Geopolitics of Natural Gas A joint study from PESD Stanford University and the Baker Institute Rice University David G. Victor and Mark H. Hayes PESD, Stanford University Energy & Resources Group, UC Berkeley 3 December 2003
Program on Energy & Sustainable Development Established with EPRI gift to Stanford, 2001 Focus: Politics, Law, Institutions Four Research Platforms Futures for gas Electricity Markets in developing countries Low-income, rural energy markets Futures for climate policy Network operation; half Stanford, half overseas 2
Major Points Introduction to the Problem: Expected Gas Demand The Need for Infrastructure Our approach Initial Findings Methodological & Substantive 3
Increasing Role of Gas in all Regions: Gas as Fraction of Total Primary Energy 50% 40% 30% 20% IIASA-WEC A3* (1998) OECD Latin America (LAM) China (CPA) India/Pakistan (SAS) Non-OECD Pacific (PAS) Africa (AFR) 10% 0% 1990 2000 2010 2020 2030 2040 2050 IEA-WEO (2002) Latin America India/Pakistan China *Note: A3 is a high growth scenario that emphasizes renewables, nuclear, as well as gas 4
Global Gas Consumption: IPCC Illustrative Scenarios & IIASA-WEC A3 Tcm/y r 12 10 8 6 4 2 IIASA-WEC A3 400 300 200 100 Tcf / yr 0 1990 2000 2010 2020 2030 2040 2050 Year IPCC SRES (2000) 5
Supply and Demand Red: flow: WEO (2002) estimated gas demand, 2030 Green: stock: EIA Current Reserves (rough) 6
World Gas Trade 800 Billion Cubic Meters (Bcm) 700 600 500 400 300 200 100 Total World Gas Movement LNG by Pipeline 0 1970 1975 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 Year 7
Geopolitics of Natural Gas Study Two Research Tracks: 1. Historical Case studies Look to the past for insights into why some projects are built, and their consequences. 2. Gas Market Modeling World Gas Trade Model Political Economy Applications 8
Six Historical Case Studies Built Projects Author 1. Indonesia LNG to Japan Lewis & von der Mehden 2. Algeria to Italy Hayes 3. Russia to Poland and Germany Victor &Victor 4. Turkmenistan (to Iran, to Russia, Olcott to Pakistan & India) 5. Qatar to Japan Hashimoto 6. Southern Cone (Bolivia to Argentina; Argentina to Chile; Bolivia to Brazil) Mares 9
Research Protocol: Why are Some Projects Built, others not? 1. Context: Project Economics and Technology 2. Other Key Explanatory Factors: 1. Political and Policy Drivers 2. Investment climate in host countries 3. Transit countries 4. Offtake quantity and price risk 5. International institutions See: Hayes & Victor, Working Paper #8, at http://pesd.stanford.edu 10
Seven Initial Observations 1) Methods 2) The gas weapon 3) Transit countries 4) State control vs. markets 5) The roles of long-term contracts and short term markets 6) Regional Institutions and the peace dividend 7) Spillovers benefits to under-served 11
Observation #1: Methods Research Question: Why are some key projects built but others not? Danger: Focus on built projects only Built projects are visible; failures usually not Case selection bias Our solution: studies of alternative projects (APs) 12
Observation #2: The Gas Weapon To date, very few political interruptions Non-commercial markets many interruptions (e.g. Ukraine 1990s) The only severe example: early 1980s Algeria Why? Gas pipelines are fixed infrastructures, costly to leave empty Unlike oil using the weapon is usually costly Severe effects on reputation Long-term damage to Algeria s export potential 13
Transmed Gas Pipeline France Magrheb (not built) Spain direct (not built) Sardinia transmed Tunisia Sicily Dispenza (2002) 14
Algeria Gas Exports to Italy 16.0 14.0 Delivered Contracted 1977 12.0 bcm 10.0 8.0 6.0 $5.5 $4.4 4.0 2.0 0.0 $3.5 $3.7 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 *Price in $/mmbtu 15
Observation #3: Transit Country Risks Project design vs. project operation. Example: Soviet/Russian gas exports Project design: Soviet era: zero concern for transit countries Today: transit country concerns dominate new project design Project operation: Transit country risks remarkably low Mainly about rent allocation (Are there credible alt. s?) 16
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Observation #4: States and Markets Today: Great Transition from states to markets Poses difficulty for case selection One (of many) issues: Will shift to markets speed or slow the diffusion of gas technology? UK example: markets accelerate dash to gas Most other countries: state itself created gas niches Contrast Russia and Poland Not obvious what the impact of liberalization is on gas use 18
Poland: Primary Energy 350 300 100% 80% Share of Final Consumption Coal Bcm Gas Equiv 250 200 150 100 50 60% 40% 20% Oil Gas Hydro 0% 1965 1975 1985 1995 Coal Gas Oil Hydro 0 1965 1970 1975 1980 1985 1990 1995 2000 19
20 FSU: Primary Energy Production, 1913-2002 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 1913 1917 1921 1925 1929 1933 1937 1941 1945 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 Mtoe 0% 20% 40% 60% 80% 100% 1922 1932 1942 1952 1962 1972 1982 1992 2002 Gas Oil Coal Biomass Hydro Nuclear biomass coal oil gas
