Best investment climate, not cartel, will lead to success in expanding LNG production, says Victor
Appeared in Boston Globe, January 22, 2005
Some economists believe the global market in natural gas may one day surpass the international trade of crude oil. So, is there a cartel, such as the Organization of Petroleum Exporting Countries, far behind?
Most energy economists and analysts say such a cartel, wielding power to dictate global prices and supplies, is unlikely to emerge even if liquefied natural gas (LNG) becomes a common commodity that circles the globe in a fleet of huge tankers.
Daniel Yergin, whose Pulitzer-winning book "The Prize" tracked the emergence of the global oil industry, says the two markets are quite different. He doubts the OPEC analogy would hold for natural gas.
For example, he says, LNG production will be spread among more countries and there is a need for more interdependence between producers and consumers than is the case for oil. Also, most natural gas still will be delivered by pipeline.
As Saudi Arabia is the king of oil, Russia may become a dominant force in natural gas markets. It holds 30 percent of the world's gas reserves. Iran is next with 15 percent. Iran and eight other OPEC countries together account for 43 percent of the world's proven natural gas reserves.
But, says energy economist David Victor, huge gas reserves will not mean success in LNG. He predicts the lead countries in a global LNG market will not be those with the deepest reserves, but those that create the best climate for outside private investment to attract the technology needed for LNG processing.
"LNG is much more capital intensive than oil," said Victor, director of the energy and sustainable development program at Stanford University.
Producers will want to run LNG operations at full capacity to recoup the costs, Victor says. In contrast, OPEC's clout in the oil market stems to a great extent from keeping capacity in reserve -- cutting back to boost prices or using excess capacity to time the markets.
"I think it's highly unlikely that we're gong to have a (similar) cartel in LNG," Victor says. Those countries most likely to pursue a cartel also are least likely to develop a favorable climate to attract needed outside investors, he suggested.
Donald Norman, an economist for the Manufacturers Alliance/MAPI, says the big players in future LNG trading will be those that commit to building expensive facilities.
Norway, with just 1.4 percent of the world's natural gas reserves, could become a significant LNG exporter by constructing plants, Norman said in a recent report on the emerging LNG markets.
Others, however, say they already see signs that OPEC countries will try to dictate LNG prices and supplies.
"No question. They say they will," says George Sterzinger, executive director of the Renewable Energy Policy Project. "Just as with crude oil, the future control of gas is determined by who has the reserves. OPEC will have a dominance that is at least comparable to what they have in crude."
Each year since 2001, more than a dozen of the world's gas exporting countries have met to discuss mutual interests.
This year, they created a 15-member group that will have a rotating president and meet occasionally to, according to Qatar's energy minister, "coordinate their interests."