Natural gas demand growth is a worldwide economic problem for producers

Implications: Justin Dargin of Harvard University reported in the June 23 issue of the Oil & Gas Journal that Iranian residents in the north of the country experienced difficulty in the freezing temperatures when Turkmenistan stopped delivery of natural gas. Forty million people were affected. Pipeline problems were cited. Insiders say the real reason was late payments. Turkmenistan wants to raise prices to $150/million btus. Iran’s president Ahmedinejad thinks that a conspiracy is at the root of the problem. How can it be that the nation with the world’s second largest gas reserve finds itself in this situation? One reason is that natural gas prices for citizens are subsidized at $0.35/million btus. This causes problems for NIGC in financing new natural gas projects. South Pars is especially affected. All Persian Gulf countries now experience shortages and this is why nuclear energy is becoming an option throughout the region. These shortages of gas affect EU plans to diversify energy supplies.

Analysis:  It is becoming clear that production of natural gas must be accelerated to compensate for crude oil supplies. Not only is it necessary to drill more wells, but equally important is pipeline construction and the building of liquefied natural gas (LNG) Tankers. Everything must be financed at the same time. National subsidies create additional problems inasmuch as the development programs in many instances cannot be made to pay for themselves. If Iran had the money for rapid development of the South Pars natural gas/gas condensate reservoir, and if the nuclear plants come on line as scheduled, it would not be necessary to import Turkmenistan gas. The nuclear program can only continue with Russian financial assistance which they are happy to do. In return, Gazprom will get first call on surplus Iranian gas (if any) which it will sell in Europe. Ten years ago, no one in Europe was particularly concerned about Middle Eastern natural gas. Five years ago, Europeans first became concerned about future supplies and three years ago concerns emerged about the reliability of Gazprom. Today, Europeans are deeply worried about supplies, steadily rising prices and future uncertainties. The shortages in the Middle East are expected to become chronic and soon local demand can possibly impact natural gas prices in the U.S. The nation expects large volumes of LNG from Qatar by 2011. But prices of LNG are being bid up by Asian demand. Even today in the U.S., natural gas prices of over $13/million btus are much higher than anyone expected a year ago, pulled up by crude oil prices. By 2011, U.S. natural gas and LNG prices will probably reflect international demand which could drive prices even higher than they are today.