RICE UNIVERSITY

Geopolitics and World Gas Trade

Peter Hartley Kenneth Medlock III

James A. Baker III Institute of Public Policy RICE UNIVERSITY

1

Overview and motivation

RICE UNIVERSITY

„

Worldwide, the demand for natural gas is rising: Renewables, waste (1%) Nuclear (3%) Hydroelectric (6%)

Nuclear (7%)

Nuclear (6%)

Hydroelectric (7%) Petroleum (36%)

Petroleum (38%)

Coal (25%)

Coal (27%)

Natural Gas (19%)

Renewables, waste (1%)

Renewables, waste (1%)

Hydroelectric (7%) Petroleum (45%)

Coal (26%)

2002

1990

1980

Natural Gas (22%) 15

289.05×10 BTU

15

351.08×10 BTU

Natural Gas (24%) 15

405.12×10 BTU

Source: EIA

„

Key reasons for the increase in demand : ‹ ‹

Environmental pressure for cleaner fuels Wholesale electricity market competition raised the demand for smaller scale electricity plants, which CCGT (an improved technology relative to older gas turbines) satisfied

„

The gas share may continue to rise if gas supplies transport fuel needs (GTL, oil shale, fuel cell)

„

Possible challenges to a gas future include: ‹ ‹ ‹ ‹ ‹

Lack of investor confidence in investing in many gas-rich nations “Resource curse” – might the growing rents from gas provoke political instability? NIMBY and terrorism – might this stymie regasification plants in the US? Slowdown to electricity reforms – could disadvantage gas relative to other fuels Alternative energy technologies – coal gasification, solar, hydro and/or nuclear power, perhaps assisted by falling costs of HVDC, could displace gas in electricity generation

2

The Challenge: Linking supply with demand RICE UNIVERSITY

Source: USGS

„

World gas supply potential is large, but: ‹ ‹ ‹ ‹

It is concentrated in areas remote from markets Substantial production and transport infrastructure is needed Prices need to rise in real terms to finance the investments Unstable political regimes may make investments unattractive 3

Likely Institutional Changes

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„

New Market Structures ‹

Falling LNG production and transport costs facilitate global markets ™ ™

‹

Increased inter-fuel competition from higher gas share in electricity; while new technologies may link different network industries ™

„

Trades between regions transmit prices as well as gas LNG imports result in gas on gas competition

Market inter-connections increase risks and potential opportunities

Summary effects: greater reliance on ™ ™ ™

market prices (including derivative markets), private operators and financing, short-term opportunistic sales and purchases;

less reliance on ™ ™ ™

„

regulation, state enterprises, long-term bilateral contracts

Changing Roles for Governments? ‹ ‹

From builder to a facilitator But politics can also block otherwise viable projects

4

Geopolitics and World Gas Trade

RICE UNIVERSITY 1.

Russia could become a pivotal supplier of natural gas ™ ™ ™ ™

2.

US, Europe and Asia all to become major importers ™ ™ ™ ™

3.

US may also play a key role in arbitraging Pacific/Atlantic prices All three may draw on supplies from Russia & Middle East US and Europe may also compete for supplies from Africa, S. America Geopolitics: Does such competition influence attitudes on other issues? Does it affect policies toward major producers?

Political relations between countries and gas trade ™

™

4.

Pipeline connections to both Europe and Asia LNG supply to both the Pacific and Atlantic basins Key arbitrage point between the major markets Geopolitics: Does this increase Russian leverage on other issues?

