The Geopolitics of Natural Gas: From Today to 2030: Session A

May 26, 2004

The Baker Institute Energy Forum unveils its new joint study on the geopolitical consequences of a major shift to natural gas in world energy markets.

http://bakerinstitute.org/events/the-geopolitics-of-natural-gas

In the interest of time I’m just going to go ahead and start the session and we’ll let people mill in as they get time my name is Bob card I’m president of the car group and a month ago I was the Undersecretary of the Department of

Energy where natural gas was a huge part of what I did there so I’m very pleased to be part of the session I’ll be moderating the panel for this afternoon which I’m excited to hear about myself I’ve been very impressed with the approach in the quality of work of the

Study I was asked to say a few things about the importance of this work in my former job to the administration so I thought would just make a few comments about where we were with this issue as you know natural gas was a huge issue in the administration I suspect it still is

But you’ll have to talk to mark Maddox at the end of the day to learn the current official version of that but it was it was prominent in the national energy policy that the Bush administration put together may two thousand one and two respects not only natural gas and of itself but

Alternative fuels for dealing with shortages of natural gas which in 2001 you may recall we had the first warning of a shortage with a price spike in the spring of that year in 2002 secretary abraham called for the MPC to revise their 1999 study I was the government

Co-chair of that study many of you contributed to it and was a fantastic piece of work that really framed for the administration where we were on natural gas and so I just thought I would talk to you just for just a couple minutes here about some facts of how the

Government feels about this the what we observed in international fora was more most nations we’re counting on natural gas as their climate change bridge into energy and so it was a bit frightening in a way to have such uniformity on the international scene of the race to gas

Is what I’ve seen in some of the publications here and that’s what we used inside the department of energy to the MPC study i think showed that there were no credible scenarios that didn’t have an increase in lng there there’s nothing you could do about an alaska pipeline plus increased access to

Domestic resources plus energy conservation that precluded more lng and in fact if you look at the risk factors in the study they all point to more lng not less than was forecast and i think you’re seeing the big energy companies here put their capital where their mouth

Is and they’re assuming that as well the lng i think that it’s adam innocent was administration consensus involved no more safety risk than any other energy commodity there was a fair amount of analysis however the public perception is not necessarily there and one thing I learned in office is is the public

Treats new things entirely different than they treat old things and hydrogen was an example when I would talk to people at the hydrogen economy and people worried about hydrogen I said if we were already had hydrogen and you tried to convince people to run around with gasoline in their cars you’d have

An outrage on your hands because I’d lot rather have my children and a car full of hydrogen than gasoline they but nonetheless that’s that’s a an issue that the lng industry is going to have to work through there is a strong community of interests within the federal government and the supply chain

I think I saw more enthusiastic alignment amongst various federal agencies that LNG was a really important thing to do than any other issue while I was in the administration and so far I think that’s demonstrated with enthusiastic and creative support of LNG by the Coast Guard at Homeland Security

By FERC part of Energy Department terior whoever’s involved but that hasn’t resolved the state and local issue and it remains an enigma why communities at the the pipe Southern California Southern Florida and New England who should be demonstrating in the streets to have an LNG terminal are the most reluctant to

Host one another interesting thing that I would never have guessed is that there is no clear political trigger for natural gas prices if somebody had told me last December that we are going to have six dollar plus prices now and ask what would be happening with say

Everything will be coming unglued but in fact there’s very little other than rhetoric there’s very little on the ground worried and it isn’t clear to me where the upper bounds of a price threshold for natural gas exist it would actually create substantive political change in the system by political change

I mean people saying that we should do things that they’re not saying we should do now people with authority to approve things approving them where they’re not approving them now so that’s that’s been a personal surprise for me on gasoline prices as well and i think i think

Everybody was caught off guard with the patients that has been exhibited the and another important thing as i see a lot of producers not that many consumers here but the lng for the US has huge impacts on the people who use it and my basic scenarios of lng works in the u.s.

Meaning that facilities are permitted when the demand is there and the supply chain works and there’s no reason why it shouldn’t there’s no reason why america shouldn’t have three to four dollar Henry Hub gas as far as the eye can see but if it doesn’t work meaning that the

Terminal turn downs that occurring already persist that there’s terrorism or other threats that deny entry into the u.s. short-term or long-term they were clearly looking at a six to nine dollar or greater energy future natural gas will not be particularly competitive and those who invested in a natural gas

Infrastructure will be underwater and coal and nuclear and other alternatives will be flush so if you’re an energy systems buyer an electric utility an LDC or somebody else who’s making even bigger investments than the LNG supply chain is in the and your postulated outcome this is a very

