Challenges ahead as gas goes global

Gary Park

Petroleum News Calgary Correspondent

Natural gas is on the verge of becoming the global fuel of the future, but making that a reality will depend heavily on how economically the industry can bring remote areas into production, says a newly released report by PricewaterhouseCoopers.

Noting that the Arctic and deepwaters contain more than half the world’s proven reserves, the report, “Going Global — Change and Challenge in the Gas Market,” said the potential of those regions is linked to technology and transportation.

It said strategic investments in pipelines linking Canada and the United States or Russia (which is projected to account for 60 percent of European exports by 2010) and the United Kingdom “present an orthodox approach to transportation, whilst liquefied natural gas offers an alternative way for companies to commercialize reserves that are currently too remote.

“Both routes require a significant investment undertaking and the challenge for companies to harness these opportunities within the current regulatory environment is immense,” PricewaterhouseCoopers said.

With more than two-thirds of world gas reserves in the former Soviet Union, Middle East and Caspian Sea, the need for additional infrastructure to connect those resources to markets will contribute to strong growth in the world’s pipeline network, the report said.

Gas by wire

Cedigaz, a Paris-based international gas association, recently forecast that global LNG trade will grow up to 6 percent a year over the next 20 years, with short-term deals of less than 18 months soaring to 15 percent by 2010 from 1 percent.

“Success on the global stage will flow to those companies that set a clear course to maximize the opportunities of globalization and competition and who manage the risks inherent in open markets,” PricewaterhouseCoopers said.

The conflicts which industry and regulators must resolve include: Security of supply vs. long-term contracts, costly infrastructure vs. an uncertain global economic outlook and remote supplies vs. geopolitical risk, the report said.

In the meantime, global consumption is forecast to double to about 177 trillion cubic feet a year by 2030.

Industry sources have projected that worldwide pipeline expansion is expected to average 7 percent a year to 2020, while PricewaterhouseCoopers said markets are undergoing “far-reaching transformation” as historic supply monopolies are giving way to regulated market structures.

Challenge to companies

Already “momentous” changes are taking place, especially in Europe where the European Parliament last month agreed to let all commercial customers choose their supplier by 2004 and all other consumers by 2007, bringing changes in the convergent gas and electricity markets closer into line.

PricewaterhouseCoopers partner Michael Hurley said regulatory policy within liberalized markets has so far been directed at the “squeezing of companies to gain greater efficiencies and deliver the benefits to end consumers.

“Yet today we have a situation that is squeezing potential investors in the gas chain and leading to a growing supply-demand deficit.

“This situation needs a rethink and ultimately regulatory policy must address the need to create sufficient security of supply and so facilitate increased levels of investment,” he said.

Martha Carnes, also a PricewaterhouseCoopers partner, said liberalized, dynamic marketplaces are making trading and risk management vital for companies trying to limit their exposure to volatility.

“Attracting new capital within this market is increasingly difficult and companies active in the gas sector must convince the investment community to accept a lower-return model,” she said.

PricewaterhouseCoopers said the challenge for all companies will be to “deliver a market model that offers incentives for investment, customer demand, market development, reduced costs and competitive prices.

“Certainly for all mature market players, gas is no longer the plentiful fuel source it once was and there is a price to be paid for ensuring the continuance of its supply.

“Policy makers and industry leaders alike must establish who will pick up the tab and how to create the right environment for its timely payment.”