Natural Gas: Threatening The Future Of Oil?

The following is a presentation by Dr Naji Abi-Aad, Senior Advisor at the Observatoire Mediterraneen de l'Energie, to the 3rd International Conference - Oil, Gas & Petrochemicals in Qatar, held in Doha on 1-3 October 2001:

Although oil continues to dominate the global energy scene, still accounting for around 40 per cent of the world's primary consumption, its position of primacy has been eroded considerably since the early 1970s. One of the principal beneficiaries of the decline in oil dominance has been natural gas which is likely to continue to be the only fuel to gain more points in the global energy market, at least in the foreseeable future. That is helped by the obvious similarities between oil and natural gas as fuels, which suggest a wide range of possibilities for inter-fuel substitution.

The share of natural gas in the world energy demand has grown substantially since the mid-1960s, clearly affecting the market for other sources of primary energy, if not by taking existing markets from them, then certainly by depriving them of much of the potential for further growth.

Between 1980 and 2000, world demand for natural gas annually increased in average by three and half times the percentage growth rate of oil consumption and more than twice that of the total primary energy use. In fact, the demand for natural gas during that period increased by an average annual rate of around 2.7 per cent, compared to some 0.8 per cent for oil, and nearly 1.2 per cent for the world total consumption of primary energy.

In 2000, when world energy demand rose by about 2.1 per cent, natural gas consumption worldwide increased by around 4.8 per cent to a record of 2,164 million tons of oil equivalent (mtoe). Natural gas has now attained its highest ever global share, representing some 24.7 per cent of the world primary energy demand.

Why Natural Gas Has Been So Successful? A wide range of reasons has been behind the success of natural gas in rapidly and increasingly penetrating the global energy market and capturing a growing share from oil and other fuels.

Natural gas has been helped by a fundamental evolution of its transportation economics. It is clear that the obvious disadvantage of gas is the high cost of transporting it, due principally to the high pressure of gas per unit of volume, which requires much more steel in a pipeline or storage tank.

The physical characteristics of natural gas also mean that much more horsepower is needed to transmit by pipeline the same quantity of energy compared with oil. It costs about four times as much to transport gas by overland pipeline as it does to move an equivalent amount (in energy content) of crude oil - submarine pipeline gas transmission costs are higher still by a factor of three to four - and 12 times as much to move gas by carrier (in liquefied form) as to transport oil in tankers. Those issues have been aggravated by the fact that more than 70 per cent of gas reserves and many sources of gas supply are located in areas far from their potential markets, and in regions with hostile environments. The resulting difficulties first led to the development of distinctive regional markets for natural gas (West Europe, North America), and wrote off natural gas discoveries in other parts of the world where if gas happened to be produced with oil, it was either flared or re-injected.

Then came the period of high oil prices of the 1970s and early 1980s, which transformed the whole economics of natural gas. Higher oil prices meant higher burner-tip values for gas, and those higher values meant the extension of economic reach of gas. They justified huge capital investments in transporting natural gas by pipeline to Europe from North Africa and the Former Soviet Union (FSU).

These higher oil prices substantially improved the economics of transporting natural gas in liquefied form, which together with technological advances have made additional markets accessible for gas, especially in South-East Asia, and notably Japan.

The boost to gas due to the development of the liquefied natural gas (LNG) technology and the improvement of its economics can be inferred from the statistics of LNG trade over the past twenty-five years. Already by 1975, LNG was firmly established as a recognisable segment of the international gas industry, with shipments in that year totalling some 10 billion cubic metres (Bcm). By 2000, the total reached around 137 Bcm representing an average annual increase of 9.6 per cent over the 25-year period.

Last year, about 72.5 billion cu m of LNG, or some 53 per cent of the world total, were imported by Japan alone. Without the technological advances in the liquefaction and subsequent transportation of natural gas that occurred over this period, Japan is likely to have consumed only negligible quantities of indigenous gas.

In addition, natural gas was stimulated - and will continue to be stimulated - by a symbiotic effect related to high oil prices. This is the spillover impact upon gas exploration of higher oil prices. As oil-targeted drilling increased, more gas was discovered collaterally.

