Natural Gas Potential

Natural gas is the cleanest burning fossil fuel for toxic air pollutants and it emits about half the greenhouse gases of coal. With future oil supplies in question, coal falling out of favor due to environmental concerns, and energy demand expected to increase, natural gas usage may grow. However, transportation of natural gas poses a problem: Pipelines routed through entire countries can pose geographic, financial, and geopolitical challenges. As a result, the natural gas trade has remained overwhelmingly regional. Liquefied natural gas (LNG) gives producers the ability to transport gas over large distances without having to rely on pipelines, but the liquefaction process requires significant infrastructure. Some experts predict LNG will take a growing share of the natural gas trade but note that natural gas markets will likely remain overwhelmingly regional.

Production and Flows
The world produced and consumed more than 100 trillion cubic feet (Excel doc) of natural gas in 2006. North America, Europe, and Eurasia make up more than two-thirds of all natural gas consumption. Current projections suggest global consumption as a whole will rise to 158 trillion cubic feet by 2030. Only about one-third of natural gas is exported, primarily to countries within the region of production. Experts predict that future increases in exported natural gas will come from LNG, making gas a more globalized commodity.
Unlike oil, natural gas production is not dominated by the places with the largest 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--neither country ranks in the top ten global producers. Nearly half of all production takes place in Russia, the United States, and Canada--with U.S. and Russian production dominating.

The Challenges of Pipelines
Pipelines remain the dominant method of transportation of natural gas, because the large volume necessary for use makes most other forms of transportation too costly. Pipelines are expensive to build, and as with other types of energy infrastructure projects, they are becoming more expensive as commodity and labor prices rise. A proposed pipeline between the United States and Canada is expected to cost about $20 billion (VOA). A pipeline proposed to run from Caspian gas producers to EU countries could cost over $12 billion (IHT). Geography also poses a problem. Several of Asia's most prosperous and populous countries are islands, including Japan, Indonesia, and Malaysia. "That's why [Asia's natural gas trade] is not more robust," says Ira B. Joseph, director of international gas at the business consulting firm PIRA Energy Group. There is almost no intercountry natural gas trade in Asia via pipeline.
Transporting natural gas across international borders can have geopolitical implications. Pipelines lock countries into relationships, opening up dependent or transit countries to both political pressure and price pressure. Russian gas, for example, travels to markets in Western Europe through Ukraine, a former Soviet Republic with which Moscow has rocky relations. In 2007, Turkmenistan cut gas deliveries to Iran in what some experts described as a price dispute. This led Iran to cut gas going to Turkey and Turkey to cut gas to Greece, each in order to make up for losses from the previous link in the chain, according to the U.S. Energy Information Administration (EIA).

Looking to the LNG Option
LNG could provide natural-gas dependent countries with more options in a situation where a producer cuts off supplies. LNG has its own limitations, however. The technology has been around for decades but until recently it was not price competitive against pipelines. A 2005 paper by Henry Lee of Harvard's Kennedy School of Government contended that LNG infrastructure prices have dropped substantially (PDF) since the 1990s. LNG requires port facilities that can accommodate tankers and processing plants. On the export side, the process also requires a liquefaction facility, which can cost several billion dollars, and large tankers, each of which can cost between $200 million and $400 million (Bloomberg). On the import side, a facility to gasify LNG on delivery can cost from hundreds of millions to billions. Jerry Birnbaum, president of the consulting firm Energy Research Associates, notes that shortages in experienced labor along with price increases for building materials have caused LNG projects to balloon in cost. Birnbaum says no one really knows the true costs for LNG projects right now. "LNG may be very expensive to produce right now," says EIA analyst Damien Gaul.
According to the EIA, global trade of LNG amounted to about 7.6 trillion cubic feet in 2006. This is less than 10 percent of the global natural gas trade. So far a total of thirteen countries are currently in the LNG export business and seventeen were LNG importers as of 2006.

Prospects for a Natural Gas Cartel
There have been discussions among countries with major natural-gas reserves, including Russia, Iran, and Qatar, on forming an OPEC-like natural-gas cartel. This idea has sparked some worry about price manipulation. Such a cartel would likely be most worrisome for the European Union (Haaretz) because it could provide Russia with more influence with suppliers the EU hopes to use as a supplement to Russian gas. However, some analysts question whether a cartel would not be able to dramatically influence prices--even regionally--because natural-gas contracts are often measured in decades, as countries and companies look to secure supplies to justify the huge associated pipeline infrastructure costs. Other analysts say a cartel could be influential if the market for short-term LNG contracts grows.
Most LNG trade is also tied up in long-term bilateral contracts, says the EIA's Gaul. Only a small percentage of total trade is conducted in short-term, or spot, contracts. It's unclear how much short-term price volatility matters for LNG infrastructure investment decisions. Because natural-gas demand all over the world is increasing, LNG projects may still be attractive (Oil and Gas Journal) since they provide buyers with access to sellers outside their region. Diversification of energy access remains an important calculation for countries, Gaul notes, but it is a "matter of crunching the numbers."