Poor inter-governmental relations can scuttle what otherwise would be economically viable projects such as pipelines through the DPR Korea The attraction of consummating high surplus trades may also affect other political issues eg. Indian attitude to sanctions on the Islamic Republic of Iran or the Pakistan border dispute

Supply Security ™ ™

Rising dependence on Middle East and Russia for exports Historically, there have been few political disruptions to international gas trade, but the risks of these may be greater in the future 5

The Rice World Natural Gas Trade Model

RICE UNIVERSITY „ „

RWGTM, based on geological and economic fundamentals, can be used to examine political and economic influences on the world gas market Model framework: Marketbuilder from Altos Partners, which calculates equilibrium prices and quantities for fixed locations and periods ‹

„

Non-stochastic, but it allows analysis of many different scenarios

Dynamic spatial general equilibrium linked through time by Hotellingtype optimization of resource extraction ‹

Capacity expansion, both greenfield and brownfield, is based on… ™ ™ ™

‹

… so that, at the margin, the maximized net present value of each project for the life of the investment is at least zero Current and future prices determine the optimal size of expansions ™ ™

„

… capital costs of expansion, operating and maintenance costs of new and existing capacity, and revenues resulting from anticipated output and expected future prices…

No uneconomic decisions are made The model iterates on price through time so that markets balance in each time period, and there are no opportunities for either spatial or intertemporal arbitrage

The model predicts ‹ ‹ ‹

Regional supplies and demands Regional prices Inter-regional flows 6

Rice World Gas Trade Model: Supply RICE

„

UNIVERSITY

Oil and Gas Journal (2003), USGS World Resource Assessment (2000), other sources gave… ‹ ‹ ‹

associated and unassociated natural gas resources, conventional and CBM gas deposits in North America and Australia, and conventional gas deposits in the rest of the world

… assessed in three categories: ‹ ‹ ‹

„

North American cost estimates were related to geological characteristics and applied globally ‹ ‹

„

proved reserves (updated 2003 Oil & Gas Journal estimates) growth in known reserves (P-50 USGS estimates) undiscovered resource (P-50 USGS estimates) But required return on investment varies by region (using ICRG and World Bank data) and project type We also allow technological change to reduce mining costs

Some cost of supply curves (indicating the capital cost of developing supplies): Comparative Cost of Supply Curves for Selected Regions 25

20

15

10

5

0 0

500

1000

1500

2000

2500

Cumulative Reserve Additions (Quadrillion BTU) Alaska

Qatar

Sources: USGS, EIA, author calculations

Saudi Arabia

Iran

West Siberia

7

Rice World Gas Trade Model: Demand

RICE UNIVERSITY

„

Econometric model for forecasting demand developed using EIA, IEA and World Bank data relates gas demand to: ‹

Economic development (real GDP/capita in PPP), ™

™

‹ ‹ ‹

Population Prices (in $/MMBTU of natural gas, oil and coal); and Country-specific effects ™

„

Primary energy demand increases with GDP/capita but at a decreasing rate (see Medlock and Soligo (2001)) Natural gas share in primary energy demand increases with development

These could reflect, for example, resource endowments or climates

We allow demand to be lost to new technologies from 2020 at prices above $5 with up to 2% lost at $5.50 and 4% lost at $10 ‹

‹

Each year, the proportion of demand vulnerable to the backstop at each price above $5 increases until in 2055 all reference case demand could be satisfied at a price of $10 We took coal gasification costs as a benchmark for the cost of the backstop technology, but nuclear or solar are other alternatives 8

Rice World Gas Trade Model: Transport

RICE UNIVERSITY

„

To facilitate calculations of optimal capacity expansions ‹ ‹ ‹ ‹

„

Supplies and demands are aggregated into discrete “nodes” Existing parallel pipes are aggregated into a single link that can be expanded We allow for many potential pipelines including ones that have been discussed and others that might appear profitable at prices calculated in initial iterations of the model Represent LNG routes by hubs and spokes to allow many potential trading partners

Pipeline costs were split into fixed and variable costs ‹

Fixed costs were based on a regression analysis of EIA cost data (annual cost per unit of capacity) for 52 pipeline projects: ™

‹

„

Costs were allowed to be a function of pipeline length, pipeline capacity (to reflect economies of scale), and indicator variables for whether the pipeline crosses mountains, water or populous areas

Variable costs –FERC filed rates in US, tariff based on a rate of return recovery elsewhere

