Natural gas expected to play increasing role in Asia, U.S.

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NATURAL GAS EXPECTED TO PLAY INCREASING
ROLE IN ASIA, U.S.
Findings Reported by Energy Forum, Baker Institute for
Public Policy at Rice University

Natural gas is expected
to play an expanding role in meeting rising Asian energy demand, and liquefied
natural gas (LNG) will be traded under more flexible, market-linked pricing
terms and arrangements, concludes a new study by the Energy Forum of the James
A. Baker III Institute for Public Policy at Rice University.

The study, “New Energy
Technologies in the Natural Gas Sectors: A Policy Framework for Japan,” was
completed over 18 months and was led by Baker Institute senior energy adviser
and project coordinator Amy Myers Jaffe. Undertaken as a joint venture with the
Petroleum Energy Center of Japan, the study was co-sponsored by the Baker
Institute and the Center for International Political Economy.

The study will be
available online at <www.rice.edu/projects/baker>.
Click the Research link on the menu at left, follow links to Foreign Policy,
Energy Forum, and scroll to “Baker Institute Study Number 18.”

The study notes that use
of natural gas as an energy source in Asia in 1999 was 10 percent of total
primary energy use, which was substantially lower than the world average of 23
percent, suggesting tremendous room for growth.

Recent technical
innovations have made LNG processing and shipping more affordable, resulting in
increased sales in both Asian and Atlantic Basin markets. The end of the Cold
War also created new natural gas pipeline opportunities in Northeast Asia.

Natural gas is mainly
used in Asia for electricity generation and petrochemical feedstock. The report
finds that if natural gas can be imported after converting it into
ordinary-temperature liquid fuels, the use of gas in the transportation sector
could increase substantially. The authors conclude that because 70 percent of
the increase in international oil use is expected to come from the
transportation sector over the next decade, the ability to utilize plentiful
natural gas supplies in manufacturing transportation fuels would greatly
contribute to enhanced energy security and environmental protection.

An expected surplus in
Asian gas supplies is spurring an interest in other supplemental technologies
for other uses of natural gas. This study investigated the prospects for
increased LNG and natural gas pipeline shipments to Japan and the policy
framework that is needed to promote augmented utilization of natural gas there.

The study also forecasts
increased demand for natural gas in the United States market, and a natural gas
supply deficit that could grow in the coming decade to as much as 6-7 trillion
cubic feet in 2010 under high demand growth scenarios. The study suggests that
the U.S. will have to turn to more pipeline imports from Canada and LNG from a
variety of Atlantic Basin or Pacific Rim producers to meet the projected rise in
natural gas demand. To fill the supply gap, the U.S. may be looking at importing
up to 4 trillion cubic feet or in terms that the producers use, 80 million tons
of LNG per year under high-growth scenarios. However, the study concludes that
even at the most optimistic U.S. demand rate, a surplus of LNG on global markets
will remain, leaving plenty of supply to make its way to Asia and avoiding the
kind of buyers’ bidding war that could substantially raise prices.

The report authors also
predict that the Asian market and Western markets will begin to look more alike
over time. Already Japanese customers are asking for more flexible terms in
their arrangements with traditional supplies. U.S. gas consumers and marketers
are beginning to sign long-term agreements rather than depend solely on spot and
short-term arrangements. The authors predict that eventually both will adopt
portfolio strategies, assembling a blend of supply and transportation
arrangements that fit all needs.

Japan, in particular,
will be looking for more flexible terms, to include both spot and term
contracts, to offset unexpected disruptions in supply and help build markets
there.

The full report includes
legal, regulatory, and infrastructure changes that must be made to facilitate
increased market penetration of natural gas in Japan, including new supplies
from the Sakhalin Islands. It also covers innovative technologies that might
broaden the sectors in which natural gas can replace other fuels.

The study concludes that
Japan’s energy security and environmental goals would benefit from increased use
of natural gas in its energy mix. A combination of LNG and pipeline gas imports
would enhance natural gas trade in smaller volume increments, increasing the
number of sectors that might use natural gas. It would also increase competition
and likely lower costs without jeopardizing supply stability and security.
Government support of research in emerging natural gas technologies could also
help spread use of gas to new sectors in Japan.

Study recommendations
include:

• 
  
  In order to facilitate
  the augmentation of gas markets, regulatory changes to Japan’s existing Gas Law
  are needed. The preparation of new laws, regulations, and procedures should not
  be allowed to impede the efficient introduction of new fuels and the expansion
  of natural gas pipelines.
  
  
• 
  
  The introduction of
  new fuels such as GTL and DME and the construction of international pipelines
  were not considered in the formation of existing laws and regulations. An effort
  to adapt these products and the building of pipelines to existing laws will
  likely result in a good deal of confusion and many delays. Thus, adjustments to
  these laws, regulations, and procedures should be made quickly to enhance the
  introduction of new fuels and facilities.
  
  
• 
  
  Administration of laws
  and regulations should be made in a nondiscriminatory manner where all market
  players, including new entrants into a liberalized market, compete on equal
  terms. New entrants should be allowed access to gas infrastructure but at a
  price that includes a fair return to investors for access to infrastructure.
  Market transparency and agreed network codes can then maintain the level playing
  field between players.
  
  
  
• 
  
  All prices, of both
  natural gas as well as its competitive fuel alternatives, need to be
  market-based and transparent such that inter-fuel and gas-to-gas competition
  will establish the most competitive delivered price to the end-user.
  

In addition to Jaffe,
members of the research team are Dagobert Brito, the Peterkin Professor of
Political Economy, Rice University; Peter Hartley, professor of economics, Rice
University; Ed Jones, coordinator, Lawrence Livermore National Laboratory;
Robert Schock, nuclear physicist, Lawrence Livermore National Laboratory;
Barbara Rhines Shook, Houston bureau chief, Energy Intelligence Group; and
Ronald Soligo, professor of economics, Rice University.

Editors: For copies of
the studies or more information about the Baker Institute for Public Policy,
see: <www.rice.edu/projects/baker/>.