Natural gas and the future

Unless alternatives are pioneered, natural gas is set to become an increasingly important fuel in tomorrow's world. It is cleaner and more environmentally friendly than both coal and oil, emitting less sulphur, carbon and nitrogen and leaving behind almost no ash particles if it is burned. At the same time it can potentially be used just as extensively both in the home and workplace: more than half of American houses already use natural gas as their main heating fuel and it is employed in all sorts of industrial processes to create all manner of different products.

The raw statistics speak for themselves. In 2006 the world's consumption of natural gas already stood at around 105.5 trillion cubic feet, of which roughly one-fifth was taken up by the United States. But the annual United States government document International Energy Outlook predicts that by the year 2030 global consumption could jump by more than half. This is partly because many people will turn away from oil if its price rises as much as many experts predict. But it is also because governments are likely to encourage the use of a substance that is less environmentally damaging than oil or coal. So natural gas will be increasingly used to generate electricity, the IEA report points out, because of 'its relative fuel efficiency and low carbon dioxide intensity' since it is the cleanest-burning fossil fuel for toxic air pollutants and it emits about half the greenhouse gases of coal.1

Producing countries will be able to continue reaping considerable profits from this growing demand for natural gas. Russia gets most of its foreign exchange earnings from the sale of both oil and gas, and in 2007 its massive energy conglomerate, Gazprom, earned a colossal 873 billion roubles from the export of natural gas.2 Another key producer is Norway, whose economy has in recent decades been sustained by the output from the North Sea.3

The Arctic's natural gas

Most experts feel sure that the Arctic region will play a vital part in meeting future demand. The survey published by the USGS in the summer of 2008 estimated that the region harbours 1,669 trillion cubic feet of natural gas as well as 44 billion barrels of natural gas liquids, which would amount to around one-third of the world's undiscovered gas. They also argued that more than 70 per cent of the undiscovered natural gas is located in just three of the provinces it surveyed: the West Siberian Basin, the East Barents Basin and Arctic Alaska. The vast majority of these reserves are also said to be located offshore.4

Other researchers have reached similar conclusions. Shortly after the USGS report was issued, two leading British organizations published their own assessments of the Arctic's natural gas resources. Using detailed scientific analysis of individual basins and industry data on exploration wells and existing discoveries, Wood Mackenzie and Fugro Robertson emphasized that while the Arctic's oil-bearing potential has probably been exaggerated the region does have very large gas reserves, which constitute nearly all the assets that have either already been discovered in the region or else are waiting to be discovered.5

The Arctic's current output certainly gives one indication of how much potential the region might have. Some of Russia's most important fields are at Yamal-Nenets, part of which juts out into the Kara Sea above the Arctic Ocean. Since the early 1980s, 11 gas fields, as well as 15 oil and gas condensate sites, have been discovered here and the aggregate reserves of the largest fields, namely Bovanenkovo, Kharasavey and Novoportovskoye, are thought to account for more than 200 trillion cubic feet of gas, 100.2 million tons of condensate, as well as 227 million tons of oil.

But the single most important natural gas field in the Russian Arctic was discovered in the centre of the Barents Sea, further west, where Soviet geologists unearthed an offshore field in the late 1980s. Further investigation revealed the sheer size of the discovery, which exemplifies the Arctic's full potential. Covering a huge area, the new field, named Shtokman, is estimated to have reserves of 110 trillion cubic feet of gas as well as a further 31 million tons of condensate (Map 5).

However, by the standards of the day, Shtokman presented insurmountable engineering challenges. Lying 340 miles off the coast, and situated in waters 1,000 feet deep, the Russians have always completely lacked the expertise to develop its resources. Even if a field like this had been located on land, its exploitation would still have been difficult enough because its deposits lie in four main layers, each of which have to be brought to the surface in different stages.