LNG costs were based on a 2003 EIA report and various industry sources ‹ ‹ ‹ ‹

Shipping costs are represented as lease rates Liquefaction costs represented as fixed costs ($4.11/mcf/yr) plus variable costs (fuel and operating costs, and feed gas cost) Regasification costs represented as fixed costs (vary by location primarily due to land costs) and variable costs (fuel and operating costs) Allow for technological change to reduce LNG costs at rates of change based on a statistical fit to the IEA World Energy Investment Outlook

9

Reference Case Supply Projections

RICE UNIVERSITY

Pronounced growth in Russia, Middle East and Australasia

200 Other Asia China

180

ASEAN

160 Australia, NZ, PNG Other Africa

140

North Africa

120

Other Middle East Saudi Arabia

100

Islamic Republic of Iran Iran

80

Qatar South America

60

North America

40

Other FSU Russia

20

Europe

0 2002

2006

2010

2014

2018

2022

2026

2030

2034

2038

Significant decline in North America and Europe

10

Reference Case Demand Projections RICE UNIVERSITY

Steady growth in North America, Europe and Asia

Backstop constrains demand growth long term…

180 Other Asia China

160

ASEAN

140

Australia, NZ, PNG Other Africa

120 North Africa Other Middle East

100

Saudi Arabia

80

Iran Islamic Republic of Iran Qatar

60

South America North America

40

Other FSU

20

Russia Europe

0 2002

2006

2010

2014

2018

2022

2026

2030

2034

2038

11

Reference Case Imports and Exports

RICE UNIVERSITY

Strong growth in exports from Russia, Middle East and Asia/Pacific

80 Europe Russia

60 Other FSU North America

40

South America Qatar

20

Islamic Republic of Iran Iran

Saudi Arabia

0

Other Middle East

-20

North Africa Other Africa

-40

Australia, NZ, PNG ASEAN

-60

China Other Asia

-80 2002

2006

2010

2014

2018

2022

2026

2030

2034

2038

Strong growth in imports in North America, Asia and Europe

12

Reference Case LNG Exports

RICE UNIVERSITY

Dominant feature is strong growth in the Middle East

In later periods, there is strong growth in Russian Atlantic LNG

50 Russia Atlantic Norway

45

Greenland 40

South America Other Africa

35

Nigeria North Africa

30

Other Middle East Saudi Arabia

25

UAE 20

Qatar Islamic Republic of Iran Iran

15 Russia Pacific Other SE Asia

10

Malaysia 5

Indonesia Australia

0 2002

2006

2010

2014

2018

2022

2026

2030

2034

2038

Alaska

Australia emerges as the largest single LNG exporter

13

Reference Case LNG Imports

RICE UNIVERSITY

All regions, except Japan andRep. South Korea, experience strong growth. The dominant feature, of Korea however, is growth in US imports (shown as US Atlantic and US Pacific)… 50 Remaining Pacific Mexico Pacific

45

US Pacific 40

Republic of Korea South Korea

Japan

35

China 30

India Rest of Europe

25 Italy France

20

Belgium 15

UK Canada

10 US Atlantic & Gulf Mexico Atlantic

5

South & Central America 0 2002

2006

2010

2014

2018

2022

2026

2030

2034

2038

14

Selected Price Projections

RICE UNIVERSITY

6.5

F 6

5.5

F 6

P J H

F 6

F 6

4.5

F

B H P J 3.5

B M

H JB

J H B M 3

H 6 JB

F H JB 6

M M P 3

M 3 P

M 3 P

F H JB

F H

6 M

6 M

P 3

JB

3 P

F H B J 6 M 3 P

F H B J M 6

F H B J M 6 3

3 P

F H B J

M 6 3 P

B F H J

M 6 P 3

B F H J

3 P M 6

B F H J 3 M P 6

B F H J 3 M 6 P

B F H J 3 M 6

F B

P

P

H J 3 M 6

B F

F B

H J M 6 3

H JM 3 6

P P

B

Henry Hub

J

Zeebrugge

H

UK - NBP

F

Tokyo

M

Beijing

6

Seoul

P

Delhi

3

Buenos Aires

P

P 2.5

3 3

1.5 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040

„

Prices are more equal when markets become linked via pipeline and LNG trade.