Difficult time because I can I could easily see political scenarios that would deny entry of LNG in the quantities needed into the US and generate those high price bands so i think that the work of this study is extremely important because the effect of natural gas on everything else that

We do with that I’m going to turn over to the program when our first speaker is going to be David Victor again and since this is a repeat performance I won’t bother introducing him just to say that in my own review of David’s work he’s done some pretty interesting work even

Outside of gas and other areas such as climate change and what not and and it think his experience on the council Foreign Relations obviously shows through in his work here so I told David my one of my greatest disappointments is I did learn of him earlier in my service

And administration David thank you thank you Bob thanks to all of you for coming back for the beginning of what will be four panels over the course of the next day and a half looking at some of the major themes coming out of the both the case study work and the model that’s

Been developed here at rights we just say a brief word about the session a here we you’re going to see this afternoon in this session a 2 case that is the one I’m going to talk about which is a pipeline from Russia into the German market principally another one

James ball is going to talk about the Trinidad lng project and then you’re going to hear from the modeling team about what some of the possible future projects may be at least when you look at the economics of this we wanted to start with this subject because the

Question of who is going to build this infrastructure and put out the trillions of dollars that are implied over the next 30 years is one of the central questions in this industry right now we have to get a sense historically who’s done what in the past and why and

What do we think this changing structure of the gas market might imply for the the future I’m going to speak today about a study that that is a joint product of myself and Nadezhda who is my close collaborator on a number of studies we’ve done now on the Russian

Oil business and now on the Russian gas business let me just start with a basic overview of the project that we’re looking at here this is a in some sense this is a Russian view of Europe so you’ve got Russia right here in the middle the earth here are the European

Markets the German market the Italian market is Poland here Belarus and Ukraine down here as everybody knows there were very large number of huge pipeline projects built starting in the late 1960s through the 1980s to take Russian gas into the German the French the Italian market and a few other

Markets as well those projects and they were built as state to state agreements essentially state to state agreements organized by the Soviet Union are shown with these very large pipe lines here that all go through Ukraine now the dominance of Ukraine in this market and part reflects terrain and in part

Reflects that the Russian gas industry initially built up around fields here and some of the caucuses in the network organized around some of those early fields and as those fields were depleted brush and gas production moved east into Western Siberia and the paper has some more detail about that and some

Quantitative detail about that so the system bequeathed by the Soviet Union was essentially this huge backbone of large in a 156 inch pipe after another right next to each other a gigantic system that moved a very large amount of gas actually principally for consumption inside the Soviet Union and also for

Export I’m going to speed speaking today about the largest Russia being the largest holder approved reserves the largest producer in the world and the largest exporter and I’m going to skip over I apologize a couple of the details in the 20 minutes that I have but to

Talk about this project the project that we are looking at here is not one of these huge state to state pipe line projects because although those are really interesting historically you don’t actually learn very much about the today’s world by studying those projects because those are not the kinds of

Projects we argue that are going to be going forward in the future instead what we’re doing is we’re looking at a pipeline right here that connects to an existing pipeline that was built as part of the earlier era this yellow pipe here we’re looking at this blue I think

That’s blue you know blue pipe here but that starts in Belarus and crosses Poland and goes into the northeastern German market and I’ll say a couple words in a moment about why this pipe was built and what folks were trying to do something that underscore is that this pipe does not cross Ukrainian

Territory this is a really interesting study for us because this allows us to look at the transit country problem you had an integrated country the Soviet Union no transit country problems there and then suddenly because of political change inside the Soviet Union these transit countries appeared and we’ve

Been able then to look as almost like a controlled scientific experiment social scientists rarely get this so that makes us very excited a controlled scientific experiment to look at the consequences of transit country issues and that’s what we’re looking at here don’t worry about the detail in here but this slide

Here shows the history by off-taker of soviet and then russian gas exports and what I want to underscore is simply if you look way up here on the top that’s 1970 that’s the the first pipeline that leaves the Soviet Union significant pipe on the leaves the Soviet Union initially

To supply a small market in Poland but mainly Austria and Czechoslovakia and then over time with new projects you have more countries coming online and larger and larger supply the size the pies is proportional to the size the volume so that today we’re looking at about a hundred and thirty BCM of

Exports now what we do in this study is we try to unpack who did what in building this pipeline which we call the Belarus connector let me just as a historical point back on this map a lot of the literature calls this pipe on that we’re studying this pipeline that

Goes across Belarus and into the German market of it calls at the Yamal pipeline and that’s because in the early days the interests on the Russian side were to tap these gigantic fields in yama on the imminence of those fields right up here and so whenever somebody wanted to do an

