The lures (and limits) of natural gas
From Boston to St. Petersburg, natural gas is changing the way the world thinks of energy. But as gas goes global, will Russia become the new Saudi Arabia?
HERE IN NEW ENGLAND, LNG is shorthand for controversy. For years, activists and state and local politicians have been battling energy companies interested in building liquefied natural gas (LNG) terminals in spots like Fall River and Outer Brewster Island. Opponents argue that the terminals, and the tankers full of flammable super-cooled natural gas that dock at them, are a threat both to the local environment and anyone who happens to live nearby. Proponents call these fears overblown and talk up natural gas's virtues: It's efficient and clean-burning and emits less greenhouse gas than any other fossil fuel.
The debate only underlines the growing importance of natural gas-and in particular imported natural gas-as New England and the US enter an increasingly globalized energy market. Indeed, as the leaders of the world's wealthiest nations meet this weekend at the G-8 summit in St. Petersburg, Russia, the new global role of natural gas will be on display. Russia is the world's dominant player in natural gas, and the summit's host, Russian President Vladimir Putin, has made ``energy security"-and implicitly, his country's increasing leverage on energy matters-a central theme of the meeting. In the coming years, the distance from St. Petersburg to Fall River may get a lot shorter.
Worldwide, technological advances-like LNG, which frees gas from the geographical limits of pipelines-have combined with a growing concern about climate change to push many of the world's developed nations in the direction of gas. New England, a part of the world not blessed with abundant natural energy supplies, has been no exception. According to the Northeast Gas Association, a regional trade group, in 1998 15 percent of the region's electricity was generated by gas-fired power plants; last year that number had climbed to 40 percent. Half of New England's gas already comes from abroad, either by pipeline from Canada or by LNG tanker from Trinidad and Tobago.
Nationwide gas imports are also rising-a growing American demand has coincided with a faster-than-expected tailing off of domestic supply-and, despite the resulting high prices, US gas imports are only expected to increase. In 2002, LNG accounted for 1 percent of the US gas supply; by 2020, according to some estimates, it could be at least 20 percent. Russia is building a new LNG plant on Sakhalin Island, in the North Pacific, to supply the Western United States.
In addition to Russia and Trinidad and Tobago, Iran, Qatar, and Algeria are all nations that stand to benefit from the global move to gas. But Russia is the Saudi Arabia of gas-in fact, while Saudi Arabia, the world's oil heavyweight, has 20 percent of global oil reserves, Russia has 27 percent of the world's gas. And under Putin, Russia has shown a willingness to use this preeminence, even more than the country's oil riches (it's also the world's second-largest oil supplier) in the service of an aggressive foreign policy. Last New Year's Eve, in what was widely seen as a political gambit, Russia shut off gas supplies to neighboring Ukraine, a move that was felt all the way to Western European countries like Italy and France.
As a result, the US and some of its allies are starting to worry about the power that Russia enjoys thanks to its gas dominance (Iran, which has the world's second-largest supply, is also a concern). Rumors have surfaced suggesting the imminent formation of a ``gas OPEC," a cartel of gas producing nations with the power to keep prices high or wield the threat of a gas cutoff as a geopolitical cudgel, just as OPEC did in 1973 when it embargoed the US and Western Europe over their support for Israel in the Yom Kippur War.
But according to many leading industry analysts, a gas OPEC wouldn't work very well, and even unilateral forms of gas-based strong-arming, like Russia's, will probably backfire in the long run. Because of the expense involved in producing gas, because of the inefficiencies that remain in the gas market, and because gas, unlike oil, must compete against other fuels, the power that it confers on producer nations is limited. Indeed, some analysts even suggest that gas can, in some circumstances, be as much a force for stability-perhaps even energy security-as other valuable natural resources are forces for destabilization and unrest.
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To understand why gas works differently from oil in the context of energy markets, it's important to keep in mind that gas is not really a commodity-not yet, at least. ``With oil, the term economists use is that it's fungible, you can send the same barrel hither and yon," says Daniel Yergin, chairman of Cambridge Energy Research Associates, a consulting firm. Essentially, oil is oil, and it's shipped anywhere in the world depending on who the highest bidder is.
The gas market, on the other hand, is much more rigid. ``Gas started as a very localized fuel," says Henry Lee, who teaches energy policy at Harvard's Kennedy School of Government. Though there were companies drilling and selling gas in the United States in the mid-19th century, it was hard to transport very far. ``People used to put it in pipes that were mostly wooden or poorly welded together. All they could really do was use it in streetlights."
