab Emirates, Qatar, Egypt, and Libya, the area represents about 40 percent of the global LNG trade--and LNG is expected to dominate future natural gas exports from the region. Algeria is the region’s largest exporter, shipping via both pipeline and LNG. With the world’s third largest reserves, Qatar is the region’s largest producer and has had the strongest growth in production and exports--almost all LNG. The Middle East/North Africa region also has a developed network (PDF) of pipelines, primarily leading into southern Europe. But very little infrastructure exists currently on the African continent to facilitate intraregional natural gas, according to the EIA.And generally, pipelines from the region are not a viable option for the region’s main customers in Asia.

  Exports from Iran, the region’s third largest producer, were minuscule. Iran will likely stay a pipeline country rather than a major LNG exporter because of costs and international sanctions limiting certain technologies. Saudi Arabia, with the world’s fourth largest natural gas reserves, has modest production levels, but produces none for export. Nigeria has significant natural gas, especially as a byproduct of oil production. The country continues to burn off much of this gas, though oil producers are beginning to look at ways to harness associated gas for domestic energy.

• Latin America/Caribbean -- The region is the world’s smallest consumer of natural gas, at less than 5 percent. Trinidad and Tobago is the region’s number one gas exporter and its only major LNG exporter. Venezuela and Brazil are the region’s largest natural gas producers, Brazil being a net importer and Venezuela producing all of its gas for domestic use. Several countries are investing in LNG import capacity, including Brazil, Argentina, and Chile.

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