Observation #5: Contracts and Spot Markets First Projects: Always Anchored in Longterm contracts What is a contract? Renegotiation clauses, price & quantity Enforcement of contracts Self-enforcing contracts (esp. pipelines) Outside enforcers (World Bank, western firms) A shift to merchant markets? Example of U.S. gas market and LNG 21
Gas and Crude Prices 12 10 Henry Hub Spot Cushing, OK Crude 8 $/MMBtu 6 4 2 0 2/1/89 2/1/91 2/1/93 2/1/95 2/1/97 2/1/99 2/1/01 2/1/03 22
Observation #6: A Peace Dividend from Pipelines? Analogy: European Coal and Steel Community and the Treaty of Rome (1957) Same true for pipelines? Southern Cone example No evidence supports this hypothesis Causal arrows run opposite direction peace and institutions allow gas, not vice-versa 23
Southern Cone: Gas Interconnections Before 1990 Current and Future Venezuela Venezuela Peru Bolivia Brazil Gas pipeline Bolivia-Argentina 1972 Peru Bolivia Brazil Gas pipeline Santa Cruz-Sao Paulo 1999 Bermejo-Rámos 1988 Chile Paraguay Argentina Uruguay Gas pipeline Bolivia-Chile Atacama 1999 Norandino 1999 GasAndes 1997 Gas pipeline del Pacífico 1999 Chile Paraguay Argentina Uruguay Gas pipeline Paisandú 1998 Gas pipeline Bolivia-Paraguay-Brazil Gas pipeline Mercosur Gas pipeline Uruguaiana 2000 de la Vega, 2000 Gas pipeline Methanex 1996
Observation #7: Benefits to Under-served Do large-scale infrastructure projects generate spillover benefits and public goods? Results: as theory would predict State-driven projects assembled through political negotiations: spillovers are key Southern Italy example Market-driven projects: private benefits and scalability dominate decision-making GasAndes example 25
What Next? Refining the results And, new questions E.g., does the resource curse apply to Gas? Three Trials in the World Gas Trade Model Real vs. estimated projects in 90s Making a market: China State-owned enterprises: Russia 26
0.25 The Value of Soviet & Russian Gas Exports: The Difficulty of SOE reform 7 0.20 1980 6 Gas Price (96'US $ / cubm) 0.15 0.10 1975 1986 1989 1990 2001 5 4 1992 25 billion '96US$ 3 2 Gas Price (96'US $ / Mbtu) 30 billion '96US$ 20 billion '96US$ 15 billion '96US$ 0.05 1 10 billion '96US$ 5 billion 0.00 0 20 40 60 80 100 120 140 160 180 200 Former Soviet Union: Exports (billion cubm/year) Note: Prior to 1992 FSU export, excludes movements between FSU countries. Data source: BP(1975-1990), EIA (1992-2001) 0 1 billion '96US$ 27
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FSU: Natural Gas Production, Export, Import and Consumption 800 700 600 500 Billion Cubic Meters 140 120 100 80 60 40 20 FSU: Natural Gas Export Gas Consumption 544 666 553 Billion Cubic Meters 400 300 200 100 0 1960 1980 2000 187 129.3 47 270 371 Import Export Production for internal use 10.4 0 1955 1960 1965 1970 1975 1980 1985 1991 2001-100 -200 29
1970, 3.4 Billion Cubic Meters Poland Austria 1975, 19.3 Billion Cubic Meters Czechoslovakia Poland Austria Italy 1980, 57.6 Billion Cubic Meters Germany Poland Italy 1991, 105.2 Billion Cubic Meters Czechoslovakia Poland Germany Italy Czechoslovakia 2001, 131.06 Billion Cubic Meters France Germany Turkey Austria Bulgaria Hungary Iran Poland France Croatia Czech Republic Italy Netherlands Italy Finland France Others Poland Germany Germany Greece Romania Slovakia Turkey 30
Poland Primary Energy Consumption 350 300 100% 80% Share of Final Consumption Coal Bcm Gas Equiv 250 200 150 100 60% 40% 20% Oil Gas Hydro 0% 1965 1975 1985 1995 Gas Oil Hydro 50 Coal 0 1965 1970 1975 1980 1985 1990 1995 2000 31
Russian Primary Energy Balances 2000 Share of Consumption 1750 1500 100% 80% 60% GAS 40% Bcm Equivalent 1250 1000 750 OIL 20% COAL HYDRO 0% 1985 1990 1995 2000 Gas NUCLEAR 500 250 0 Oil Coal 1985 1990 1995 2000 Hydro Nuclear 32
Italian Gas Supply by Source Bcm 80.0 60.0 40.0 20.0 0.0 1960 1970 1980 1990 2000 Other Algeria Russia Netherlands Libya Domestic Production Source: IEA 33
Italian Primary Energy Consumption 350 Share of total 300 100% 80% OIL 250 60% 40% GAS Bcm 200 150 20% COAL NUCLEAR 0% 1965 1975 1985 1995 HYDRO Gas 100 Oil 50 Nuclear Hydro - 1965 1970 1975 1980 1985 1990 1995 2000 Coal 34
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Japan's Primary Energy Balance 1,000 Share of Total 100% 800 80% 60% Oil Bcm 600 40% Coal 20% Hydro 0% 1965 1975 1985 1995 Nuclear Gas Gas 400 Oil 200 Nuclear Coal - 1965 1970 1975 1980 1985 1990 1995 2000 Hydro 36
Singapore Primary Energy Supply 45 40 120% Share of Total Gas 35 100% 80% Oil Bcm Natural Gas 30 25 20 15 60% 40% 20% Gas 1965 1975 1985 1995 Oil 10 5-1965 1970 1975 1980 1985 1990 1995 2000 37
Indonesia Primary Energy Supply 120 Share of Total 100 100% 80% Oil 60% Bcm Natural Gas 80 60 40 40% Gas 20% Coal Hydro 1965 1975 1985 1995 Gas Oil 20 Hydro - Coal 1965 1970 1975 1980 1985 1990 1995 2000 38
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Long-term Crude and Gas Prices 40