Thursday, December 29, 2005

Global Gas

Ever since the hurricanes disabled a sizable fraction of US energy production from the Gulf Coast, I've been worried about the availability of natural gas this winter. So far, unseasonably warm weather has kept prices from spiking, indicating that supply remains adequate. Ironically, it's Europe that appears to be struggling with gas availability, rather than the US.

Natural gas futures prices in the UK are more than double their level of a year ago, actually exceeding US natural gas prices as of yesterday ($16/million BTU vs. $11.50 here.) With North Sea production declining and the UK economy growing, Britain is becoming a net importer of energy. At the same time, Continental Europe could get squeezed by the ongoing gas pricing dispute between Russia and Ukraine, with the former threatening to cut pipeline deliveries in the main line supplying Germany and the rest of Europe. This highlights the EU's critical dependence on Russian gas, as I've noted previously.

The reason for pointing this out isn't to make us feel better about the high prices we're paying for natural gas. Rather, it's to remind us that we are competing in an increasingly global natural gas market, not only with India and China, which are hungry for energy in any form, but with Europe, which has a particular preference for natural gas due to its low greenhouse gas emissions, relative to coal and oil. The focus of this competition will be liquefied natural gas, or LNG, the form in which gas can be shipped all over the world from its origin.

Although a spot market in LNG is starting to emerge, it is still very much a long-term contract business. That's understandable when you look at the cost of a gas liquefaction plant and its associated infrastructure, running into the multiple billions of dollars. Companies don't make these investments without having a large chunk of the future production contracted. This has important implications for the US, as we expand our infrastructure for receiving LNG, against a great deal of local opposition.

Delays in approving US LNG projects, due to lawsuits and local permitting problems, preclude the companies involved from signing contracts for the gas to supply these facilities, until the uncertainties are resolved. As a result, they may miss out entirely on the output of a new LNG production plant in the Middle East, Nigeria, Australia or Indonesia, because others are prepared to commit when we aren't. Since these contracts typically run for 20 years, which may be close to the life of the underlying gas reserves, there are typically no second chances. Missing out on the "base-load" output of new plants forces us to compete for unreliable "spot" market supplies, typically at higher prices.

With US natural gas production stagnating at least partly as a matter of choice--with substantial gas reserves placed off-limits for development--and with gas demand continuing to grow, we have no choice but to play the LNG game. But if this isn't to become another source of energy volatility for our economy, we must learn to play it astutely, and that means resolving our infrastructure schizophrenia, so US companies can compete effectively for new, long-term gas supplies in a market with many other players.

No comments: