As with many other products and commodities participating in a globalized supply chain, the three dominant market places are located in North America, Europe and Asia. This is no different for natural gas. While each region shares similarly a reliance on energy to support the tenets of the modern high-standard of living, all three are highly divergent in terms of demographic, culture, and history; and differ widely in policies concerning finance, monetary regulation, and of course, energy. These qualities and more have shaped generations of market development in terms of policy and practice, and in examining the results of those developments, or today’s key differences between the natural gas markets in Asia, Europe, and North America, differentiations will be made based on the following three criteria: market maturity, the sources of supply, and the dependence on imports. (McRae and Ruppel, 2011)
Asia – Market Maturity
Asia is the least developed natural gas market but shows the greatest growth potential. China in particular is rapidly modernizing; what was once a largely agrarian country is becoming a collection of burgeoning city-centers with growing energy needs–proof can be found in any of over 100 cities with a population over one million (Perkowski, 2012). In addition, Chinese government has recently unveiled a policy whereby natural gas is prioritized for the transportation sector in an effort to displace diesel and reign in emissions. (Aishu and Hua, 2012) This suggests China, currently the eighth largest consumer of natural gas, may ascend that list to the top three—situating itself among Russia and the US. Despite China’s position to increase gas consumption, significant barriers exist to natural gas market maturity. Structural and regulatory issues concerning natural gas—including pricing–are addressed ad hoc. (Huang, 2012 p.3058)
Although industrialized Asia largely sets worldwide LNG prices (which are tied to oil-indexed long term contracts), the prices are not binding. China has pursued non-market concessions with India through bilateral agreements (McRae and Ruppel, 2011), and bypassed bidding processes with countries like Angola and Nigeria, who sign agreements without human rights or financial transparency requirements normally required by Western investors. (Mitchell, 2012) Absent any semblance of sound legal framework (let alone continuity of pricing practice), such actions show great unpredictability in China’s trading habits which reduce confidence of potential investors aspiring to enter China’s natural gas industry. These add up to significant barriers to natural gas market maturity.
Asia – Sources of Supply
Asian geography promotes trade by sea and larger economies have logically invested heavily in LNG—more than two-thirds of global LNG is traded in the Asia Pacific region (Mitchell, 2012) where flexibility exists to receive gas shipments from a variety sources. Australia (LNG) and Central Asia (pipeline) have traditionally supplied gas to China, but should global market conditions shift, China is easily able to accept shipments from Canada and the United States, and high-CAPEX projects like the Kitimat LNG terminal in British Colombia are indications that North America may grow in relevance to China’s gas supply chain.
Asia – Dependence on Imports
With limited local conventional gas, industrialized Asia is highly dependent on imported LNG from South East Asia, Australia and the Middle East. (McRae and Ruppel, 2011) However, recent assessments peg China’s recoverable tight-gas reserves at over 1,200TCF. Due to uniquely challenging reservoir lithology, (Faulkner, 2012) China will require assistance from Independent producers as their E&P technology lags by world standard. (Faulkner, 2012) Even with Shell allocating USD1B per year to Chinese shale gas exploration (Hamilton, 2012), it may take a decade until Chinese shale gas flows to market. Therefore, it’s reasonable to expect Asia will continue importing roughly 40% of its gas (roughly half is from in-region) and may become increasingly dependent on supplies from Central Asia (Kazakhstan), the Middle East and Western Africa. (Mitchell, 2012)
Europe – Market Maturity
Europe contains a well-developed natural gas market which is considered open, although the lack of a uniform natural gas financial and legal framework for European Union (EU) nations is an encumbrance to efficient market operation. The complicated patchwork of cross-border pipelines must also comply with multiple and dissimilar legal and regulatory regimes which add complication to construction and operations. (McRae and Ruppel, 2011) The European market relies heavily on long term contracts with price terms based on a mix of competing fuels, and pipeline access is restricted. This policy was crafted by way of reaction to the 1973 Arab Oil Embargo; it’s inherently inapplicable to today’s market and serves as a hindrance to full development of the European spot market. (McRae and Ruppel, 2011)
Europe – Sources of Supply
Europe is at considerable disadvantage in terms of security of natural gas supply—there is access to Russian and Central Asian natural gas, but only through Russian pipeline systems monopolized by Gazprom and Transneft, meaning shipments are highly subject to disruption resulting from infighting between Russia and transit-nation Ukraine. (Mitchell, 2012) While France has been determined to contain a remarkable 180TCF of shale gas, Europe may never see the benefit as France has invested in nuclear to eliminate the need for hydrocarbon exploration, and holds a moratorium on same. Poland is the other European country with significant shale gas; they intend to monetize their resources expeditiously. (McRae and Ruppel, 2011)
Europe – Dependence on Imports
While dependency rates between EU nations varies, the EU imported 54.1% of its gross energy consumption in 2010 (European Commission, 2012), indicating great dependence on seller nations (primarily Russia, Nigeria, Algeria, Qatar and Norway). The EU receives almost 50% of its gas by pipeline, and LNG continues to support the Iberian Peninsula. Diversification of supply is a high priority. (McRae and Ruppel, 2011) One major step to liberalizing markets would be to establish pricing mechanisms not tied to oil.
