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THE GEOPOLITICS OF NATURAL GAS

A joint study by the James A. Baker III Institute for Public Policy's Energy Forum and Harvard University’s Kennedy School.

Some of the most dramatic energy developments of recent years have been in the realm of natural gas. Huge quantities of unconventional U.S. shale gas are now commercially viable, changing the strategic picture for the United States by making it self-sufficient in natural gas for the foreseeable future. This development alone has reverberated throughout the globe, causing shifts in patterns of trade and leading other countries in Europe and Asia to explore their own shale gas potential. Such developments are putting pressure on longstanding arrangements, such as oil-linked gas contracts and the separate nature of North American, European, and Asian gas markets, and may lead to strategic shifts, such as the weakening of Russia’s dominance in the European gas market.

Against this backdrop, Rice University’s James A. Baker III Institute Energy Forum and Harvard’s Geopolitics of Energy Project have launched a two-year study on the geopolitical implications of natural gas. The project is bringing together experts from academia and industry to explore the potential for new quantities of conventional and unconventional natural gas reaching global markets in the years ahead. The effort draws on more than fifteen country experts of producer and consumer countries who will assess the prospects for gas consumption and production in the country in question, based on anticipated political, economic, and policy trends. Building on these case studies, the project will formulate different scenarios and use the Rice World Gas Trade Model to assess the cumulative impact of country-specific changes on the global gas market and geopolitics more broadly.

While not disregarding the importance of economics and geology in determining the future of natural gas, this study pays particular heed to the geopolitical dimensions of natural gas. It appreciates that the interplay between international politics, security, and energy is multi-directional and therefore seeks to:

  1. Identify the political, economic, geopolitical trends and realities that could frustrate or facilitate increases in global gas consumption and production in the decades ahead.
  2. Anticipate the impact of these geopolitical realities, their implications for domestic or global gas consumption and production, and how they will affect global gas markets.
  3. Assess how these changes in the global gas market will then, in turn, affect the geopolitical situation.

The study is structured in two parts. In the first stage, case studies will be prepared by experts on the 18 countries/regions most likely to affect gas developments at a global level – by driving either consumption or production patterns. These experts will produce chapters explaining the current political and energy situation and identifying the main drivers of political change and their implications for future energy developments. Case studies will assess to what extent these energy developments will be shaped by the degree of political stability, projected economic growth, government policy, decision-making structures, the investment climate, international obligations, geography, and regional relations.

The Geopolitics of Natural Gas study includes the following case studies:

  • Algeria – Dr. Azzedine Layachi, Professor of International and Middle East Affairs, Department of Government & Politics, St. John's University
  • Argentina - Dr. David Mares, Director, Center for Iberian and Latin American Studies Professor, Political Science, University of California, San Diego, and Baker Institute Scholar for Latin American Energy Studies, Rice University
  • Australia – Dr. Ronald Ripple, Director of the Centre for Research in Energy and Minerals Economics (CREME), Curtin Business School
  • China – Dr. Steven Lewis, C.V. Starr Transnational China Fellow, Baker Institute, and Associate Director, Chao Center for Asian Studies, Rice University
  • Europe – Dr. Andreas Goldthau, Head of Department of Public Policy and Associate Professor, Central European University
  • GCC – Amy Myers Jaffe, Executive Director for Energy and Sustainability, University of California, Davis; Jareer Elass, Consultant, Baker Institute Energy Forum; Keily Miller, CES Research Associate, Baker Institute
  • India – Dr. Charles Ebinger, Senior Fellow and Director, Energy Security Initiative, Brookings Institution; Govinda Avasarala, Senior Research Assistant, Foreign Policy, Energy Security Initiative, Brookings Institution
  • Iran – Dr. Suzanne Maloney, Senior Fellow, Foreign Policy, Saban Center for Middle East Policy, Brookings Institution
  • Iraq – Luay Al Khatteeb, Executive Director and Founder, Iraq Energy Institute
  • Japan – Dr. Ken Koyama, Managing Director, Chief Economist, Charge of Strategy Research Unit, The Institute of Energy Economics, Japan
  • Levant Countries – Simon Henderson, Baker Fellow and Director, Gulf and Energy Policy Program, Washington Institute for Near East Policy
  • Mexico – Dr. Isidro Morales, Professor, Monterrey Institute of Technology and Higher Education (ITESM)
  • Russia – Dr. Rawi Abdelal, Joseph C. Wilson Professor of Business Administration, Harvard Business School; Isabel Gorst, Reporter, Financial Times
  • Turkey – Dr. Soner Cagaptay, Senior Fellow and Director, Turkish Research Program, Washington Institute; Tyler Evans, Yvonne Silverman Research Assistant, Turkish Research Program, Washington Institute
  • Turkmenistan – Dr. Martha Brill Olcott, Senior Associate, Russia and Eurasia Program, Carnegie Endowment for International Peace
  • United States – Dr. Michael Levi, David M. Rubenstein Senior Fellow for Energy and the Environment and Director of the Program on Energy Security and Climate Change, Council on Foreign Relations