„

US and European prices track each other closely until the mid 2020’s.

„

Seoul prices are initially linked to Tokyo (via LNG) but later more closely track Beijing as both China and the Republic of Korea import gas via pipeline from Russia. 15

Gas and Oil Prices are linked

RICE UNIVERSITY

7.0

B

B

B

Henry Hub

J

World Oil Price

6.5

J 6.0

J

5.5

J J

5.0

J

J

J

J

J

J

J

J

J B

JB

JB

B J

B J

J

J

B B

B B B

4.5

B

B 4.0

J

B B

B

B

B

3.5

B 3.0

2.5 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040

„

The gas and oil prices are linked via the estimated cross- elasticity of substitution between gas and oil. In addition, the assumption that the share of gas tends to rise with economic development raises the gas to oil price relativity over time.

„

The oil price is exogenous in our model. We use the latest EIA median forecast. In principle, one could solve for the oil price in the same way that we solve for the gas price. 16

Reference Case Results – Summary

RICE UNIVERSITY

„

Russia becomes the dominant exporter in the global gas market ‹ ‹

Russian pipeline gas continues to be important for Europe Russia also becomes a major supplier of natural gas to China, Republic of Korea and Japan ™ ™ ™

‹

Russia also enters the LNG market ™ ™

„

‹ ‹

Major exporters in the region are Qatar, Islamic Republic of Iran, UAE and, later on, Saudi Arabia Islamic Republic of Iran is the primary source of pipeline gas exports from the Middle East Qatar is the largest Middle East supplier of LNG, but Saudi Arabia, UAE and Islamic Republic of Iran also become significant after 2025

Several long-haul international pipelines are constructed ‹ ‹ ‹ ‹

„

Sakhalin LNG serves the Pacific Basin near term and holds fairly steady throughout the model time horizon. LNG is provided to the Atlantic Basin beginning in 2022 from deposits in the Barents Sea region. Growth here is strong as supply deficits in Europe and North America grow rapidly.

The Middle East will also become an important supply region, exporting both LNG and pipeline gas ‹

„

Sakhalin gas goes to the Korean peninsula and Japan, and East Siberian gas goes to China next decade The Republic of Korea shifts to pipeline gas from Russia at the expense of LNG imports Japan continues to import LNG as a national gas grid is prohibitively costly

The trans-Saharan pipeline (Nigeria to Algeria) is constructed in 2014 India imports gas via pipeline from the Islamic Republic of Iran beginning in 2024 European imports from the Middle East via Turkey increase dramatically post-2020 Gas is also piped east from West Siberia to western China by 2038 and to East Siberia (& China and the Republic of Korea) by 2045

North America becomes a major importer of LNG ‹ ‹

Alaska merely offsets declines in other North American production with little effect on price Gas prices in the US eventually exceed prices in Europe and Asia

„

Europe imports more LNG than Northeast Asia from the early to middle 2030’s

„

South American gas is consumed primarily in South America ‹ ‹ ‹ ‹ ‹ ‹

„

Trinidad LNG export growth is limited to the near term Peruvian LNG exports begin in 2010, but do not grow to be large Venezuelan LNG is significant in later time periods (post-2025) Brazil imports Bolivian and Venezuelan supplies via pipeline Argentina imports from Bolivia, Paraguay and Uruguay via pipeline Chilean imports from Argentina are later displaced by Bolivian gas and ultimately some LNG

A backstop technology is used almost everywhere by 2040, but is used most in the US, Europe and Japan

17

Illustrative Geopolitical Scenarios

RICE UNIVERSITY „

The Reference Case solution reflects geology, geography and economics but no constraints arising from politics

„

Scenario analysis can inform us of possible outcomes in a world where political constraints exist

„

One type of scenario eliminates specific projects, for example: ‹ ‹

„

Pipelines through the DPR Korea cannot be constructed Iran-India pipeline is not constructed

Other disruptions could be more pervasive, such as the possibility that OPEC members slow development to earn higher returns on exports ‹

