Wednesday, July 7, 2010

Natural Gas: Alternative to Oil

While hydrogen-powered automobiles may still be in the future, there is a cheap, clean alternative to oil: natural gas. Often a by-product of oil production, natural gas was considered a waste material that was burned off at the well head.

Use of natural gas has doubled from 1973 (671 Metric Tons of Oil Equilvalent) to 2007 (1296 MTOE). Energy consumption has increased at such a rate, however, that this represents only a minor increase in the OECD percentage of fuel consumed. In 1973, Gas was 14.4% of the 4675 MTOE; by 2007 that share had only increased to 15.6% of the 8286 MTOE (International Energy Agency, Key World Energy Statistics 2009).

Natural gas has a major drawback: it is difficult to transport to the end user. Experts in the field such as Adam E. Sieminski (Siminski, World Energy Futures, in Kalicki and Goldwyn, eds., Energy and Security; Baltimore: Johns Hopkins Press, 2005, 40-43) and Daniel Yergin (Yergin, Energy Security and Markets, in Kalicki and Goldwyn, ibid, 58-60) describe the growth of liquified natural gas (LNG) as the solution to the transportation problem. But LNG has its own drawbacks: the equipment to cool natural gas to minus 240 degrees, keep it at that temperature during transit, and then reconverting the liquid to its natural form are all expensive. It is also dangerous: Sempra Energy wanted an LNG terminal to service Southern California, but residents' fears of LNG storage tank explosions forced Sempra to build in Mexico.

Trade in LNG is certainly increasing, but until these problems are resolved the major way of moving natural gas is via pipeline. Construction of these delivery networks are expensive and represent a fixed capital investment for the pipeline owners. There is therefore little competition in the natural gas market, as it is too expensive to build multiple pipelines to deliver product to the same location. This means that whoever controls the pipeline controls both the producer output and the consumer price.

Russia, through the semi-autonomous pipeline owner Gazprom, has used this situation to develop a monopoly over natural gas delivery from the former Soviet Union. In 2008, Russia produced 20.9% of the world's supply of natural gas, consumed natural gas domestically, but still exported 23.4% of the supply. (IEA, World Energy Statistics, 2009). Whether the gas originates in Kazakhstan, Azerbaijan, or Turkmenistan the only way to get the gas to the European market is through the Gazprom-controlled pipelines. Vladimir Putin, former Russian president and current Russian premier, has commented on this situation by noting that control of Gazprom is a matter of state policy. Pipeline projects to break the Russian monopoly represent, therefore, a direct threat to Russian economic interests.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at