Natural Gas

Prospects for natural gas demand worldwide remain bright, despite the impact of the Asian economic recession on near-term development. Natural gas consumption in the International Energy Outlook 1999 (IEO99) is somewhat increased from last year's outlook, and the fuel remains the fastest growing primary energy source in the forecast period. Worldwide gas use more than doubles in the reference case projection, reaching 174 trillion cubic feet in 2020 from 82 trillion cubic feet in 1996 (Figure 31). Strongest growth is projected in the developing countries of Central and South America and Asia, but large incremental increases in demand are projected for industrialized countries as well.

Figure 31. World Natural Gas Consumption, 1970-2020

Sources: History: Energy Information Administration (EIA), Office of Energy Markets and End Use, International Statistics Database and International Energy Annual 1996, DOE/ EIA-0219(96) (Washington, DC, February 1998). Projections: IA, World Energy Projection System (1999).

In the industrialized countries, where gas markets are most mature, gas use is projected to grow by 2.2 percent over the 24-year projection period, more than twice as fast as the projected growth rate for oil consumption. Many industrialized countries view natural gas as a way to reduce greenhouse gas emissions and, as a result, are expected to expand their use of gas. Because natural gas is a cleaner fossil fuel than oil or coal and is not as controversial as nuclear power, it is expected to be the fuel of choice for many industrialized countries in the future.

Developing countries are also interested in the environmental benefits of using natural gas, but often they are more intent on using natural gas to diversify fuel mix. In particular, countries of Central and South America are expanding gas-fired electricity generation capacity at a rapid pace in an effort to diversify electricity sources. Heavy dependence on the non-emitting hydroelectric resources in the region has led to problems in maintaining the electricity supply in times of drought. Hydroelectricity and other renewable resources accounted for 77 percent of the energy consumed for electricity genera tion in Central and South America in 1996; by 2020 the share is projected to fall to 53 percent because of expanded natural gas use.

In developing Asia, the news regarding gas markets has been mixed, an obvious result of the economic crisis that began in 1997 and continued throughout 1998. Various projects have been delayed or scaled back. In Thailand. for example, the state power company reduced expected investment in gas projects by 30 percent for the 1998-2006 period. Activity in Indonesia has been hit even harder. On the other hand, there is fresh optimism that China will build a liquefied natural gas (LNG) regasification project in Guangdong, and there has been movement in the development of LNG projects in India-such as Enron's finalized agreement to purchase LNG from Oman for its Dabhol power project.

Other major developments in natural gas markets in 1998 include:

•Several important pipelines were either completed or under construction in Central and South America in 1998. The first Uruguay-Argentina pipeline connection became operational. Progress was also made on the Bolivia-to-Brazil line, as well as on two Argentina-to-Brazil lines, Gas Atacama and Norandino. Negotiations are underway to get another pipeline connection between Argentina and Brazil via a planned 1,900-mile Mercosur pipeline.

•Progress on the Camisea gas fields in Peru stumbled somewhat at the end of 1998, with Shell and Mobil withdrawing from the project. As a result, tenders for field development were re-offered. It is still likely, however, that development of the vast 11 to 20

trillion cubic feet of estimated natural gas reserves in the Camisea fields will occur in the near future.

• Growth of Western Europe's gas infrastructure continued apace in 1998. Two major offshore pipeline systems, the Interconnector-running from England to Belgium-and the NorFra-running from Norway's North Sea flelds to France-began operating. Onshore construction on several major lines was completed: the Artere des Hauts-de-France, France's largest on-land gas pipeline; the trans-Belgium VTN-RTR pipeline; and Germany's Wedel line, which runs across western Germany. Altogether, these pipelines represent a $2.7 billion investment in European gas infrastructure.

⚫Nigeria has taken steps toward reducing the amount of natural gas flared during oil production-which currently accounts for about three-fourths of all gas produced by the country. In 1997, the first phase of the three-phase Escravos project was completed. The $550 million project provides 165 million cubic feet of natural gas per day for domestic consumption. The second phase of the project will provide the first gas to Ghana as part of the West African Gas Pipeline; the third phase may be used to supply gas for the Chevron-Sasol gas-to-liquids project. By 2004, Nigeria expects to virtually eliminate gas flaring.

