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Geopolitics of Natural Gas

Geopolitics of Natural Gas.

On Feb. 21, 2014, the Baker Institute hosted a conference that was the capstone for “The Geopolitics of Natural Gas,” a multi-year study directed by Kenneth Medlock, senior director of the Center for Energy Studies at Rice University's Baker Institute; Meghan O'Sullivan, director of the Geopolitics of Energy Project at Harvard University's Kennedy School; and Amy Myers Jaffe, executive director of energy and sustainability at the University of California, Davis. 

Some of the most dramatic energy developments of recent years have been in the realm of natural gas. Large quantities of North American unconventional gas are now commercially viable, changing the strategic picture for the continent and raising the possibility that the United States could become an exporter of natural gas to Asian and European markets. This development has reverberated across the globe, causing shifts in patterns of trade and catalyzing other countries in Europe and Asia to explore their own indigenous shale gas potential. The increased availability of unconventional natural gas is, in turn, putting pressure on longstanding contractual arrangements that underpin the oil-linked gas pricing paradigm. In addition, the heretofore discrete nature of North American, European and Asian natural gas markets is being challenged by increasing opportunities for trade, particularly via liquefied natural gas (LNG), which may lead to strategic shifts, such as the weakening of Russia’s dominance in the European gas market.

Against this backdrop, the Center for Energy Studies at Rice University’s Baker Institute and Harvard’s Geopolitics of Energy Project of the Kennedy School launched a multi-year study on the geopolitics of natural gas. “The Geopolitics of Natural Gas” project brought together more than 15 country experts on major natural gas producing and consuming countries. Each expert assessed the prospects for gas consumption and production in the country in question, based on anticipated political, economic, and regulatory trends. Building on these case studies, participating scholars took part in a workshop designed to formulate states of the world describing different possible futures. This exercise subsequently informed the construction of several scenarios to be run using the Rice World Gas Trade Model so that the economic and geopolitical impacts of various modeled changes could be analyzed.

The modeling approach to global gas markets used in this project highlights the importance of economics and geology in determining the future of natural gas, but, importantly, this study pays particular heed to the geopolitical dimensions of natural gas. It recognizes that the interplay between international politics, security and energy is multi-directional and therefore seeks to:

  1. Identify the political, economic and 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, influence global politics.

The study is structured in two parts. Part One takes a case study approach, looking at internal and regional dynamics that will affect individual countries’ gas production and consumption over the next 30 years. Part Two presents results from multiple scenarios modeled using the Rice World Gas Trade Model to simulate how politics could change global gas markets — and vice versa.

Part One: Case Studies of Key Gas Producing and Consuming Countries

Case studies have been prepared by experts on 15 countries/regions generally deemed most likely to affect gas developments at a global level — by driving either consumption or production patterns. Each expert has produced a chapter explaining the current political and energy situation and identifying the main drivers of political change and their implications for future energy developments. Case studies have also assessed to what extent 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.

Many of the case studies are now available online. Subsequent cases will soon be published. The Geopolitics of Natural Gas study includes the following case studies:

Part Two: Modeling and Analysis

The project has drawn on the findings of the case study authors to create 10 different scenarios that were analyzed using the Rice World Gas Trade Model (RWGTM). Specifically, the RWGTM was used to investigate how upstream investments, international trade and global LNG flows, the role of contracts in natural gas trade, and regional natural gas prices will be affected by emerging economic, regulatory and geopolitical trends. Through the modeling efforts, the study team examined 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 was also modeled — in both the RWGTM and in a working paper by Dr. Peter Hartley examining the value of long-term contracts under shifting market conditions.

The scenarios include, among others, a low oil price scenario, a Middle East stability scenario, a North America LNG export push scenario, a conflict scenario in the East China Sea, and an environmental policy scenario characterized by the regional adoption of CO2 emissions reduction policies and regionally varying policies — from outright bans to stricter requirements at well sites — on shale development. The study also includes a reference case that captures geopolitical, contractual and regulatory constraints that currently exist in the global natural gas market. The reference case establishes the baseline to which all scenarios are compared.

The full analysis of all scenarios and their geopolitical implications, detailed in multiple papers, will be completed and posted on this website in December 2013.

  • Coming Soon - “The Rice World Gas Trade Model (RWGTM): Model Description and Status Quo Case” by Kenneth B. Medlock III, James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics and Senior Director of the Baker Institute Center for Energy Studies
  • Coming Soon - “Scenario Analysis with the RWGTM: The Geopolitics of Gas and Future Market Outcomes – Part 1" by Kenneth B. Medlock III, James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics and Senior Director of the Center for Energy Studies; Meghan O’Sullivan, Jeane Kirkpatrick Professor of the Practice of International Affairs and Director of the Geopolitics of Energy Project at Harvard University's Kennedy School; and Amy Myers Jaffe, Executive Director for Energy and Sustainability, University of California, Davis
  • Coming Soon - “Scenario Analysis with the RWGTM: The Geopolitics of Gas and Future Market Outcomes – Part 2” by Kenneth B. Medlock III, James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics and Senior Director of the Baker Institute Center for Energy Studies; Meghan O’Sullivan, Jeane Kirkpatrick Professor of the Practice of International Affairs and Director of the Geopolitics of Energy Project at Harvard University's Kennedy School; and Amy Myers Jaffe, Executive Director for Energy and Sustainability, University of California, Davis
  • Coming Soon - “Scenario Analysis with the RWGTM: The Geopolitics of Gas and Future Market Outcomes – Part 3” by Kenneth B. Medlock III, James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics and Senior Director of the Baker Institute Center for Energy Studies; Meghan O’Sullivan, Jeane Kirkpatrick Professor of the Practice of International Affairs and Director of the Geopolitics of Energy Project at Harvard University's Kennedy School; and Amy Myers Jaffe, Executive Director for Energy and Sustainability, University of California, Davis
  • The Future of Long-term LNG Contracts by Peter Hartley, Baker Institute Rice Faculty Scholar and George and Cynthia Mitchell Chair in Sustainable Development and Environmental Economics at Rice University
  • Recent Developments in LNG Markets by Peter Hartley, Baker Institute Rice Faculty Scholar and George and Cynthia Mitchell Chair in Sustainable Development and Environmental Economics at Rice University

 

Topics of Research

Issues explored in this study include:

  1. Implications of unconventional gas abundance for U.S. energy security and the implications for global gas supply developments
  2. The impact of unconventional gas in Europe on the pace of supply developments in Russia, Australia, the Middle East and Central Asia.
  3. 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
  4. The impact of geopolitical constraints on the effect of unconventional gas developments and world natural gas market trends
  5. 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
  6. The impact of global CO2 emissions reduction policies on global natural gas markets
  7. The effect of unconventional natural gas production in China on global LNG markets, natural gas pricing, and the prospects for Russian gas to Asia

Click here to view the Case Study Protocol.

Click here to view the report of the Scenarios Workshop on the Geopolitics of Natural Gas.

Insights from the study:

 

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

 

Associated Research

China’s Energy Hedging Strategy: Less Than Meets the Eye for Russian Gas Pipelines
The National Bureau of Asian Research Energy Security Program, February 2015, Amy Myers Jaffe, Kenneth B. Medlock III, and Meghan L. O’Sullivan

Natural Gas Price in Asia: What To Expect and What It Means
Center for Energy Studies Research Paper, February 2014, Kenneth B. Medlock III

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 Center for Energy Studies 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