Current gas exports are more concentrated than the distribution of reserves – Russia has 29%, and the top 7 (as of 2004) have 79% of exports – but… ™ ™

‹

Nevertheless, in the Reference Case, OPEC members’ share of exports is around 32% in 2020 and rises to around 43% by 2040 ™ ™

‹

Qatar is the only significant Middle East exporter with 3.8%, and Canada, Norway and Netherlands with 27% of exports are unlikely to join a cartel

Islamic Republic of Iran shows strong growth in pipeline gas Saudi share (LNG) becomes important after 2030

While more widespread development will create many supply sources, many big consumers will also become big importers, so a cartel might be possible 18

No DPR Korea pipes: Effects on the Republic of Korea & China RICE

Republic of Korea – Reference case

UNIVERSITY

Republic of Korea – No DPR Korea pipes

3

3

2.5

2.5 South Backstop South Backstop

2

2

North Backstop

North Backstop

LNG South Region

1.5

LNG South Region

1.5 LNG North Region

LNG North Region

1

1

Beijing to Rep. of Korea Beijing to South Korea

Nahodka to Rep. of Korea

Nahodka to South Korea

0.5

0.5

0 2002

2006

2010

2014

2018

2022

2026

2030

2034

0

2038

2002

China – Reference case

2006

2010

2014

2018

2022

2026

2030

2034

2038

China – No DPR Korea pipes 9

8

8

7

Backstop

Backstop 7 6

LNG

LNG 6 5

Domestic production

Domestic production 5

West Siberia to China

West Siberia to China

4

4 3

Nahodka to Northeast China

2

East Siberia to China

Nahodka to Northeast China

3 East Siberia to China 2

Vietnam to South China

Vietnam to South China 1

1

0

0 2002

2006

2010

2014

2018

2022

2026

2030

2034

2038

2002

2006

2010

2014

2018

2022

2026

2030

2034

2038

19

No DPR Korea pipes: Some other Effects

RICE UNIVERSITY

Changes in world demand 0.15

Changes in world supply Russia Remaining FSU

0.1

1 Australia, NZ, PNG

0.8

Europe, Greenland Middle East

0.05

South Koreaof Korea Republic 0

Nigeria 0.6 China 0.4

ASEAN

0.2

Remaining Africa

United States Japan

-0.05

ASEAN

Middle East 0 Remaining Asia

Canada, Mexico

-0.1

Africa

-0.2

Central & South America

Remaining Asia

-0.15

-0.4

Russia

Indian sub-continent -0.2

-0.25

Central & South America

-0.6

Australia, NZ, PNG

-0.8

Europe, Greenland Remaining FSU North America

China

-1

-0.3 2002

2006

2010

2014

2018

2022

2026

2030

2034

2002

2038

2006

Changes in world LNG output

2010

2014

2018

2022

2026

2030

2034

2038

Changes in select prices

1.4

1.25

Russia Pacific

1.2

1.00

6 Middle East 1

Nigeria

6 6

0.75

M

South America Norway, Greenland, Alaska Australia 0.4

0.25

0.2

0.00

JH B 6F 3

6

6

6

6 6

B H J3 6F

P M 3 6F JB H

6F JB H P 3

3F JB H P

3P H JB

F P JB H M 3

F M 3B J P H

F B 3P M J H

F H J 3B P M

F B 3 P H J

P F H JB 3

3F B P JH M

F B P H J 3 M

F H JB 3P M

F JB 3H P

F B J P 3H

H JB F 3P

F B 3P J H

JF H 3P B

M

M M

M -0.50

6 6

-0.25

Other Africa 0

6

M F

P M

Indonesia Other SE Asia

6

6

0.50

0.6

6

M

Russia Atlantic 0.8

6

6

M

M

M

B

Henry Hub

J

Zeebrugge

H

UK - NBP

F

Tokyo

M

Beijing

6

Seoul

P

Delhi

3

Buenos Aires

M P

-0.75

-0.2 2002

2006

2010

2014

2018

2022

2026

2030

2034

2038

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040