•The Russian government, which owned 40 percent of Gazprom-the Russian state gas company that controls over 95 percent of natural gas production-and is the largest earner of foreign exchange for Russia, agreed to sell part of its stake to foreign investors. On December 21, 1998, Russia's Interfax news agency announced that Ruhrgas, Gazprom's biggest export customer, had won a bid for 2.5 percent of Gazprom for $660 million [1].

Reserves

As of January 1, 1999, proven world natural gas reserves, as reported by Oil & Gas Journal, were estimated at 5,145 trillion cubic feet, 58 trillion cubic feet higher than the estimate for 1998. Most of the increase in reserves is attributed to the developing countries, with a small increase in reserves of the industrialized regions and virtually no change in the reserves of Eastern Europe and the former Soviet Union (EE/FSU). In the industrialized regions, the decrease of 12 trillion cubic feet between 1998 and 1999 in Western Europe's natural gas reserves was offset by the doubling of Australia's reserves (from 19 to 45 trillion cubic feet) in industrialized Asia. In the developing countries, reserves in Central and South America declined by 3 trillion cubic feet

between 1998 and 1999, but in every other region of the developing world, reserves increased. Proven reserve estimates increased by 13 trillion cubic feet for Africa, by 16 trillion cubic feet for Asia, and by 24 trillion cubic feet for the Middle East.

About 72 percent of the world's natural gas reserves are located in the FSU and countries of the Middle East. Russia and Iran alone account for almost one-half of the world's gas reserves (Table 11). In the industrialized world, reserves have remained fairly stable over the past 20 years. Reserves of the industrialized countries declined every year between 1993 and 1998, but in 1999 they increased by 10 trillion cubic feet because of the addition of 24 trillion cubic feet in Australia's proven reserves (Figure 32). Reserves in the EE/FSU and the developing world have, in contrast, more than doubled over the past 24 years, although since 1994 reserves in the EE/FSU have remained flat.

1974 1979 1984 1989 1994 1999 Sources: 1975-1993: "Worldwide Oil and Gas at a Glance," International Petroleum Encyclopedia (Tulsa, OK: PennWell Publishing, various issues). 1994-1999: Oil & Gas Journal (various issues).

Worldwide, natural gas reserves are more widespread geographically than oil reserves. Outside the EE/FSU and the Middle East, reserves are fairly evenly distributed, except for industrialized Asia (Figure 33). Moreover, despite high rates of increase in gas consumption, particularly over the past decade, most regional reserves-to-production ratios have remained high. Worldwide, the reserves-to-production ratio is estimated at 64.1 years [2. p. 20]. Central and South America has a reserves-to-production ration of about 72.7 years, the FSU about 86.2 years, and the Middle East and Africa both more than 100 years.

Figure 33. World Natural Gas Reserves by Region as of January 1, 1999

Regional Activity

North America

IEO99 projects considerable growth in natural gas mar kets in North America over the forecast period, with consumption increasing at an average annual rate of 1.7 percent per year. Consumption in the United States and Canada is expected to increase at rates of 1.6 and 1.7 percent per year, respectively, and consumption in Mexico is projected to increase by 3.8 percent per year. A significant portion of the growth in all three countries is expected to fuel electric power generation. The Canadian Gas Association projects that natural gas consump tion for electric power generation in Canada will more than double between 1997 and 2010. The Energy Infor mation Administration (EIA), in its Annual Energy Outlook 1999 (AEO99) [3], forecasts that natural gas consumption for electric power generation in the United States will also more than double over the same period, and the Comission Reguladora De Energia (CRE) expects overall Mexican natural gas demand to more than double, with approximately half the gas used to generate electricity.

Trade among the North American countries, especially between the United States and Canada, is projected to increase considerably. According to the AEO99 forecast, natural gas imports from Canada increase by 72 percent between 1996 and 2020, rising from 2.9 to 5.0 trillion cubic feet. Imports from Canada have until recently been constrained by pipeline capacity, and the expected increase in imports between 1996 and 2001-over 20 percent-is made possible by considerable new pipeline capacity coming on line during the period. While mast of the new capacity provides access to supplies from Western Canada, where most of Canada's approx mately 65 trillion cubic feet of reserves are located, new capacity is also expected to provide access to Sable Island supplies in the offshore Atlantic. Gas fields with more than 3 trillion cubic feet of total reserves are located in the Sable Island area, and considerably more reserves are thought to lie in this offshore Atlantic region.

