The natural-gas explosion

Feb 28th 2005
From The Economist Global Agenda

A giant contract between Shell and the Gulf state of Qatar to supply liquefied natural gas to America and Europe is the latest in a series of deals that should lead to gas providing a far larger share of the world’s energy needs. Since the world’s gas reserves are more widely spread than is its oil, the growth in facilities for handling LNG should also mean greater energy security

IN 1959, the Methane Pioneer, a converted second world war ship, set out from Lake Charles in Louisiana, bound for Canvey Island, site of an unlovely oil terminal east of London. On board was a cargo of liquefied natural gas (LNG). The pioneering transatlantic voyage proved that gas in this state could be transported safely from producer to consumer and from remote areas where reserves are large to the places where there is a market for natural gas. Over the intervening years, there has been much talk of LNG being a “fuel of the future” but the amount of gas transported by this means (as opposed to being sent by pipeline) has remained fairly modest, due to the expense of liquefying, transporting and regasifying it.

In the past few years, however, with oil prices rising sharply and energy consumers becoming ever more anxious to diversify their sources, there has been a surge of interest in LNG. On Sunday February 27th, Royal Dutch/Shell signed a deal with Qatar’s state-owned gas company for a 30% stake in a $7 billion project, in which 7.5m tonnes a year of LNG will be produced for the American and European markets, starting in 2010. The Anglo-Dutch firm is just the latest in a succession of oil companies that have committed themselves to LNG projects. The same day, work began on the construction of another huge LNG project, also in Qatar. This one, 30% owned by America’s ExxonMobil, is expected to produce 15.6m tonnes a year of LNG when the $12.8 billion project is completed in 2007. France’s Total, not to be left out of the boom, announced on Monday that it was also buying a stake in this venture.

Besides the high cost of oil and the desire to seek new fuel sources to improve energy security, another important factor supporting the growing demand for gas has been the pressure on electricity generators to seek cleaner and less carbon-intensive inputs for their power stations.

The recent coming into force of the Kyoto protocol, aimed at reducing greenhouse-gas emissions, only adds to this pressure. Since the early 1970s, natural-gas production has increased by more than 120%. In 2002, gas accounted for 21.2% of the world’s total energy supplies, a five-percentage-point increase since 1973, according to the International Energy Agency. Projections from America’s Energy Information Administration (EIA) suggest that it is set to become an even more important component of world energy supplies. By 2025, world consumption of gas could top 151 trillion cubic feet, 25% of the world’s total energy consumption.

Currently some 95% of the gas the world consumes is delivered by pipeline. But some consuming countries, such as America, are fast depleting those gas reserves that can easily be reached by pipe. Big, new gas fields are being discovered all the time—but are often separated from the big consuming countries by oceans, or by highly unstable regions. LNG is the answer to this, providing it can be made cost-effective. At present, only 1% of the gas America uses arrives in the form of LNG. The EIA cautiously estimates that this could rise to about 3% by 2020. Others in the industry are far more optimistic, saying LNG could account for as much as 20% of American gas consumption within 20 years.

Liquefying natural gas, by cooling it to –161ºC, reduces its volume by 600-fold. It can then be transported by sea in specially built tankers (see picture) and reconverted to gas at the point where it enters an importer’s pipeline system. This is a costly investment, but then so is laying a pipeline. According to America’s Gas Technology Institute, liquefying gas, shipping and then regasifying it is cheaper than sending it by undersea pipeline over distances of more than 700 miles, or 2,200 miles in the case of overland pipelines. What is changing the economics of LNG now is that soaring demand is spurring innovations that are bringing down the cost of liquefaction plants, tankers and regasification plants. One expert reckons that these costs have tumbled by a quarter over the past decade. Further savings will make LNG ever more attractive despite the large up-front costs that have so far deterred all but the biggest oil companies.

Qatar’s government is pushing to become the world’s predominant LNG supplier by giving foreign investors a friendly welcome. The small Gulf emirate has the world’s third-largest reserves of natural gas and the world's largest single gas field. Russia and Iran do have bigger reserves overall. But Russia’s treatment of Yukos, one of its own private oil companies, and indeed its recently announced restrictions on foreign participation in tenders to extract mineral resources, are unlikely to encourage investment in LNG. Iran’s constitution bars foreigners from any ownership within the oil sector, ruling out the kinds of production-sharing agreements under which foreign companies usually develop oil resources. By contrast, Trinidad & Tobago, in the Caribbean, is busy developing its LNG potential while nearby Venezuela’s volatile politics have hampered investment there.

Political unrest and suspicion of foreign investment are likely to continue holding back some countries’ development of their potential as LNG producers. But, fortunately, the world’s gas reserves are more widely dispersed than its oil. So as demand for LNG grows and the big oil firms go looking for new sources, they may find it easier to avoid those countries that are unstable and unwelcoming to foreign investment, and seek instead places like Qatar, which has reduced bureaucratic barriers and given the multinationals a warm welcome.

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