Insights from the study:

Research Plan

Utilizing its world gas trade model, the Baker Institute will investigate how development of extensive global unconventional gas resources could influence geopolitical relations over the coming decades and map out the implications for global market trends and U.S. energy security. The study will examine how global LNG export flows, sources of supply, and prices will be affected by emerging energy policies, trends in unconventional gas production, and the evolving role of contracts in regional pricing for natural gas. The modeling will examine the potential for the continuance of the recent trend toward increased use of spot market indexation for contracted deliveries of natural gas from major suppliers, such as Russia and Norway. In particular, the extent and pace at which contracted flows under oil-indexed terms may or may not become the most effective means of delivering natural gas to large consumers will be modeled by allowing swaps to occur where profitable arbitrage opportunities present themselves. This will allow rational economic agents to determine whether or not the historical natural gas pricing regime persists.

For this study, the Baker Institute will create a custom “status quo” reference case that is different from the conceptual unconstrained, competitive market reference case used in past studies. The new status quo reference case will be designed to capture geopolitical, contractual and regulatory constraints that currently exist in the global natural gas market and could be anticipated to be sustained over a five year period.

Topics of Research

Issues to be explored include:

  1. The impact of shale gas on the duration of the current global supply surplus
  2. Implications of an unconventional gas boom for U.S. energy security and for the prospects for the development of frontier natural gas resources, such as those in North Alaska and Mackenzie Delta
  3. The impact of unconventional gas on the pace of supply developments in Russia, Australia, the Middle East, and Central Asia.
  4. The impact of unconventional gas on the competition of fuels and the relationship between energy commodity gas prices
  5. The impact of unconventional gas and development of major untapped conventional natural resources from producers such as Iraq, Iran and Turkmenistan on demand for LNG and geopolitical trends that might alter the development and flow of natural gas supplies globally
  6. The impact of geopolitical constraints on the effect of unconventional gas developments and world natural gas market trends
  7. The prospects for a fully globalized commodity market for natural gas and the implications for regional pricing, supply trends and early indicators of a market that is moving in that direction
  8. The impact of global CO2 emissions reduction policies on global natural gas markets under different scenarios for unconventional natural gas supplies
  9. The effect of unconventional natural gas production in China on global LNG markets, natural gas pricing, and Russian pipeline trends

Click here to view the Case Study Protocol.

Click here to view the report of the Scenarios Workshop on the geopolitics of natural gas.

 

This study is generously supported by Baker Institute Energy Forum Sponsors and ConocoPhillips.

 

Associated Research

US LNG Exports: Truth and Consequence
Faculty Working Paper, August 2012, Kenneth B. Medlock III

The Geopolitics of Natural Gas: Report of Scenarios Workshop
Report by the Baker Institute Energy Forum and Harvard University's Belfer Center, July 2012

The Status of World Oil Reserves: Conventional and Unconventional Resources in the Future Supply Mix
Faculty Working Paper, October 2011, Amy Myers Jaffe, Kenneth B. Medlock III, and Ronald Soligo

New Alignments? The Geopolitics of Gas and Oil Cartels and the Changing Middle East
Faculty Working Paper, Songying Fang, Amy Myers Jaffe, and Ted Temzelides

Shale Gas and U.S. National Security
U.S. Department of Energy

Impact of Shale Gas Development on Global Gas Markets
Natural Gas & Electricity Journal, April 2011, Kenneth B. Medlock III