Natural Gas Market Localization
In the long run, the world is moving toward a more globalized gas trade. However, Rachel Ziemba, an analyst for RGE Monitor, an economic website, contends that "we aren't there yet." In an April 2008 analysis, Ziemba notes that production and demand for natural gas is shifting. However, natural gas trade is still largely regional. It can be broken down as follows:

Russia/Eurasia/Europe. The countries of Europe and Central Asia represented about 43 percent of the world's gas consumption in 2006. Many countries in Europe use substantial amounts of natural gas; 24 percent of the European Union's energy comes from natural gas, and more than 50 percent of Russia's energy is from natural gas. The region has a massive network of pipelines, primarily running from Russia into Western Europe. As the world's largest producer of gas with the largest reserves, Russia represents about 27 percent of global exports, the highest of any single country. After Russia, Norway, the Netherlands, and Uzbekistan are among the highest net exporters in the region. Russia, in control of an extensive pipeline system, has been the main "country of transit" for Central Asian gas into Western Europe, RGE Monitor's Ziemba says, noting the region's major problem is "two competing pipeline systems." European countries have increasingly looked for ways to diversify their access to natural gas outside of Russia. The Nabucco pipeline project would route natural gas from Caspian states to the European Union, bypassing Russia's extensive pipeline network. Some analysts believe another pipeline bypassing Russia was at the heart of the 2008 Russia-Georgia conflict. Such tensions come at a time when EU countries are reevaluating their energy production in order to meet greenhouse-gas reduction goals. In October 2008, several Eastern European countries led opposition to an EU climate change proposal over fears it would make them dependent on Russian gas (Telegraph).
EU governments are also investing in LNG (PDF). In 2006, EU countries represented about 24 percent of global LNG imports. PIRA's Joseph notes that Russia is unlikely to become a bigger player in the LNG market due to its lack of a warmer-water port. Russia's energy company, Gazprom, is looking into the possibility of building LNG icebreaker tankers (Moscow Times).

North America. The region, which comprised about 26 percent of global gas consumption in 2006, also has an extensive pipeline system. Up to 25 percent of all energy consumed in North America comes from natural gas. The United States is the world's second-largest gas producer and the world's largest gas consumer-representing about one-fifth of global consumption. Still, the country gets about 20 percent of its gas from imports. U.S. producers have increasingly looked to unconventional sources, such as coal-bed methane, for natural gas. These projects have been so successful that experts say they lower interest in new LNG investment. Nine of the twelve largest U.S. gas fields (PDF) are from unconventional sources and currently supply more than 40 percent of U.S. gas production. In 2008, U.S. natural gas prices dropped significantly following reports of increases in supply (NYT). Canada is the world's second-largest exporter of natural gas, nearly all of which goes to the United States. Its production is expected to drop off slightly in the coming decade (PDF). Mexico also ships some natural gas to the United States, but overall the country is a net importer and domestic demand is rising. Though the EIA says the country has significant untapped reserves, Ziemba notes that Mexico's natural gas industry has problems similar to those of its oil sector because of limitations on international investment.
Neither Canada nor Mexico are major exporters outside North America. The United States is a major LNG exporter; it shipped around 60 billion cubic feet in 2006, almost all of it going to Japan. The EIA projects U.S. imports of LNG will more than triple by 2015.

Asia/Oceania. The region, though the most populous in the world, represents just 14 percent of global natural gas consumption. China gets just 3 percent of its energy from natural gas, while India gets about 8 percent of its energy from gas, according to the EIA. As of 2006, China and India were both importing small amounts of LNG, with India importing about seven times as much gas as China. Much of the consumption in these countries comes from domestic production. China has the region's second-largest natural gas reserves and hopes to increase its domestic production in coming years. In the meantime, efforts to ratchet up gas imports have fallen short. LNG in particular has not proved to be price competitive with coal. Ziemba still sees promise for natural gas in China. She notes that the country is still on an "infrastructure spending spree." The EIA predicts that both China and India could double domestic production by 2015. Countries in the region actively export and import LNG. At more than one trillion cubic feet each in 2006, Indonesia and Malaysia are the region's biggest net exporters and among the world's top-ten exporters; both export almost entirely LNG. Japan and South Korea account for nearly 60 percent of the world's LNG import trade, and experts say these two countries will remain the dominant consumers of LNG in the near future.

Middle East and Africa. The region represents less than 13 percent of the world's natural gas consumption, but contains many of the world's LNG exporters, including Algeria, Oman, the United Arab Emirates, Nigeria, Qatar, Egypt, and Libya. It currently represents nearly 47 percent of all global LNG exports--and LNG is expected to dominate future regional gas exports. Algeria is the region's largest exporter, shipping via both pipeline and LNG. For Qatar, the third-largest natural gas reserves in the world, gas exports--almost all LNG-- were only slightly larger than those of Indonesia and Malaysia. However, the country is investing heavily in LNG and is expected to more than triple natural gas production by 2015. The Middle East/North Africa region also has a developed network (PDF) of pipelines, primarily leading into southern Europe. But very little infrastructure exists on the African continent to facilitate intraregional natural gas. Iran's exports are miniscule, though discussions are ongoing with a number of countries looking for access to more of its gas. Iran in the near term will likely stay a pipeline country rather than a major LNG exporter because of costs and international sanctions limiting certain technologies. Saudi Arabia, the world's fourth-largest natural gas reserves, has modest production levels but produces none for export.
Nigeria has significant amounts of natural gas, with the world's eighth-largest proven reserves. So far the country continues to flare, or burn, gas during oil production, though oil producers are beginning to look at ways to harness this gas for domestic energy. A pipeline still under construction is expected to bring gas from Nigeria to the Ivory Coast, Benin, and Ghana.

Latin America. The region is the world's smallest consumer of natural gas. Trinidad and Tobago is Latin America's top 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. The EIA notes that despite "adequate reserves that support healthy prospects for long-term production growth in South America, the region has begun importing LNG to supplement current domestic supplies, which have failed to keep up with demand." Bolivia is the largest exporter via pipeline in the region. In 2006, Bolivia's president Evo Morales nationalized natural gas fields, which experts say has deterred international investment.