The Geo-Politics of Gas – Priorities for the Gas Economy

Good morning everyone. It’s a pleasure to join you.

It’s always tempting to view the current period in which we live as having a particular significance or importance for the future. I guess that’s human nature. But we know that ultimately it is only history which can provide the necessary perspective.

That said, I do think the global gas industry is at a turning point today. I believe that the events of this decade will prove to be decisive in the industry’s evolution. And geo-politics will have a large bearing on the industry’s future development.

So I’d like to start off by suggesting two entirely different scenarios for how the natural gas industry worldwide might unfold by the year 2030.

In the first scenario, natural gas – underpinned by its superior environmental and commercial performance – is well on its way to becoming the dominant source of energy worldwide.

North America, Europe and Asia have successfully completed the transition to liberalized downstream markets with multiple competing gas suppliers.

A new set of alliances between the gas super-majors and part or wholly privatized state energy companies have delivered investments of over $3,000 billion in gas infrastructure.

Half of all gas produced is traded internationally. And gas now flows to market as freely as oil from a multitude of sources led by Russia, Qatar in the Middle East and Algeria in North Africa.

Market forces and technology advances allow gas prices to be highly competitive with competing fuels. The citizens of much of the world are enjoying the benefits that globalization has brought, creating sustainability and stability. And the issue of security of supply has become a historical footnote.

In my second scenario, natural gas has failed to overtake coal and remains the world’s third largest energy source. Liberalization has only partially occurred. Competition is shallow, gas does not move freely and new infrastructure is limited.

The failure of gas to fulfill its potential can be traced to oligarchic behavior by resource holders - and the slow pace of liberalization in consumer nations which allows powerful national monopolies to fend off competitors. And in this country, the enormous world gas resources are unable to connect into the US market because our industry has not made its case effectively.

This has fed concerns over security of supply and driven consuming nations into a more protectionist approach – seeking self-sufficiency and energy diversification through increased use of coal and nuclear – rather than trusting the global market.

Governments have responded by re-designating gas as a premium fuel, limited to specific uses only and with a price to match. Coal is the power generators’ fuel of choice in the US and Asia. In addition, a new generation of nuclear plants has been built in Europe and elsewhere.

Those two scenarios represent two ends of a spectrum of possibilities, but the key point is that the idea of a golden age of gas is not a given. The conventional verdict has been that gas is set to grow in the same way that oil did in former decades.

However, gas is not the new oil.

In particular, there is one striking contrast between oil and gas. While there has been no real alternative to oil for use in transport, which accounts for over 50% of its market, there are several competing alternatives to gas, particularly for its primary growth sector of power generation.

So the gas industry has to be distinctive if it is to compete successfully with other fuels and for the best case scenario to prevail. And this means breaking out of the old paradigm and creating a win-win situation for producers and consumers alike.

The issues standing in the way of this are as much about geo-politics as they are about market forces, although the two are interwoven.

So what are they and how can they be overcome?

We can look at them from a consumer and a producer perspective. In the USA there may be choice – but prices and volatility are shutting down parts of the chemicals industry. The power sector is burdened by investments in gas fired generating capacity which were based on the promise of low cost gas.

America still remains largely disconnected from the emerging global market in gas supply.

In Europe, concern centres on the patchy progress of liberalization which is denying choice to customers. The market suffers from the lack of a mechanism to provide efficient price signals to suppliers and consumers.

In Asia, mature gas importing economies like Japan and S. Korea toy with the route to market liberalization while transition economies such as China weigh the advantages of a gas economy developed along traditional lines. Meanwhile security of supply looms as an issue for all regions.

By 2015, forecasts suggest Europe will be importing 80% of its gas and the USA 30%. Asia is expected to be using as much energy as North America by 2015, much of it imported. And as we approach 2030, the resources needed to supply the burgeoning demand for imports will increasingly be concentrated in a few countries.

Today 10 countries possess over 100 tcf of proven serves – The USA, Venezuela, Russia, Iran, Iraq, Qatar, Saudi Arabia, the UAE, Algeria and Nigeria. All of these will be significant over the next decade.

Beyond that, we will see increasing market share among the three producers which have more than 500 tcf – Qatar with 500 tcf, Iran with 800 tcf and Russia with 1700 tcf.

From the standpoint of the producer countries, the geopolitical trend to liberalized downstream markets is cause for serious frustration. Producers can look back to a world of long term, oil-indexed contracts and destination clauses. They now need to be able to look ahead to a new form of security in a fully open market.

A market which has multiple, credit worthy buyers for their gas entering into a range of contract terms – both long and short. And a liquid spot market providing an efficient means of balancing supply and demand. But right now, they are in limbo.

