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The Economics and Geopolitics of Natural Gas

by Tony Tran on Monday September 7, 2015

On September 7, 2015, MIT CEEPR Senior Research Scientist Sergey Paltsev visited Istanbul, Turkey, for an invited lecture on the economics and geopolitics of natural gas at Sabanci University. Turkey’s strategic geopolitical location, bridging fossil resources and demand centers, offers wide opportunities for playing an increasingly important role in providing energy security and establishing the energy distribution hub. New pipeline projects that will bring natural gas from Russia and Azerbaijan are under construction. Several projects for piping natural gas from Turkey to Europe are also under discussion.

The global energy system continues to pose both diverse challenges and opportunities. In his talk, Dr. Paltsev highlighted a number of recent economic and geopolitical developments that are shaping natural gas markets across the globe. These include: Saudi Arabia’s actions which resulted in global oil price reductions, which have, in turn, led to lower natural gas prices and changed the prospects for liquefied natural gas (LNG) projects in the US and Australia; efforts by the European Union to reduce its dependence on Russian gas and the emergence of Iran (due to sanctions relief provided in the nuclear deal) as a potential alternative supplier; potential for natural gas exports from Russia to China; natural gas pricing reform in China; and climate change policies designed to lower greenhouse gas emissions and keep more coal, oil, and natural gas in the ground.

While examining the impacts of the changing oil prices on natural gas development in different regions of the world, Dr. Paltsev considered US projects for LNG exports that were once very attractive due to the difference between US and Asian prices in 2011-2014. A drop in oil prices and oil-linked natural gas prices during the second half of 2015 has changed the prospects for these new projects. As LNG projects have a long lifetime, developers must assess long-term prospects for international natural gas prices. With certain additional supply from Australia and other countries, and uncertain additional demand from China, India, and other Asian countries, these potential projects would be entering the LNG market under new conditions, where Asian natural gas prices will not be at as high a premium as they were in 2011–2014.

European natural gas demand is even more uncertain due to climate policy aspirations and recent geopolitical developments. Recent tensions over Ukraine force Europe to actively seek alternative suppliers, creating some opportunities for additional LNG supplies and pipelines that will by-pass Russia. In addition to the Trans Adriatic Pipeline (TAP), there are several other projects under consideration, such as the Tesla Pipeline and the reverse flow of the Eastring Pipeline. Recent discoveries of natural gas in the East Mediterranean also provide potential to increase the available volumes for the EU destination.

With a re-start of nuclear generation in Japan and slight increases in demand in South Korea, longer-term natural gas price dynamics will be affected by natural gas developments in China and India. Recent policy in China targets an increase in the contribution of natural gas to the nation’s energy supply. Historically, China’s natural gas prices have been highly regulated with a goal to protect consumers. The old pricing regime failed to provide enough incentives for natural gas suppliers, which often resulted in natural gas shortage. Dr. Paltsev provided an overview of the natural gas pricing reform aimed at creating a more market-based pricing mechanism.

In addition, Dr. Paltsev emphasized the need to become knowledgeable about traditional fuels such as natural gas, oil, and coal while making investments in alternative energy options. “If you’re trying to understand the role of renewables, solar, wind, geothermal, carbon capture and sequestration, and biofuels, you need to understand their main competitors,” he said. “Because if you are serious about doing something different, you need to understand the economics of the current producers, the resources, how the markets are going to evolve in the future, and the prospects of the so-called traditional fuels.”

Sergey Paltsev’s talk can be viewed at: https://www.youtube.com/ watch?v=ukMSp1o8dlM