Some geologists feel sure that both Shtokman and Snow White are just the tip of an energy iceberg in the Barents Sea and are an unmistakable sign that much more is waiting to be unearthed. Their upbeat assessment has been subsequently confirmed by a series of important, though less dramatic, finds. In November 2008, for example, Statoil announced the discovery of another reserve, located 50 miles north-east of Snow White, that reportedly contains between 70 and 500 billion cubic feet of recoverable natural gas. 'It is, of course, promising that we once more have proven gas in the Barents Sea', pointed out Geir Richardsen, head of exploration activities in the far north for Statoil. 'We need time to make an evaluation and analysis to understand the volume and size of the find.'6

Alaska is also reckoned to have some very large, recoverable natural gas reserves. These include the Wyoming Basin and the National Petroleum Reserve, while the North Slope of Alaska has about 119.15 trillion cubic feet of conventional recoverable gas resources. The North Slope is also an area deemed to be full of huge quantities of hydrates, which are formed when gas and water are locked in an icy solid that forms in very low temperatures. In a report published in November 2008, USGS scientists reported that around 85.4 trillion cubic feet of natural gas is recoverable from Alaska's gas hydrates, which would be enough to heat more than 100 million average-sized homes for more than a decade. 'This is a huge source of untapped energy', as Interior Department Secretary Dirk Kempthorne commented. 'The assessment points to a truly significant potential for natural gas hydrates to contribute to the energy mix of the United States and the world.'7

Canadian reserves may well prove to be as extensive. The Mackenzie Delta, located in the Northwest Territories, holds an estimated 5-6 trillion cubic feet of recoverable underground natural gas reserves and four companies (Imperial Oil, ConocoPhillips, Shell Canada and ExxonMobil) are currently in the process of exploiting the region's three major fields.

A resource war for Arctic gas?

Although the Arctic is undoubtedly rich in natural gas as well as oil, it is highly unlikely that any future resource war will be waged for control of these assets. This is partly for some of the same reasons that weigh against a regional war for oil: many of the areas where large reserves of natural gas have been detected lie within established borders, not disputed zones. Of course, there are clear exceptions, most notably the Barents and Beaufort seas. In the summer of 2008, there were reports that a giant new gas field had been discovered in the 'Grey Zone', adjacent to the Russian and Norwegian mainland.8

But, as the previous chapter has pointed out, armed clashes in these disputed areas are most unlikely, even if rival camps may heatedly exchange some sharp words.

Commercial viability

There are some reasons why conflict over natural gas is even less likely than over oil. One key difference between the commodities is that gas is generally more difficult and expensive to extract and move to market. 'A remote oilfield in the Arctic or anywhere could be exploited by tankers, and crude oil could be placed in local storage tanks if thick winter ice makes access to the area seasonal', as Andrew Latham, a director of Wood Mackenzie consultancy, points out. By contrast, 'remote gas always requires huge infrastructure, whether it is piped or moved by LNG tankers'.9 Latham has also added that 'export and technology constraints are expected to delay production of a large portion of the commercial gas (in the Arctic) until 2050', echoing the views of experts at the EU headquarters who emphasize that 'exploitation of the Arctic's reserves will be slow, since it presents great challenges and entails high costs due to harsh conditions and multiple environmental risks'.10

This means that an energy company needs to be absolutely sure that its huge capital outlay can be offset by the promise of even bigger reserves than any oil investor would look for. But for the moment at least, no one is absolutely sure that there are gas reserves on this vast scale in any disputed part of the Arctic. For any government to risk conflict over resources that have such a questionable commercial value would either be unthinkable or else require mass deception or massive misunderstanding.

Future sources of supply

There is another difference between the two commodities that makes a resource war over natural gas, wherever it is deemed to lie, even less likely than over oil. This concerns how much natural gas is left in the world, or more specifically, how much governments fear a future shortage of natural gas. While fears about the future of oil are rife (if far from universally shared) most experts agree that the world still has plenty of natural gas. So while there has been much talk of 'peak oil', references to 'peak natural gas' or to 'the end of gas' are completely unheard of. Instead the International Energy Outlook predicts that supply will match demand in the year 2030, and points out that:

Historically, world natural gas reserves have generally trended upward. As of 1 January 2008, proved world natural gas reserves, as reported by Oil & Gas Journal were estimated at 6,186 trillion cubic feet -virtually unchanged from the estimate for 2007 of 6,168 trillion cubic feet. Reserves have remained relatively flat since 2004, despite growing demand for natural gas, implying that, thus far, producers have been able to continue replenishing reserves successfully with new resources over time.11

Part of the reason for this difference is that oil has been extensively hunted, used and exploited for centuries, whereas the relationship between the human world and natural gas, although increasingly passionate, is a much more recent affair that is borne of far more advanced technology and expertise.

