Summary
Dinakar Sethuraman and Angela Macdonald-Smith (Bloomberg) reported in the International Herald Tribune on March 11 that Russia forced Exxon Mobil to give up plans to export Sakhalin-1 gas to China. Indonesia will cut exports to Japan and Nigeria requires explorers to share natural gas with citizens. Nations with almost half the world’s natural gas resources are reducing exports to supply growing domestic demand. Chris Jarvis, president of Caprock Risk Management expects a 50% rise in prices within five years. These policies will limit opportunity for major oil companies and raise prices. Consumption of natural gas is increasing at three times the rate of crude oil. BP statistics reveal that the known gas reserves will last 63 years while oil resources have only a 41-year life. Demand for liquefied natural gas (LNG) is increasing at 10%/year. Natural gas costs 18% less than crude oil on a thermal energy basis. By 2011, the natural gas market will be tight.
Analysis
The international oil companies began to realize the strength of the natural gas market about the year 1995. The increasing proportion of annual Capital and Exploratory budgets dedicated to natural gas development reflected this. Major internationals were quick to lock in long term supply agreements with Indonesia, Qatar and Trinidad, among other gas rich nations. Around the year 2000, the Oil & Gas Journal, in an editorial, contemplated changing the title of the trade magazine to Gas & Oil Journal. In the event, sentiment prevailed and the traditional title was retained. But the magazine has never lost sight of the trend and follows developments in both the natural gas and LNG markets to the same degree that it follows crude oil events. As regards future natural gas prices, can it be true that they will rise as fast or faster than crude oil prices? Not only true but also probably vastly underestimated. Vladimir Putin was among the first of the world leaders to realize that to control energy was to control commerce and by extension, to control the destiny of much of the world’s population. Operating in a political vacuum as a result of U.S preoccupation with Iraq and internal bickering among European Union functionaries about energy policy, Putin has built Gazprom into an energy giant. Its goal is to control all natural gas resources in Europe and Asia thus dominating prices from the North Atlantic to the South China Seas. The Russians, seeing their own gas reserves dwindle are acutely aware of how fast European reserves are also falling. This is why they have brought under Gazprom’s sway the resources of Eastern Europe, the Caucasus and the Middle East. Putin has left nothing to chance. Where will all of this lead? At a minimum, increased tension between Russia and the West. The eternal Guerre du Petrole will soon eclipse today’s turmoil in the Middle East. Israel will become a backwater on the global stage. To cover all of the bases, Putin has lured many of the major internationals into oil and gas development in Russia. Basically he agrees to share hydrocarbon profit with the Western companies that bring new technology to old depleting Russian oil fields. Siberia is rich in natural gas, as is the Arctic. These same Western oil and gas firms will bring state of the science high technology to the natural gas side of the market. It may appear that All is Quiet on the Western Energy Front. The truth is otherwise.