20

No Is. Rep. of Iran-India Pipe: Effects on India & Islamic Republic of Iran

RICE

India – Reference case supply

UNIVERSITY

India – supply w/o pipeline

4

4

3.5

3.5 Backstop

Backstop 3

3 LNG West (Dahej/Hazira)

LNG West (Dahej/Hazira) 2.5

2.5 LNG South (Dabhol)

LNG South (Dabhol) 2

2 Domestic production West

LNG East (Calcutta) 1.5

1.5 Domestic production East

Domestic production West

1

1 Pakistan to India

Domestic production East

0.5

0.5 Bangladesh to East India

Bangladesh to East India

0

0

-0.5

-0.5 2002

2006

2010

2014

2018

2022

2026

2030

2034

2002

2038

2006

Islamic Republic of Iran – Reference case exports 6

5

5

LNG Export

Iran to Turkey Islamic Republic of Iran to Turkey

3

2014

2018

2022

2026

2030

2034

2038

Islamic Republic of Iran – exports w/o pipeline

6

4

2010

LNG Export

4

Islamic Republic Iran to Turkey

3

of Iran to Turkey

Islamic Republic of Iran to Pakistan Iran to Pakistan

2

Islamic Iran to IraqRepublic of Iran to Iraq

2

Islamic Republic Iran to Iraq of Iran to Iraq

Islamic Republic of

1

Iran to to Azerbaijan Iran Azerbaijan

Islamic Republic of Iran to Azerbaijan Iran to Azerbaijan

1

Turkmenistan to North Turkmenistan to theIran

Turkmenistan to to North Turkmenistan the Iran 0

0

North of the Islamic Republic of Iran

North of the Islamic Republic of Iran

-1

-1 2002

2006

2010

2014

2018

2022

2026

2030

2034

2038

2002

2006

2010

2014

2018

2022

2026

2030

2034

2038

21

No Is. Rep. of Iran-India Pipe: Some Other Effects RICE UNIVERSITY

Changes in world demand

Changes in world supply

0.20

1 Remaining Middle East

0.15

North America

0.8

0.10

Europe

0.6

North America

0.05

Iran Islamic Republic of Iran

0.4

Iran Islamic Republic of Iran

0.00

Indian sub-continent

Indian sub-continent

FSU

0.2 Australia, NZ, PNG

Remaining Australasia

-0.05

0 ASEAN

Remaining Middle East -0.10

-0.2

Remaining Asia

FSU -0.15

-0.4

Nigeria

Africa -0.20

Remaining Africa

-0.6

Central & South America Europe, Greenland

-0.25

-0.8

-0.30

-1

Central & South America

2002

2006

2010

2014

2018

2022

2026

2030

2034

2038

2002

2006

Changes in world LNG output

2010

2014

2018

2022

2026

2030

2034

2038

Changes in select prices

2.5

1.0

P

0.8

2

P P

0.6

P

P

1.5 0.4

1

P 0.2

Other Middle East

0.5

P

P

P

Iran Islamic Republic of Iran

0.0

P M JB H F 6

3 P F 6 H JB

M 3 JB H F 6

P F 6 JB H 3 M

3 M 6 JB F H P

H J6 3 B M F

M P F 6 JB H 3

3

P 3 M H JB 6 F

3 M F JB 6 P H

P 3 H M JB 6 F

M 6 JB F H 3

H J6 M P F B 3

3 F B M 6 JH

3 H M 6 JB F

F M 6 JB 3 H

H JB F M 6 3

F M B 6 3 J H

3 J H 6 M F B

3 6 F B M J H

3 H J M 6 B F

P

-0.2

Remaining

0

-0.4

P

B

Henry Hub

J

Zeebrugge

H

UK - NBP

F

Tokyo

M

Beijing

6

Seoul

P

Delhi

3

Buenos Aires

-0.5 -0.6

M

-1 2002

2006

2010

2014

2018

2022

2026

2030

2034

2038

-0.8 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040

22

Restricted OPEC Development

RICE UNIVERSITY „

We assumed that the return on export infrastructure investment projects from all current OPEC members (Algeria, Nigeria, Libya, Qatar, Saudi Arabia, Islamic Republic of Iran, Iraq, UAE, Kuwait, Venezuela, Indonesia) is increased above the base level ‹ ‹