Gas production benefited significantly when higher prices, through the mid-1980s, catalysed an upsurge in oil drilling. Much gas is still found as the incidental result of oil exploration, even though improved seismic techniques and much advanced digital analytical methods have made the selective identification of gas via-a-vis oil targets more accurate. Nonetheless, more oil drilling led to more gas discoveries.

The use of natural gas has also been boosted by the rapid expansion in the demand for electricity, that in turn creates a growing market for those fuels used to power the electricity generating stations.

For some years now the fuel of choice to satisfy this incremental demand is natural gas, burned in both gas turbines and combined-cycle gas turbines (CCGT). Indeed, the inherent characteristics of natural gas and the relatively high oil prices have enabled gas to make great inroads into the electric power sector in many countries. Where natural gas is easily available at an acceptable price and the infrastructure well established, it has been able to dominate the power market and become oil's fiercest competitor. In this role, natural gas has been helped by the easing in some countries, such as those of the European Union (EU), of the highly restrictive policy on gas combustion for power generation.

Natural gas has also been helped by developments in both gas-turbine and combined-cycle technology, which are making the economics of natural gas use in power generation attractive indeed. In the CCGT, the high net efficiency has recently reached around 60 per cent compared with the typical 33 per cent efficiency of conventional thermal plants.

A related development currently gaining momentum, especially in Western Europe, is the trend towards combined heat and power (CHP) plants: these mostly gas-fired stations, which use waste heat for space heating or further industrial processes, rather than venting it into the atmosphere, can achieve efficiencies between 70 per cent and 90 per cent. Each percentage-point improvement in efficiency results in a significant reduction in unit costs and a concomitant shortening of the capital recovery period, which is very important for capital-intensive projects like power stations.

What is more, CCGT plants have lower capital costs and can be built much more quickly, which helps the generators to keep pace with the rapidly rising demand for electricity and thus avoid power cuts and brown-outs.

Although the direct fuel costs of a gas plant may be relatively higher, the initial capital investment and construction lead-time are both considerably lower; for a private company, whose discount rates are likely to be significantly higher than those used by a public firm, this is enough to swing the balance in favour of gas.

Gas-fired power plants are not only highly efficient, but also pollute less, a boon in an era of heightened concern about atmospheric pollution and environmental issues. The burning of oil and coal is regarded, rightly or wrongly, as the real culprit of climate change and is held responsible for the so-called global warming by rising the level of carbon dioxide in the atmosphere.

Increasing pressures stemming from those concerns have led to the adoption of the Kyoto Protocol, which is aimed at a drastic reduction in oil and coal consumption in favour of "friendlier" sources of energy like natural gas. Indeed, the use of natural gas in CCGT plants, compared with conventional oil- or coal-fired units, results in a halving of carbon dioxide emissions, a cut in nitrogen oxide emissions by two-thirds and the virtual elimination of sulphur dioxide and particulate emissions.

This environmental aspect ought to work in favour of natural gas, not only in the power industry but in many other energy-using economic sectors, helping this energy source to be clearly positioned as the cleanest of fossil fuels, ideally coping with increasing environmental pressures.

The success of natural gas owes a lot not just to the pull of consumer demand, high oil prices, technology and environmental concerns, but also to the push of policy, with many gas producers making great efforts to expand the export of their most abundant resources. The assiduous promotion of ever, greater exports of natural gas is exemplified by Russia, Algeria and Qatar, which have huge gas reserves and somewhat fewer oil resources.

The opening of those countries' gas reserves for foreign investors is to ensure the continued growth of their gas industries.

The proved reserves of natural gas in the Russian Federation - estimated at the end of 2000 at 48,140 Bcm - are equivalent to nearly 303 billion barrels of oil, which are six times larger than its reserves of oil. Algeria's reserves of natural gas, at 4,520 Bcm, are equivalent to around 28.8 billion barrels of oil, more than three times its proved oil reserves of 9.2 billion barrels.