There is another reason why both producers and consumers have reason to share this relative optimism about the future of natural gas supply. This is the growing ease with which the commodity can be moved from its source to its destination market.

The emergence of LNG

Gas is far more expensive to move than oil because it has a much lower energy content: one square yard of oil contains around 170 times more energy than an equivalent measure of gas. As a result there are far fewer commercially viable ways of moving gas, which at one time was only moved along specially constructed pipelines often stretching for thousands of miles. These are difficult, expensive and time consuming to build, and if this supply was cut off, whether by accident or design, then a consumer might have no other source it could turn to other than emergency stockpiles. During the 1990s, the technology and expertise to freeze, liquefy, store and then transport natural gas by giant tanker became much more widely used. This was not because of any scientific breakthrough (the technology has been around for decades) but because the costs of building the infrastructure, although still enormous, started to become more competitive when compared with the construction of pipelines. As a result banks regarded such projects as less risky and were therefore more willing to lend money to investors. Today, as the operation at Hammerfest illustrates, it can sometimes be less financially demanding to ship the substance in the same way as crude oil, loading it onto tankers that move over vast distances instead of relying solely on pipelines.

This development is already having enormous implications. On the one hand, producers can feel more confident about future sources of supply. Gas fields that would have been too difficult to connect with pipelines can now be developed because tankers can move their output instead. Snow White is a classic example because the construction of a pipeline from the site to the wider continental pipeline grid, which feeds the European consumer market, would have been prohibitively expensive: the vast cost of building a pipeline that is more than around 2,000 miles in length is generally considered to be much harder to justify in raw economic terms. If the distance is greater than 2,000 miles or so, then it is probably more cost effective to use LNG.

The development of LNG is also reassuring for consumers. Instead of being forced to rely on a very limited number of suppliers, consumers have now started to diversify their sources. The UK, for example, was once heavily dependent on piped gas from the North Sea, but has now started to import shipments of liquefied gas from places as far afield as Qatar and Algeria. These shipments already meet about one-tenth of its national demand. By the year 2020 British officials hope that tankers from every corner of the world, including Egypt, Nigeria, Oman and Trinidad, will make up more than one-third of its gas supplies. American imports of natural gas are expected to mirror the same trend, increasing rapidly from 631 billion cubic feet in 2005 to more than 2 trillion cubic feet in 2015 as new liquefaction facilities come on line both at home and abroad. At the beginning of 2008, the United States had five LNG import facilities in operation that can handle more than 5.8 billion cubic feet every day. Four additional facilities are also being built in the Gulf of Mexico and two in the offshore waters of New England, which, when completed, will more than double the nation's import capacity.

The implications for both the consumers and producers of natural gas are considerable. If consumers are able to rely more heavily than before on shipments of liquefied natural gas, then they no longer have the same need to acquire 'diversity of supply', just as no producers can expect to monopolize supply. In other words, there is little strategic point in either consumers or producers seizing control of natural gas reserves in any part of the world, including the Arctic.

Of course this is certainly not to say that those reserves have nothing to offer. Arctic gas would give the EU, for example, an extra source of supply that would reduce its dependency on Russia. In 2007, Gazprom supplied 4.4 trillion cubic feet of gas to the EU - around half of its intake - and such heavy dependency makes consumers extremely vulnerable to accidental or deliberate disruption. This danger became apparent in January 2006 and again in January

2009, when pricing disputes between Russia and Ukraine prompted Gazprom to briefly turn off its supply of gas. This had unfortunate consequences for some European states, notably Bulgaria, Poland and Hungary, since their own supplies were fed through the same pipeline network that moved across Ukraine and for a time many people braced themselves to face the bitter winter cold amidst bitter recriminations that the EU had been taken 'hostage'.12

