Igor TOMBERG
Leading researcher
Center for external economic studies
Institute for International Economic and Political Studies
Russian Academy of Sciences
Ph. D. (Economics)

We are witnessing an active formation of a new global energy market that is based on trade in natural gas. This process will necessarily entail establishment of new interdependencies and geopolitical groupings, production cooperation chains and (regional or even global) price cartels and, in the short term, it is going to have a far-reaching effect on global economy. As natural gas becomes an object of global trade, it turns into a decisive factor of sustainable development. Besides, natural gas will mean a cleaner environment for absolutely all consumers.

Formation of global gas market

Emergence of a global gas market is made possible by both the wide-scale construction of long-distance pipelines and the

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changes taking place in gas industry itself. Formerly it was believed that it might only be cost-effective to transport natural gas in gaseous form via pipelines, i.e. over land. There can be no transoceanic pipelines. However, if you cool natural gas to a temperature around minus 162° C it turns into a liquid named LNG (Liquefied Natural Gas), which can be transported in special tankers over enormous distances.

At the delivery point, liquefied natural gas is brought back to its original state at LNG regasification plants. This has been traditionally a very costly process. However, it is very efficient (the volume of methane, when liquefied, is 600 times less), making it possible to transport an enormous quantity of energy in a single cargo container - a single shipment is equivalent to 5% of US daily gas consumption. Besides, the previously high costs of terminals and tankers are actually going down as recent technological and design improvements have resulted in an almost 30% cost reduction.

Today, we are witnessing the start of a new era in which natural gas is going to supplant oil, just as not so long ago oil supplanted coal, rising to the top of the global energy balance. It is very important that, while emission pollution which occurs in

Chart

Global energy balance

Source: Oil and Gas Journal, February 2, 2004, p.19

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producing energy from oil is less than half the one taking place in peat or coal utilization, natural gas, in its turn, is three times cleaner than oil. It should be noted, though, that, according to forecasts, natural gas is not going to "beat" oil too soon - not before the starting process of its becoming a global commodity gains momentum (see the Chart).

Though gas trade is a gigantic business (estimated to total over $500 billion a year), it has only been developed on local, state and regional levels due to the limited pipeline length and the lack of global gas market. Today, however, the situation is changing, because LNG makes it possible for consumers to get gas from rich gas fields all over the world that have for a long time not been developed.

The need for a global gas market makes its emergence a reality. In addition, the benefits of gas itself have grown increasingly more

Table 1

Proven reserves of gaz (% global reserves)

Source: BP Statistical Review of World Energy: June 2003, BP p.l.c., L., 2003

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Table 2

European gas consumption trends (2003)

Source: Eurogas

evident in the recent decades. Besides being more ecological (gas has the highest combustion efficiency of all fossil fuels), gas is in abundant supply. Overall proven reserves of gas exceed a trillion barrels of oil equivalent. Russia is the absolute leader, accounting for about 30 % of the known reserves (see Table 1).

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Gazprom, the world's biggest gas company, produced 545 billion m³ of gas in 2004, exporting 149.1 billion m3 to Europe. European gaz consumption trends (see Table 2).

Formation of a gas analogue of OPEC was discussed by energy ministers at the Fifth International Gas Exporting Countries Forum in Trinidad.

Russia, possessing the world's biggest natural gas reserves and being its biggest exporter, usually takes an active stand at such meetings. It is only natural that Gazprom's head Aleksei Miller was one of the two nominees for chairmanship in this organization. As Russian industry and energy Minister Viktor Khristenko did not attend the meeting this year, Russia only had Foreign Ministry representatives to stand up for its interests. Nevertheless, it would be wrong to say that Russian authorities are not concerned with problems of "gas OPEC". It would be enough to refer to an April 13 meeting in Moscow between deputy Foreign Minister of the Islamic Republic of Iran Mohammad Mohsen Aminzadeh and Andrei Kokoshin, Chairman of the Committee for CIS affairs and contacts with compatriots of the RF State Duma. They discussed, among other things, the project for a "gas OPEC" with the participation of Iran, Russia and other neighboring states. Mohammad Mohsen Aminzadeh confirmed efficiency of a potential "Organization of gas exporting countries" with the participation of Iran, Russia and other neighboring states, and expressed Iran's willingness to launch this project.

Energy security, in view of the recent record oil price hikes, has become a key item for discussion at all major international meetings and contacts. It also was a key issue for the latest presidential campaign in the US. US media, following the example

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of their colleagues in Russia, have repeatedly accused the administration of excessively indulging in "exotics", like the hydrogen engine, and showing no interest for such a promising energy source as gas.

According to Washington Post, disregard for natural gas may become a fatal mistake for the US. The newspaper writes that natural gas consumption in the US, according to the US Department of energy, is expected to increase 40% by the year 2025. The daily believes it will result in US dependence on this fuel, which may naturally change the overall atmosphere of the political dialogue between Washington and Moscow.

