The Geopolitics of Natural Gas

by George Hatjoullis

According to the Financial Times Lex column (http://on.ft.com/1qqcLky), US liquified natural gas export facilities awaiting approval could manage 30 billion cubic feet of gas per day. Of those already approved, the first will not be completed until 2015. The US has enjoyed a large boost to natural gas production from hydraulic fracking and other advanced production technologies. The Lex column quotes an estimate of total US production of 80 billion cubic feet per day by 2020, so the warranted exports are almost 40% of near term production potential. This is a lot of gas.

The problem highlighted by the Lex column is the uncertainty of future gas prices. The LNG export facilities are expensive to build and the long lead times in construction inject a high level of uncertainty. The US is not the only LNG producer expanding production and some other producers, notably Russia, Norway and Australia may have some location advantages. The Ukraine crisis injects another variable into the export equation in the form of politics. One can see that Europe might not want to be limited to dependence on Russian supplies. This might allow the US to negotiate supply contracts at premium prices irrespective of global supply. This would certainly be welcomed by the export facility investors.

It is ironic that, whilst all states profess concern at climate change and apparently accept that it is man-made, this has not dimmed the desire to expand production of LNG. Indeed, many governments are accepting political flack on the controversial ‘fracking’ production technology to facilitate this desire. Petroleum has always had a geopolitical dimension and now we see gas add another argument. One is left wondering whether hydrocarbons are merely a weapon in geopolitics or whether they also provide the motivation. One might have hoped that the silver lining in the ‘fracking’ cloud is that it is distributing hydrocarbon resources more widely as well as increasing the supply. A wider distribution, one might have hoped, would make access less of a potent weapon in geopolitics. However, if excess supply is going to motivate a struggle for markets then the silver lining is lost.

The promise of new energy technologies is of abundant, safe and cheap energy for all. This would remove the most potent motive for conflict on the planet. No doubt out belligerent species will find some other reason for mass self-destruction but one can hope. The climate change threat provides an excellent motive for an accelerated drive towards new energy technologies and the relegation of the hydrocarbon. However, short-term economic interests seem to be slowing the process down and governments, whilst paying lip service to the dangers of CO2 emissions, are actively promoting hydrocarbon interests. It is a dangerous game on many levels.

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