Fearful of a repeat scenario, European countries have increasingly tried to look away from Russia and find ways of diversifying their supplies. The proposed Nabucco pipeline project would route natural gas from Caspian states to the EU, bypassing Russia's extensive pipeline network in the process. For the same reason, the EU Commission has shown a clear interest in the Arctic's energy resources. So in November 2008 an EU document argued that the Arctic is a 'unique region of strategic importance which is located in [the] immediate vicinity' of Europe and claimed that its 'resources could contribute to enhancing the EU's security of supply concerning energy and raw materials in general'.13 European representatives have also pointed out that:

The Arctic region is believed to be one of the most important remaining petroleum provinces. Development of the Arctic energy resources can therefore be a major contribution to the world's energy supply in the long term. As part of the Arctic energy potential, the Barents Sea represents an opportunity to develop a new European petroleum province.1

But this would not be a justification for the use of military force to stop these resources from being captured by another country, perhaps hostile, or to seize them back. The growing importance of liquefied natural gas offers consumers like the EU or the United States 'diversity of supply', just as its emergence is undermining any stranglehold and strategic leverage that producers like Russia may have previously enjoyed over their consumers. This completely undermines any argument for using force to seize natural assets in the Arctic or anywhere else, if not for showing a strong interest in them.

So it was significant that in September 2008 EU Energy Commissioner, Andris Piebalgs, argued that while Western energy firms should look to the Arctic region as a possible source of supply -'having options is always a good thing' - he emphasized that Russia's importance should not be exaggerated.15 Instead, he pointed out, 'the EU already has very diversified suppliers . . . Norway, Algeria, Caspian, Trans-Saharan . . . We are in a good situation'. He further cautioned against 'singling out one supplier' or 'diminishing one supplier, saying that it is more dangerous than the other'.

Monopolistic pricing

'Diversity of supply' has clear economic, as well as strategic, implications. In an ideal marketplace, consumers want several sources to choose from because they can more easily negotiate a fair price, whereas producers clearly gain if they are in a monopoly situation. Could this give Russia, as a key gas exporter, a good reason to use military force to seize the Arctic's gas reserves?

The Kremlin has certainly benefited enormously from buying gas from Central Asia at one price, and then reselling it to Europe at a much higher one. Until the emergence of liquefied gas, the price of the commodity was determined not by market conditions that are constantly fluctuating, but almost entirely by long-term contracts between suppliers and consumers. As they struggle to claw back the huge cost of building long-distance pipelines, Russia and other exporters have always sought to lock their consumers into lasting relationships, usually of a 25-year duration or more, and closely link the price of gas with that of oil.

Not surprisingly, for a time Moscow did everything it could to prevent the emergence of a spot market that would undercut the prices that suited them: most of its pipeline agreements have destination clauses that prohibit the resale of the transported gas. But once again, the emergence of liquefied gas is having drastic implications, and in the spring of 2007 the world's leading LNG exporter, Qatar, broke new ground by establishing an energy exchange at Doha, its capital, where shipments could be openly bought and sold by traders. The terms of pipeline supply contracts have usually been shrouded in secrecy, but the new spot market has brought much-needed price transparency instead.

Of course, the emergence of this spot market is not preventing Russia from doing its utmost to maintain a grip over its European customers: Gazprom's strong commitment to the 'South Stream' pipeline that links southern Europe to its energy corridors illustrates this determined drive. But even when a natural gas spot market does emerge, there are ways in which Russia or any other producer could influence the price of the commodity much more effectively than by using military force to seize the assets of just one particular resource-rich area: at the end of 2008, reports emerged that Moscow was making tentative moves to establish a gas cartel, which, like OPEC, could work together to hold sway over the price.16

Besides oil and natural gas, the Arctic is also home to some other natural resources, which international powers are keen to access. All of these are important enough to cause disagreements and tensions, or to aggravate existing ones, but are much less likely than energy resources to be a cause of heavy, serious conflict.

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