New in Foreign Affairs: Keeping the Lights on - Daniel Yergin on a New Global Energy Business Emerging in Liquefied Natural Gas

October 15, 2003—A new global energy business—natural gas—is emerging to help keep “the world’s lights on.” This is the result of a looming shortage of natural gas in North America that has doubled prices, and is forcing the United States to turn to the world market, according to “The Next Prize,” an article in the November/December issue of Foreign Affairs by Cambridge Energy Research Associates (CERA) chairman Daniel Yergin and CERA global liquefied natural gas (LNG) director Michael Stoppard.

“Lights, air conditioning, and factories in the United States will run on electricity that is sometimes generated with natural gas from Indonesia, the Algerian desert, the seas of Trinidad or Nigeria, the island of Sakhalin in the easternmost part of Russia, the frigid waters or Norway, or the foothills of the Andes,” they write.

The gas will come in the form of liquefied natural gas that has been refrigerated to minus 260 degrees Fahrenheit and shipped in tankers. This development is not predetermined, however, as a variety of financial, economic, geopolitical, and environmental concerns could “capsize” LNG’s development.

Writing on the 30th anniversary of the 1973 oil embargo, the authors observe that the emergence “of this new global gas business” is reminiscent of “the transformational years of the late 1960s and early 1970s, when the United States became integrated into the world oil market [and] went from being a minor petroleum importer to a major one”—helping to set the scene for the global energy and economic crises of the 1970s.

Although the natural gas business is huge—worth more than half a trillion dollars per year—it has historically been a local, national or continental business, limited by the reach of pipelines and the absence of a global marketplace. But this picture is changing because LNG will allow the world’s plentiful but long underdeveloped and “stranded” gas reserves to be efficiently carried to consumers.

“Much is now expected of LNG,” say Yergin and Stoppard. “But developing its full potential could cost as much as $200 billion worldwide, and energy companies will have to choose between investments in LNG and other investments.”

“The need for a global LNG market is growing urgent,” they write. Since the second half of the 1990s, natural gas prices have doubled in North America, “placing a new burden on the economy and portending a shortage.”

Yergin and Stoppard identify the key reasons for the tightening of the North American natural gas market: the U.S. reserve base is maturing, and possible growth areas for production are closed off because of environmental objections. At the same time, demand is growing, spiked by the enormous development over the last few years of electric power generation based on natural gas as “the fuel of choice.” Over 90 percent of the 200,000 megawatts of new capacity depends on natural gas as its fuel. LNG, along with gas from Alaska, will have to fill the gap. Yergin and Stoppard predict that LNG, which supplied only 1 percent of U.S. gas needs last year, could serve as much as 20 percent of demand by the end of the next decade.

The United States needs to embrace the developing global LNG market in order to complete the transformation, and to meet U.S. energy and economic needs. In addition, company strategies and government policies need to move forward together to make this happen.

Which other factors could capsize LNG’s development? There are several, according to the authors:

• Low and volatile gas prices, even if they are only temporary, could discourage investors and stifle growth.
• A lack of confidence in the developing market could prevent companies from committing the necessary capital and human resources.
• State-controlled companies will have to resolve conflicts that are likely to arise between LNG’s commercial attractiveness and other political and social imperatives.
• “Imposing price controls and restricting gas consumption…might stop development altogether,” they warn.
• LNG exporting countries may form a gas association akin to oil’s OPEC—an OGEC. “But there will be limits to how far they can go…They will likely be cautious about taking actions that could disrupt the critical flow of revenues back into their national treasuries,” say the authors.
• Banks and other lenders will need to have confidence in LNG projects’ financial soundness.
• All market participants will need the ability to weather the ups and downs of a commodities market.

“A variety of risks will come from the increased interdependence, but in a growing, diversified global natural gas market, they can be managed,” says Yergin. “And they are dwarfed by a much greater risk: that the U.S. and Europe could face a persistent natural gas shortfall.”

The authors dub natural gas “the next prize”—a reference to Dr. Yergin’s Pulitzer Prize-winning book The Prize: The Epic Quest for Oil, Money & Power.

“The natural gas business is on the brink of profound change,” says Stoppard. “It is set to become global and to adopt a more flexible market model.” Timely development is key for the United States.

Federal Reserve Chairman Alan Greenspan warned recently that dwindling domestic supplies were “a very serious problem” and a major threat to the U.S. economy and spoke forcefully on the need to develop LNG supplies.

Several questions will have to be answered before LNG’s future is sealed:

• Will the complex network of technology and investment be established in time, given uncertainties about markets, regulation, and government policies?
• Will geopolitical risks constrain—or disrupt—development?
• Can natural gas live up to the need, and the high expectations, that the world now has for it?

The answers will determine whether natural gas will fulfill its potential to become “the next prize.”

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Lisa Shields, Council on Foreign Relations: +1-212-434-9888 or [email protected]

Anne Rhodes/Tom Sommers, Cambridge Energy Resource Associates: +1-713-222-1600