Washington Post is concerned that Russia is already setting up, under its aegis, an organization of natural gas exporting countries. Citing expert opinion, the daily writes that the Gas Exporting Countries Forum established in 2001 may in near future turn into a kind of "gas OPEC" which will obviously be headed by Russia. Considering this process that is picking up speed, Russia (that already occupies leading positions in global oil exports) may actually reign over global energy markets, thus getting an opportunity to dictate terms to Europe and the US.

However, prior to becoming a top manager on the world gas market, one should first set it up. The Gas Exporting Countries Forum (GECF) does not yet match the configuration of the OPEC too well, yet it was at the meeting of this organization in Cairo that a deputy Chairman of Gazprom scared analysts with his statement, "I believe it meets the interests of our countries to sell gas on the market at the highest possible price, so one should follow proper procedures and pursue a coordinated policy". Another thing that made experts refer to the idea of "gas OPEC" was the Gazprom high

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executive's acknowledgement of having various aspects of gas policy (including pricing policy) coordinated with Kazakhstan. Gazprom is suspected of trying to meet its external contractual obligations at the expense of its neighbors. This maneuvering will enable Russia to become a gas integrator in the entire post-Soviet space.

"Russia will set gas prices on the future integrated market", say the authors of the report jointly prepared at the Stanford and Houston Universities. The researchers made this conclusion after considering various scenarios.

Integration of efforts of Russia, Kazakhstan, Turkmenistan, Uzbekistan and Iran, which possess enormous gas reserves and are actively developing its production and transportation, constitutes an objective basis for establishment of a large regional gas alliance. Availability of potentially boundless sales markets, such as India, Pakistan, China, etc. makes the idea even more attractive. In addition, it is forecast that gas is going to account for up to 70% of the growth in demand for electricity generation sources. The only problem is that both demand and the very emergence of the gas market will depend on the growing share of LNG in overall gas supplies. This commodity has a great future despite the current high processing cost. By paying this cost today (i.e. by starting a large-scale construction of gas processing plants), Russian energy companies may really be able to dictate their prices on the global market.

Growing exports of liquefied natural gas (LNG) might be an alternative to increasing exports of gas via pipelines. The LNG

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market demonstrates the highest growth rates in the world (a 12.1% growth in 2003, a double increase in trade volumes between 1993 and 2003, a 7.3% average annual trade growth over the same period). In contrast to gas supplies via pipelines, the basic feature of LNG is its high market mobility - namely, the global LNG transportation and regasification system is highly standardized, the number of LNG regasification terminals in consumer states is constantly growing, making it possible to transport increased supplies of LNG to practically any place in the world (as opposed to gas pipeline exports).

Russia, however, is not present on the global LNG market - due to the traditional export strategy of Gazprom, which, as far as one can judge, is largely designed to meet the interests of the influential pipeline engineering lobby (Stroitransgaz, a subsidiary of Gazprom,

Increase in LNG trade volumes, compared with other global gas trade volume indicators (2003)

Source: BP

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is the biggest contractor in new export gas pipeline construction). In particular, Gazprom is currently actively lobbying a project for construction of an underwater North European gas pipeline across the Baltic Sea to the German coast, to supply gas to North Western Europe. The project costs around $10 billion. At the same time, there are no definite forecasts of a major growth in gas demand in the anticipated Russian gas sales area - in other words, we may well have the situation with the gas pipeline "Blue flow" to Turkey repeated all over again.

At the same time, the UK (one of the main anticipated sales markets for Russian gas to be supplied over the North European gas pipeline) plans to build three new LNG regasification terminals in the near future.

Overall, according to Ocean Shipping Consultants Company, West European LNG imports are going to increase to 139 billion m³ of gas in 2010 and 181 billion m³ in 2020 (as opposed to 41 billion m³ of gas in 2003). Yet Russia does not produce LNG at all, and Gazprom's strategy does not envisage priority development of LNG production to increase gas exports; moreover, the company has not yet come up with any real projects for construction of LNG production facilities.

The only project really envisaging construction of the first Russian LNG production plant in the near future is "Sakhalin-2", a private project with no Gazprom participation (controlled by foreign shareholders). The project's operator, Sakhalin Energy, plans commissioning an LNG plant with an annual capacity of 9.6 million tons (around 13.2 billion m³ of gas). Sakhalin Energy has already done a rather successful marketing campaign for the future supplies of gas to the Pacific region, signing contracts for around

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Table 3

LNG production projects in Russia

Source: Institute of energy policy

70% of overall production volumes. Any other LNG production plans exist only as concepts. It is still not clear whether or not the project for construction of an LNG plant using raw materials from Shtokmanovskoye field in the Barentz Sea will actually be implemented as it is potentially in conflict with the North

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European gas pipeline construction project. All other projects proposed come from companies other than Gazprom (except the project for construction of a LNG production terminal in Kharasavei, Yamal Peninsula, which is still just a concept proposed by VNIIGAZ research institute that has found no practical application).

To give a serious impetus to LNG export development, Russian authorities should support LNG production and export initiatives put forward by private oil and gas companies, including foreign investors in the Shtokmanovskoye field development.

RA

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