Qatar's gas reserves mostly in the giant North Dome - the world's largest single gas field - are believed to exceed 11,000 Bcm, i.e. the equivalent of some 70 billion barrels of oil. This vast quantity of gas is five times that of Qatar's own reserves of crude oil, and that of the UK's and Norway's combined end-2000 oil reserves.

With such large gas reserves, it is not surprising to find that gas exports have been extremely important for those three countries. Indeed, the gas exports of Russia (nearly 2.26 million barrels of oil equivalent per day - mboepd in 2000) are more than half its 4 million barrels per day (mbpd) of oil exports, while Algeria's exports of natural gas (at around 1.07 mboepd in 2000) are almost 240 per cent larger than its oil exports (about 0.45 mbpd in the same year).

Gas exports of Qatar, the new comer into the international gas arena, already represent around 28 per cent of its total petroleum exports (some 0.9 mboepd in 2000).

Those three gas giants are pushing hard to expand their market share. Whereas Qatar has been aggressively promoting its gas mainly in South-East Asia, the Indian sub-continent and the regional markets (Gulf, Eastern Mediterranean), Russia and Algeria have been concentrating especially on Western Europe. Russia's Gazprom has created a host of downstream affiliates jointly with national gas companies in its target markets, while Algeria's Sonatrach recently announced integrated gas exploration, production and marketing agreements with several gas firms there.

While those countries are trying to foster ever-greater gas exports, other gas producing states are actively pursuing the enhanced use of indigenous gas, either to release more oil for export or to reduce the prospective need for oil imports. This is exemplified in the Middle East by Egypt, Syria and Saudi Arabia.

The other policy-oriented issue with positive influence on natural gas demand is the reawakened anxiety among the governments of the main energy consuming countries about their dependence on oil from the Middle East and the need to diversify the sources of imported energy.

Several conflicts in the region have periodically served to remind the major consuming nations of the relative instability of the Middle East on which they depend for the bulk of their oil imports, and have strengthened their resolve to reduce their dependence on the area's crude oil.

Although the Middle East also accounts for a large proportion of the world's natural gas reserves (around 35 per cent at the end of 2000), its position is far less dominant in gas than it is in crude oil (Middle East oil reserves accounted for more than 65 per cent of the world total at the end of the same year). This allows a greater possibility of supply diversification over the years, which, together with the provision of adequate storage facilities in the consuming countries, ought to help buy greater security of energy supplies.

Recently, a major evolution in the US regulatory controls that has heightened competition in all comers of the gas industry has been also helping natural gas. In 1993-94, open-access pipeline policies were fully implemented there, creating a full gas-to-gas competition, resulting in sharp price reductions and subsequent demand growth.

This unbundling of gas supply companies and the consequent decline of gas prices in the US have so far been enforced in Europe only in England. But, likewise, when the European Commission will establish an open access to gas supplies in the EU as part of its planned and adopted internal energy market policy, this would result in lower end-user gas prices, which would have a major effect in spurring on growth in European gas consumption.

Will the Success of Natural Gas Continue in the Future? The future of natural gas, this clean, efficient and environmentally-friendly fossil fuel, mostly depends on the trends that lie ahead for certain factors, i.e. expansion in established demanding sectors, inroads in new consuming domains, level of oil prices, and technological developments, especially in the area of gas transportation.

What are the expansion prospects of gas demand and those of its incursion in new sectors?

The use of natural gas has been confined almost exclusively to the boiler-fuel sector where there are no such barriers to the expansion of its use. While the prospects are certainly bright for a much higher use of natural gas in power generation in the industrialised countries, they are likely to be even brighter in regions where rapidly growing demand for electricity requires new power plants to be built - and quickly. This will probably be the case in the emerging economies of Asia-Pacific, Latin America and many other regions of the world.

In the residential sector of most industrialised countries, penetration of natural gas may almost have reached saturation point in terms of its traditional role as fuel for space heating and cooking. There, the market for oil is restricted either to areas that are too remote from existing natural gas infrastructure for it to be economical for fuel substitution to take place, or to countries without a gas grid.