Several projects are currently proposed to increase import capacity from Canada into the United States, and although it is unlikely that all of the proposed projects will be built, EIA assumes that some combination of those projects will add approximately 2 billion cubic feet per day of pipeline capacity to access supplies in western Canadian and 0.4 billion cubic feet per day to access Sable Island supplies. Major projects include the Allance project, which would bring gas from British Columbia to Chicago; the Northern Border expansion.

which would extend the current system (which enters the United States at the Montana border) to Indiana and possibly to the Michigan-Canada border, and the Maritimes and Northeast project, which would move supplies from Sable Island into the Northeast United States [4].

Western Europe

In Western Europe, the IEO99 reference case projects increases in natural gas demand of 2.9 percent per year over the 24-year projection period, as compared with growth of 1.7 percent per year in North America and 2.2 percent per year in industrialized Asia. Total natural gas consumption in Western Europe is projected to reach 27 trillion cubic feet by 2020 (Figure 34). The fastest regional growth is expected in "other Europe," where countries with less mature but rapidly expanding infrastructure, such as Greece, Spain, and Portugal, are included in the IEO99 forecast.

Mexico serves predominantly as an export market for U.S. natural gas. Exports from the United States to Mexico are projected in AEO99 to grow more than sixfold between 1996 and 2020, from 0.03 to 0.19 trillion cubic feet per year. Although Mexico is rich in natural gas resources, most are located in southeastern Mexico, far from the primary consuming areas in the north and central regions of the country, and Mexico lacks the infrastructure to move the gas from the southern producing regions to the north. Consequently, it will likely be more expedient, at least for the near term, to satisfy increasing demand at least in part with imports from the United States.

Several projects have been proposed to increase capacity to flow gas from the United States to Mexico in anticipation of the increased demand for industrial use and electric power generation in northern Mexico. If completed, the proposed projects would more than double the current U.S. export capacity to Mexico. Export capacity from Mexico to the United States has not increased over the past several years, and no new projects have been proposed. The only indication of increased exports from Mexico to the United States is Pemex's intention to export part of any increased production from the Burgos Basin in northeastern Mexico to the United States. Because of the favorable location of the Burgos Basin, Pemex plans to spend $5.5 billion over the next 15 years to increase Burgos production from 500 million cubic feet per day to 1,400 million cubic feet per day in 2001.

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Sources: History: Energy Information Administration (EIA), Office of Energy Markets and End Use, International Statistics Database and International Energy Annual 1996, DOE/ EIA-0219(96) (Washington, DC, February 1998). Projections: EIA, World Energy Projection System (1999).

Several factors favor increased reliance on natural gas in Europe. Most important is access to abundant low-cost reserves. Although little new productive capability is available within continental Europe, abundant reserves are available for import from the North Sea, North Africa, and the FSU. Great strides continue to be made to instali infrastructure to tap these reserves (see box on page 41). In 1998, new pipeline links to the United Kingdom and Norwegian North Sea production became operational. One link-the UK-Belgium Interconnector-is designed to allow gas to flow to continental Europe or toward the United Kingdom, depending on short-run weather-related needs. These new links add to existing capability to bring natural gas into Europe not only from the North Sea but also from Russia, Algeria, and Libya. Supplementing these developments are a variety of interconnections within continental Europe that allow gas to flow throughout

Mexico is making rapid progress with its plans to privatize natural gas distribution. The effort began in May 1995 with legislation that opened natural gas transmission, distribution, and storage to private investment and allowed private companies to import and export natural gas. Considerable expansion of the existing infrastructure is needed both to provide gas to fuel electricity generation and to provide access to the residential market, and much of the expansion will be accomplished by the private sector. Several distributorships have already been privatized, and Hector Olea, president of the Comision Reguladora de Energia, has indicated that 80 of the largest municipalities in Mexico will have residential gas service within 2 years. Four years ago, when the current administration came into power, only 10 to 15 cities had natural gas service [5].