Today, while the construction of international pipelines and the development of LNG have created something of a global market for gas, it still lacks the flexibility of the oil market. In large part, that's because gas, which is far more demanding in terms of infrastructure, is so expensive to extract and transport. Whereas oil can simply be pumped into a tanker like water from a tap, gas has to be liquefied, which requires that it be cooled to a couple hundred degrees below zero, then stored at that temperature in the tanker, then turned back into a gas (usually by mixing in seawater to warm it up) when it arrives at its destination. According to Richard Ward, CERA's director of research, while the costs for such projects vary widely, a typical gas field along with a liquefaction plant costs $3 billion to $4 billion. Delivering the same amount of energy from an onshore oil facility costs $600 million to $750 million, a fraction of the price.
The amount of money required just to get a natural gas operation up and running means that gas, for the most part, isn't just sold to the highest bidder on an open market. Gas producing countries and companies instead sign long-term contracts, locking in their prices. ``If I'm going to sink billions of dollars into an LNG project," explains Lee, ``someone has to guarantee me a price."
Along with making the gas market less mercurial than the oil market, the high upfront cost also tends to dissuade suppliers from taking their gas offline. And taking gas offline-either to create scarcity and jack up prices or to make a political point-is exactly what people are afraid a gas OPEC might do. ``The mechanics that once allowed OPEC to be successful don't really exist in gas," explains James Jensen, an energy consultant based in Weston. The price of not pumping gas, of leaving all that expensive infrastructure unused, is that much higher than with oil. At the same time, because of those high costs, producers can't afford to build the kind of surplus capacity that would allow them to smooth out price spikes by releasing more gas into the market, as Saudi Arabia can with oil.
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Still, security remains an issue, and gas has on occasion been used as a weapon-as when Russia cut off Ukraine's gas supply. Gazprom, the Russian state-run gas company, claimed the cutoff was due to a pricing dispute, but many observers thought Russia was trying to undermine Ukraine's pro-Western government on the eve of an election. The effect in Europe-which gets about a quarter of its gas from Russia, all of it piped through Ukraine-was a collective roar of disapproval. Within days, Russia reopened the spigot.
While the episode was seen in Europe as a painful flashback to both the 1973 oil crisis and Cold-War-era Soviet saber-rattling, it also showed the limits of gas brinkmanship as diplomacy. In the months since, European governments have begun looking for ways to wean themselves off of Russian gas. One option, an idea strongly supported by the US, is the construction of new gas pipelines that would run through Turkey, allowing Europe access to gas from Kazakhstan, Turkmenistan, and Azerbaijan.
At the same time, some European governments have been looking for ways to move away from gas altogether. Reversing his government's earlier opposition, British Prime Minister Tony Blair has begun to push for more nuclear power, citing an overreliance on foreign gas as a factor. Germany has done the same. And many European nations have redoubled their commitment to coal-fired electricity.
These moves may not cheer many environmentalists, but they highlight perhaps the key difference, in terms of political leverage, between oil and gas. ``Gas has competitors, oil has no competitors," says David Victor, director of Stanford University's Program on Energy and Sustainable Development. ``If the price of oil goes up, people still have to use oil in their cars. Gas has to compete against coal and nuclear, and suppliers of gas know that, so they're more wary about trying to use the gas weapon than is the case in oil."
Since January, Russia has been on an extended campaign to convince Europe that it is, in fact, a reliable supplier of gas. Claude Mandil, head of the International Energy Agency, believes that Russia's show of reliability is not just aesthetic. In his opinion, ``they have been extremely reliable as a supplier." After all, with an estimated 25 percent of its revenue coming from gas-and with billions of dollars in foreign investment needed to help develop several mammoth new gas fields-the Russian government can ill afford to alienate its gas customers and investors.
Energy analyst James Jensen, for one, believes that the costs of producing gas will drop in the coming years, and that the market for gas will start looking more and more like the market for oil. If that happens, something like a gas OPEC might become more imaginable, with Russia's hand on the global supply valve. Until that day, however, the increasing importance of gas, and the relative security it may afford, could be a welcome development.
Drake Bennett is the staff writer for Ideas. E-mail drbennett@globe.com. 