In Europe, contractual terms acceptable under the old model are being outlawed by downstream liberalization measures.

Russia has warned against what it calls ‘over-bureaucratisation’ undermining competitiveness and security of supply.

In Asia, traditional buyers are demanding more flexibility in their contracts with producers.

In the US, a liquid spot market sets prices today.

But access points to important markets for major new sources of gas are proving problematic. In the last two months, four LNG import schemes have been withdrawn after difficulties in gaining approval.

The second issue for producing countries is the ‘fair trade’ one.

Can they and the operators working with them overcome the problems of the 20th century when natural resources did not go hand in hand with growth and widespread prosperity?

World Bank indicators show that over the past 40 years, developing counties raised their GDP per capita by an average of almost 150%. However, when we separate out the data for developing countries that produce oil – the average growth in GDP per capita was only 90%. Care is always needed with statistics – but the disparity is marked.

And NGOs such as Oxfam and Christian Aid have concluded that dependence on energy or mineral production has often been accompanied by high infant mortality, malnutrition, corruption and civil war.

With fewer sources, gas will be much more transparent to consumers than oil – with governments and importers much more susceptible to particular lobby interest groups.

All of these issues argue the case for dialogue between producer and consumer.

And bodies like Stanford and the Baker Institute offer us a forum to discuss ways forward that prevent this industry from failing to realize its true potential.

So, given that, what are the priorities for action among policy-makers and industry players?

First, the world has plenty of gas. Some 60 years of proved reserves – and that again in probable reserves.

For that reason, alone it would be perverse for nations to incur the economic and environmental costs of so-called energy self-sufficiency. The issues are affordability, accessibility and acceptability.

Affordability and accessibility are inextricably linked with market liberalization.

The geo-political forces that set in chain a global trend to market liberalisation in gas and power appear somewhat muted in the face of a number of setbacks.

We need to complete the process whereby a new generation of competing gas marketers can emerge – a diverse range of producers can enjoy improved market access to a variety of credible counter-parties – and consumers can choose natural gas on economic as well as environmental grounds.

In North America that means demonstrating that high ethical standards can go hand-in-hand with competing keenly in a free market. And it means enabling US consumers access to a world market in gas via LNG.

In Europe it means demonstrating how consumers, businesses and economies can benefit from choice.

In Asia Pacific it means embracing the entrepreneurial opportunities available and thereby turning what was a state-dominated, inflexible sector into a model of openness and progress.

Among producers and producing nations, it means creating a climate of confidence that allows trade to develop freely. It means new partnerships between the public and private sectors to develop major new supply chains to market.

For example, in the UK we are now working in a joint venture with Sonatrach of Algeria to import LNG to the Isle of Grain. This new agreement enables Sonatrach to participate throughout the gas chain and BP to diversify its offering to UK customers. This is about pursuing opportunity – and sharing risk.

This is about win-win.

Acceptability can be defined on a number of geopolitical dimensions – economic, environmental and ethical.

Our efforts focus on driving down costs and optimizing the recovery and flow of gas to market. And ensuring gas wins the debate over other more carbon intense or environmentally unfriendly fuels.

And in ethical terms, we must confront the fair trade and transparency issues.

We all have a direct interest in ensuring that the process of globalisation benefits as many people as possible – by bringing them opportunities which would not otherwise have been available. There is a fresh determination to share the benefits of resource extraction and respect human rights.

In the last five years, for example we have seen the launch of the Extractive Industries Transparency Initiative – a serious attempt to give the public more visibility of what revenues governments receive. And governments such as Trinidad & Tobago have been keen to apply the lessons learned from the oil era.

Today there is a gas master plan being implemented in Trinidad which is designed to create a legacy of sustainable development.

International and national institutions also have a key role to play. The role of IFIs can go well beyond their primary function of funding.

Their involvement can incentivise governments to provide the kind of stable, predictable legal and regulatory regimes that encourage investment. And they can act as a legitimate third party whose involvement signals to the external world that a project meets or preferably exceeds international standards.

So...I began my comments this morning by suggesting that the events of this decade will prove to be decisive in this industry’s evolution.

Geo-politics will play a large part of course.

But at the heart of this - is the essential question of trust.

We need to build a track record for gas based on trust if we are to make the leap forward envisaged under the best-case scenario. This means winning the absolute trust of those who purchase energy - the consumer.

It means persuading policy- makers that natural gas is - and will be - the most trusted fuel to enhance their plans for energy security and environmental progress.

And it means creating the circumstances in which producing nations can trust in gas to deliver the benefits that their resource inheritance can offer.

Gas is not the new oil. I believe it can be much more than that.

That is the challenge for us all.

Thank you.