Europe's New Natural Gas Pipelines

Five major European pipelines began operating commercially in October 1998, representing some $2.7 billion in investment [6]:

⚫NorFra, commissioned in August 1998, is the world's longest subsea pipeline. The $1 billion NorFra is the first direct link between Norway and France that does not cross a third country. The pipeline is 521 miles long and has a capacity of 530 billion cubic feet per year, all of which is under contract. NorFra is expected to provide up to one-third of the gas requirements projected by Gaz de France. Any excess capacity will be provided to Spain and Italy after 2000.

⚫Artere des Hauts-de-France, Gaz de France's $185 million, on-land extension of the NorFra pipeline with a diameter of 44 inches, the largest high-pressure pipeline ever laid in France-was also commissioned in August 1998. The pipeline, which runs from the Norwegian gas landfall near Dunkirk via the NorFra underwater pipeline to just north of Paris [7], is 115 miles long and has a capacity of 530 billion cubic feet per year, all of

which has been contracted.

⚫The UK-Belgium Interconnector, commissioned in September 1998, runs from Bacton in the United Kingdom to Zeebrugge, Belgium. The pipeline, constructed at a cost of $745 million, has a capacity of 706 billion cubic feet per year, as well as a reverse flow capacity of 300 billion cubic feet per year (see Table 12 for committed capacity). •Distrigas's new VTN-RTR transit network runs across Belgium. The 180-mile, $355 million pipeline was commissioned in September 1998. It has a capacity of 706 billion cubic feet per year, of which 530 billion cubic feet is under contract. •Wingas's Wedal pipeline, commissioned in October 1998, runs from Bielefield to Aachen, nearly 200 miles across western Germany. It cost $370 million to construct, with a capacity of 388 billion cubic feet per year.

the continent. Norwegian, Russian, and Algerian gas can now be delivered to Italy, Spain, Austria, and Germany.

Various Eastern European and Balkan countries are gaining increasing access to larger and more diversified sources of gas. Strengthening European Union institutions are further contributing to growing natural gas use. In 1997, the European Union announced its natural gas directive, which is designed to enhance competition in natural gas markets. The directive seeks to free up

access to pipeline transmission to enable more open dealing between natural gas consumers and suppliers. As a consequence, established pipeline companies are developing more diversified relationships with their customers and suppliers and unbundling, to varying degrees, the provision of transportation from other natural gas services. At this point, the process of regulating reform is incomplete and uneven across the region, but growing market opportunities combined with institutional pressure for change are causing revisions in estab lished regulatory frameworks and methods of doing business.

The United Kingdom's Interconnector pipeline, be tween Bacton, England, and Zeebrugge, Belgium, was completed on schedule. Gas began to flow through the Interconnector on October 1, 1998 (Table 12). The line was originally estimated to cost $762 million, but actual costs were 10 percent under budget. With a glut of new gas supplies available to European countries following a mild winter, natural gas prices fell substantially in Europe in 1998. As a result, it is likely that the Interconnector will be used to ship gas to the United Kingdom should there be a surplus of continental gas over the 1999 winter season [8]. This is an interesting reversal from the situation in 1997, when the Interconnector was expected to help alleviate Britain's gas supply bubble.

The Interconnector links the United Kingdom's gas transmission system with continental gas grids. It has the capability of exporting up to 706 billion cubic feet per year of natural gas to European customers. The line can be reversed to import 300 billion cubic feet per year into the United Kingdom, and increased compression capac ity would make it possible for Britain to import even

more.

Gas-fired electricity generation has grown rapidly in the United Kingdom in recent years. Indeed, between 1996 and 1997, natural gas generation grew by almost one-third, replacing coal- and oil-fired plants that were taken out of service or retired [9. p. 264]. In IEO99, total natural gas consumption is projected to nearly double between 1996 and 2020, and gas use for electricity gener ation increases fourfold over that same time period (Figure 35).

Although the British government approved the construction of five additional gas-fired power plants between May and December 1997, a moratorium on new gas plant construction was issued in December in response to concerns over what the so-called "dash for gas" was doing to the British coal industry (9, p. 264). The government has also noted that it is concerned that the rush to increase gas-fired generation at the expense of coal would lead to an over-dependence on a single energy source, stifling market competition.