While potential exists for shale gas development to reduce European imports, stringent EU environmental regulations ensure Europe’s dependence on imports for years ahead. Lengthy disruptions are unlikely as Russia and Algeria have failed to reinvest hydrocarbon revenues for economic growth; they remain highly dependent on steady cash inflows to remain solvent. If a lengthy disruption did happen, Europe generally has powerful North American allies who may use diplomacy, sanctions or hostility to mitigate damage. In the event of conflict, North American surplus LNG export capacity may bolster gas shortfalls in Europe.
North America – Market Maturity
The United States and Canada enjoy the most developed and un-restricted natural gas market in the world. Natural gas infrastructure is highly developed and is the mechanism by which the US was able to consume 22% of the world’s natural gas in 2009. (Mitchell, 2012) Natural gas is produced by private companies with open access to the pipeline network and sold at prices set by the New York Mercantile Exchange (NYMEX) based on principles of supply and demand. Gas in North America trades at the greatest degree of independence to oil compared to other regions, indicating an exceptionally mature natural gas market.
North America – Sources of Supply
By way of the North American Free Trade Agreement, the US receives natural gas supply by pipeline from Canada and Mexico, and LNG shipments from Trinidad. Canada receives shipments of American gas to eastern markets via pipeline. Importation of Canadian hydrocarbons may increase if authorization is granted to build the Keystone XL pipeline from Canada to the Gulf Coast.
North America – Dependence on Imports
North America possesses the reserves and technology to theoretically discontinue natural gas imports. Whether this makes political sense is debatable—doing so would financially impair many supply nations with whom North American countries participate in a variety of global affairs. Canada and the US are particularly well situated to conduct natural gas arbitrage. Environmental concerns have slowed the development of the Keystone XL pipeline. Left unresolved, natural gas may be reallocated for export to Asia.
In the West (US and EU), increased market share for NG will be an adjustment to an already well-functioning energy supply chain. In China, development of a natural gas market will be part of a paradigm shift–acknowledgement that Chinese people are earning and spending more, and expect higher standards of living. While the West currently enjoys relatively convenient pricing on natural gas, China will boost Asia’s competitiveness with Europe for supplies from Russia, West Africa, Iraq and Central Asia. This will cause an eastward shift of the global gas supply chain, (Mitchell, 2012) and may shine a brighter light of scrutiny on Asia’s standards of conduct that might not be in line with a Western sense of decency.
The results of such confrontation on natural gas markets are impossible to predict. One thing we can be sure of is that natural gas as a commodity is more than just a tool by which we power our machines or heat our homes. Natural gas is a gift to the world that if used correctly, can drastically improve the human experience for a great many people. Whether buyer and seller nations can be pragmatic about international trade agreements, use the proceeds to grow internal economies, and establish transparency in the marketplace are the metrics by which we will know if this resource is being put to good use or merely squandered.
1) Mitchell, J. (Nov 2010) “More for Asia: Rebalancing World Oil and Gas” Chatham House 2) McRae, G. and Ruppel, C. (Jun 2011) “The Future of Natural Gas, An Interdisciplinary MIT Study” Massachusetts Institute of Technology. Available at: http://mitei.mit.edu/publications/reports-studies/future-natural-gas 3) Perkowski, J. (May 2012) “China’sBest kept Secrets: Mianyang and Other Tier 3 Cities” Forbes Magazine. [Online] Available at: http://www.forbes.com/sites/jackperkowski/2012/05/11/chinas-best-kept-secrets-mianyang-and-other-tier-3-cities/ 4) Huang, L. (May 2012) “Development in China’s Natural Gas Industry Regulation” Advanced Materials Research. [Online] Volume 527-527 pp 3058-3061. Available at: http://www.scientific.net/AMR.524-527.3058 5) Faulkner, C. (Sep 2012) “China’s Natural Gas Potential” Business Excellence [Online] 26 September. Available from: http://www.bus-ex.com/article/china%E2%80%99s-natural-gas-potential 6) Aishu, C. and Hua, J. [Ed. Fernandez, C.] (Oct 2012) “China Prioritizes Use of Natural Gas By Vehicles, Ships” Reuters [Online] 31 October. Available from: http://www.reuters.com/article/2012/10/31/china-gas-policy-idUSL3E8LV5DN20121031 7) Hamilton, G. (Aug 2012) “Shell Canada to go ahead with Kitimat LNG projects despite billion-dollar Chinese gas investment” [Online] 21 August. Available from: http://www.vancouversun.com/business/resources/Shell+Canada+ahead+with+Kitimat+projects+despite/7124608/story.html 8) Main Origin of Primary Energy Imports, EU-27, 2002-2010.[Online] European Commission Eurostat. Available from: http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Energy_production_and_imports