„

Changing the required return will operate like a coordinated reduction in the rate of development of gas export projects ‹

„

The weighted average cost of capital for export pipeline projects was increased to 20% from the 8–10% assumed in the base case The weighted average cost of capital for liquefaction projects also was increased to 20% from the 10–13% assumed in the base case

A major difference from a genuine cartel is that the higher revenue is not assumed to influence domestic demand in OPEC countries

The alternative would be to postulate a price objective for the member countries and a production sharing agreement to support that objective ‹

The ultimate consequence would be a reduced rate of project development, a higher rate of return on investments but also increased government revenue from the National Oil (or Gas) Company 23

Effects of restricted OPEC development

RICE UNIVERSITY

Changes in world demand

0.2

Changes in world supply 3 Remaining S & C America

0 2

Remaining Asia

OPEC countries

-0.2

North America

Remaining Middle East

1

Remaining Asia

-0.4

Europe and Greenland

Remaining Africa Europe and Greenland

0

Russia

-0.6

Remaining FSU

North America -1

Remaining FSU

Remaining S & C America

-0.8

Remaining Middle East

-1

Australia, NZ, PNG -2

Russia

Remaining Africa Australia, NZ, PNG -1.2

OPEC countries -3

-4

-1.4 2002

2006

2010

2014

2018

2022

2026

2030

2034

2002

2038

2006

Changes in world LNG output

2010

2014

2018

2022

2026

2030

2034

2038

Changes in select prices

3

1.0

6

0.8

2

6 M

Russia 0.6

1

Australia, NZ, PNG Remaining Africa

0

Remaining S & C America

P 3

0.4

0.2

6F J H 6 F P

Remaining Middle East

-1

Europe and Greenland

0.0

M JB H 3

6F H 3JB 3 B

North America

-2

6 F M P

-0.2

Remaining Asia OPEC countries

-3

M

B M 3 P

3 P F 6 B M H J

H J P B M F 6

H J B F P M 3 6

H J JH B F P M 3 6

B M 3 F P 6

H JB F 3

P B F J H 6 M

6 M

B 6 M F J H

3 P

B H F JM 6

6 H M F P B J

JB H F 6 M 3

B P H J F

B H F B J P H F M

J 6 M

P M

P

6

6 3

H J B F

M H B F J

3 3 P

3

3

3

P 3

B

Henry Hub

J

Zeebrugge

H

UK - NBP

F

Tokyo

M

Beijing

6

Seoul

P

Delhi

3

Buenos Aires

P

3

H J

-0.4

P -0.6

-4 2002

2006

2010

2014

2018

2022

2026

2030

2034

2038

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040

24

Concluding Remarks

RICE UNIVERSITY „

The results illustrate the key role Russia will play in the world gas market ‹ ‹ ‹

„

Russia not only has a lot of gas It also is strategically placed to ship gas either east or west and hence is in a position to arbitrage between European and Asian markets Toward the end of the horizon, Russia also becomes a significant exporter of LNG, thus helping to solidify the link between LNG prices and pipeline gas prices around the world

North America and Middle East also link the Pacific and Atlantic markets ‹ ‹

Middle East producers can export LNG east or west, and also can ship gas via pipeline to Europe or the Indian sub-continent In North America, if Pacific Basin gas prices rise, more Atlantic Basin LNG is imported and the arbitrage point moves toward the west coast

„

Long distance international gas trade provides opportunities for countries to gain from cooperation, but also to lose from conflict

„

Ultimately, there appears to be substantial gas available to satisfy demand at a reasonable price until the second half of the century when alternative backstop technologies should become competitive ‹ ‹

The global supply curve for natural gas is reasonably elastic Substantial known gas reserves may not be exploited since they are likely to be more expensive than the feasible alternatives 25