- The Washington Times - Saturday, July 12, 2003

As the Organization of Petroleum Exporting Countries nears its 30th anniversary of world price and supply shock, a new energy gap in natural gas is creating the conditions for a counterpart.

Producers of stranded natural gas (remote from pipeline-connected markets) no doubt will take notice of the Federal Reserve Chairman Alan Greenspan’s view that Liquefied Natural Gas (LNG) is an import option for the energy needs of the United States. LNG is natural gas refrigerated as a liquid and shipped on special tankers to terminals (seaports) where it is converted back to gas and transported by pipelines to industrial consumers (mainly electricity producers). Existing and potential exporters worldwide will not fail to connect a substantial opening of the U.S. market for imported LNG to a future imitation of the OPEC model as the Organization of Gas Exporting Countries (OGEC).

The political geography of a prospective of a price-setting OGEC is almost identical with OPEC. Massive low-cost reserves of natural gas for export (LNG) are concentrated around the Persian Gulf and North Africa. They would be the sources of new supply because most of Asian LNG (mainly Indonesia and Australia) is already committed under long-term contracts.

A U.S. entry into the LNG import market on a large scale would prompt the commercial development of Middle East OPEC gas, regarded as a byproduct of oil extraction without value except as recovery (pressure) enhancement through reinjection into oil reservoirs. As such, vast quantities are available for LNG-revenue streams, which would create Middle East-dominant producers in a future OGEC.

LNG import dependence on the Middle East and North African sources after September 11 unravels strategic oil import policy that has reduced the U.S. share from the region to 10 percent. Although promoted as transitional energy until Alaskan natural gas is available (estimated no earlier than in 2011), such quick-fix solutions often become irreversible in the long-term, especially with the long-term capital investment required in LNG. The scale in LNG is illustrated by China’s agreement last year to purchase LNG from Australia for 25 years for $13.5 billion, with additional costs of a terminal at Guangdong and pipelines to Hong Kong and three tankers at $1.5 billion.

Although LNG costs are declining, American utilities would be entering world competition for supply (a producer advantage so far) that limits the option of trading in spot or futures markets. With high capital, finance and security costs to support terminals and regasification plants, they are likely to select middle or long-term Japanese sales at the very least. If, however, China has set a standard for long-term LNG sales contracts, American electric power plants will be committed to LNG more than a decade after Alaska gas enters the lower 48 network. Pay-back time for LNG infrastructure — special terminals and pipelines — is irrevocable. Accordingly, the import LNG market would compete for investment dollars against Alaskan and new discoveries of natural gas in the Gulf of Mexico and the Rocky Mountains. The LNG import advantage in lead-time consolidates vested interests in LNG among price-setting foreign producers and the environmentalist community.

American imports of LNG in 2001 were slightly more than 5 percent of total natural gas imports (via land pipeline from Canada and Mexico). Some 40 percent of the LNG (6.59 billion cubic meters under contract) was imported from Western Hemispheric sources, namely, Trinidad and Tobago, which is the production center of an Atlantic Basin that also markets LNG in Spain, Puerto Rico and the Dominican Republic. This source is not only competitive against the Middle East and North Africa but also closest to the Eastern United States where all (only four) LNG terminals exist. There are none on the West Coast where the state of California hasprohibited them mainly because of environmentalist opposition. LNG terminals and tankers require special Coast Guard harbor security units for protection against terrorism and safety deficiencies. They impose new threats that will challenge the Department of Homeland Security capabilities and budget.

Atlantic Basin LNG imports do not impose high security costs of the Persian Gulf. There is no comparable Persian Gulf choke point like the Straight of Hormuz, already overrun with oil tankers heading out to sea. Ultimately, when LNG supply diversification follows the oil precedent of developing hemispheric alternatives in South America, the Atlantic basin will be the obvious choice. But should imported LNG win policy support as a response to natural gas supply uncertainty and deflect natural gas exploration on- and off-shore in the United States, Atlantic basin capacity would be challenged by the Middle East and North Africa reserves and lower prices. At that time, it would be too late to measure how much LNG from the Atlantic basin is available against the total policy as an incentive to reconsider its rejection of the terms offered by a Western consortium led by Shell to invest and develop its natural gas, upstream. Imported Saudi Arabian LNG would transform the energy balances of the industrial world and intensify concern over long-term instability and political risk.

Since Mr. Greenspan exposed the certainty of a natural gas shortage before Congress, Exxon-Mobil has announced an LNG contract with Qatar with the intention to build a terminal in Texas. But Qatar is also becoming the most strategic forward deployment of U.S. military force in the Middle East, replacing Saudi Arabia as headquarters for air capability at the Al-Udeid Air Base. This base is astride subsurface geology that adds up to the Qatar’s North Field, the third largest natural gas concentration in the world. LNG from North Field is a major part of Japan’s LNG import dependence (52 percent of total LNG world trade). Qatar is a convergence of Western energy interests and military power in one small place — proof to those disposed to believe in the Osama bin Laden terrorist vision of Western theft of Islamic natural resources.

If the proposed terminal in Texas processes LNG from Qatar, the United States begins to compete with Japan for a stake in Qatar and at the same time expands its existing military support for Japanese LNG supply security to protection of its own imports from the Middle East.

LNG could become another energy policy debate diversion from the potential of Hemispheric natural gas supply expansion. While Washington remains divided over Alaska natural gas production as a national policy imperative, Russia is showing the world how to release and distribute natural gas. Asia-Pacific demand for it is inexhaustible. At the same time, Moscow has united Russia and the EU through natural gas pipelines. It will soon supply Germany over 50 percent and the thermostats in British homes will eventually fire furnaces with Russian gas, not LNG.

While the Alaskan natural gas pipeline (connecting to potential natural gas equal to 50 percent of Saudi Arabian reserves ) awaits a loan guarantee and minor tax advantages to build it, and Rocky Mountain gas resources await permits, and American technology research into ultra-deep, off-shore exploration and recovery has yet to attractgovernment support, Russia is already beginning to design a North Sea gas pipeline that will realize the worst of Mr. Greenspan’s warnings: an EU industrial economy that will be more competitive than the U.S. because of cheaper energy in Russian natural gas.

Daniel I. Fine is a research associate at the Massachusetts Institute of Technology.


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