The recent decision by the Bush administration to steer clear of making even a start with regulating greenhouse gas emissions in times of sky high oil prices is going to lead to massive problems for the next US government.
“A new US government is likely going to tighten up on regulations for CO2 emissions, which will have a big influence on the balance between demand and supply of gas,” write analysts at global business consultancy Booze & Company. They assert that the extra costs involved with stricter regulation of CO2 regulation is bound to dramatically increase demand for natural gas in countries around the Atlantic Basin. With dramatic impacts on the world´s rather localized gas markets.
“Liquid natural gas from the Middle East and North Africa will possibly go to the US instead of to Europe. Investments in European LNG terminals could land in trouble because of this”, the consultancy reports.
As a result, the Europeans might need more access to gas via pipelines, especially Russian ones. Russia already is Europe’s largest gas supplier. European energy companies and governments are definitely going to be faced with new challenges to secure their access to gas in the mid term, the consultancy believes.
The analysts call for a new approach to the three traditionally independent regional gas markets, saying developments need to be regarded in a more integrated way. “Until now the linkages between gas markets in these markets have been viewed as limited. But the competition for access to gas in the Atlantic Basin will intensify, especially between Europe and the US”, according to the Booz vice president Otto Waterlander, one of the authors of the report.
When more LNG hits the market in the next ten years, this competition for LNG might even become more prevalent than the competition with fast growing Asian countries. What’s more, the current world focus on what’s happening in the oil markets has a slowing effect on necessary investments in new gas production. “The production of oil is prioritized, which hinders the development of new gas reserves,” Waterlander says. “The availability of gas could turn out to be way lower than is anticipated.”
Europeans already are incorporating this into their models. They are expecting a massive switchover from coal to gas for electricity generation due to massively increased costs due to CO2 regulation. But US predictions for gas consumption lack this anticipation. Booz & Company say CO2 regulation is the most important factor determining demand for gas in the next ten years. They cite International Energy Agency (IEA) figures which predict that European gas consumption will increase by 2. 9% annually until 2015. The same agency, which depends on official figures supplied by governments, puts this figure at 1.5% for the US. “The US market [..] is bound to be confronted with an increasingly big demand for gas for electricity generation, in view of the alternative resources like clean coal and nuclear energy won’t have been developed in time to meet the demand for electricity”, the Booz & Company analysts predict.
The result will be a massive run on the available liquified natural gas. “Local North American gas producers won’t be able to handle the increased demand and this will result in increased competition for LNG.” The report shows that the increased US demand for LNG will impede on European supplies. Countries that traditionally supply Europe, in the Caribean, North Africa and the Middle East, will likely start to supply US markets as well. The size of gas supplies will be affected and of course prices will increase too.
The Booz & Company models indicate that UD demand for natural gas until 2015 will increase to 84 bcm (= billion m3). That equals around 12% of the gas supplies of Organization for Economic Cooperation and Development (OECD) countries located in Europe. The European import infrastructure could be affected too. The economic viability of some of the 30+ European expansions of import terminals with a capacity of around 130 bcm by 2015 might be at risk.
All this is, of course, great news for the gas exporting countries. A better integrated and more global gas market offers great opportunities for gas exporting countries. The market will however get more complex and this requires better strategies and planning. The increase in complexity could lead to the acceleration of large gas exporting countries of their plans to launch the Gas Exporting Countries (GECF), an informal club of 15 countries similar to the Oil Exporting And Producing Countries (OPEC).