Export project folks with crayons and maps would start drawing lines and they always start at a yamal and then it cruise across territory and then go into the market that they were interested in serving and so the name stuck that this is the Yamal europe pipeline in fact it

Has really nothing to do with yamal whatsoever and so we call it the belarus connector because we wanted to underscore in this or at least examine in this study whether and how the effort to go around Ukraine instead use Belarus as the transit country in fact affected the outcomes that’s the social scientist

That’s the problem we’re trying to story that’s the problem we’re trying to look at so who did what and why let me just try and break this down in a very stark way first yr Russia and gas prom interested in this project at all you have to rewind the tape of history back

To the late 1980s in the early 1990s and imagine that there’s incredible chaos inside the Soviet Union and the organization of the gas sector in the Soviet Union the problem that they faced was how do they continue their volume oriented strategy you’ll hear tomorrow a study by mark Hayes about the Algerian

Exports into into Italy and the Algerian strategy was was not only a volume strategy but also price based strategy the Soviet and Russian strategy has been basically to boost volumes as much as possible to make Russia a reliable supplier of ever larger volumes and so the the organizational problem that

Arrives from the Soviet gas ministry then eventually what we now today call gas prom that organizational problem is how do we build new pipelines in order to expand our exports but they have an additional problem which is that they’re selling gas in the German market which is the single most important West

European market for them they’re selling gas through roar gasp and they have some sense of what the margins are and they say hey all those margins shouldn’t be going to roar gasp we want to somehow try and get around roar gasp and get more of those margins for

Ourselves and so they have this twin strategy they’re interested in boosting volumes and they’re also interested in increasing margins for themselves at the expense of the expense of rogue ask the argument we make in this paper is that first and foremost this is a commercial deal whether or not they actually

Realize these ambitions is another question but that’s what they thought they were doing a lesser part of this deal has to do with the transit countries and in particular the role of Belarus as a transit point by the middle 1990s it is painfully clear to gasp prom into the Russian government that Ukraine

Is not the most reliable transit country imaginable on the planet they had had a couple of interruptions they had enormous difficulties in getting the getting payment by Ukraine of the gas that Ukraine either took by agreement or otherwise and bala risk was seen as basically part of the Soviet Union more

Or less and so that was a reliable transit country and we don’t need to worry about the Belarusians causing us trouble that’s part of what’s going on here but I think basically what’s happening is that this is a commercial strategy in the case of Poland the pipeline for geographical reasons has to

Cross Poland it’s interesting market for the Russians because Poland doesn’t have much gas in its market at all it’s a coal dominated system and they think along the way we can also sell enormous volumes of gas to Poland but the main prize here is the German market there is

No German interest here they’re it the idea that there’s a German state strategy as doesn’t apply and I think it as a general rule doesn’t apply to most democratic countries but there is no German interest here instead what’s going on is you have an effort inside the German gas market driven by one

Company vinters hall which is part of the asf the single largest user of gas in the german market to get around roar gasp as well and nobody will sell them gas except for gas prom and that’s how the deal gets put together gasps prom originally envisions this as tapping the

Yamal fields and building huge pipelines doing the same thing that everybody did during the Union which would have been a 20 to 40 billion dollar project nobody’s going to finance a 20 to 40 billion dollar project on a completely speculative Polish market for an effort to go around

The state monopoly in Germany so what happens is this project gets scaled back progressively scaled back and in essence each party in this deal unilaterally decides what size project how many compressors and where are going to be will correspond with their interests and that’s I think the driving commercial

Aspect of this of this project we just show a couple slides to give you a sense of what the consequences were of this of this project and then I’ll and I’ll close up this first slide here is a little bit complicated but the but the message i think is very important what

You see on the horizontal axis our exports from the former Soviet Union up until nineteen ninety and then Russia after 1990 and the vertical axis you see is the price the gas price measured in two different units that they’re all in nineteen ninety six dollars per cubic

Meter on the left side and on the right side the price per million btu we have had as you can imagine a really nasty time figuring out what the real price of gas is inside the Soviet Union and Russia and I just just let me posit that

We did a good job on that and we’re not perfect what what you see on the top line here is the price if you use the Western prices which of course is not what’s haapnin prices because a lot of the gas is trading to countries that still have the old pricing regime but

You here see here on the lighter line on the bottom is our best effort to figure out what the real pricing regime is and when we tally up the total value which in recent years has been on the order of 20 billion dollars approaching the revenues that come from oil exports when

You tally all that up you get to something that’s close to what the Russian government actually reports as revenues and I’m not yet willing to concede that the reason we’re not exactly on what the Russian government reports as revenues is because we did the pricing scheme wrong what I want to

Underscore is that the on the Russian side of this deal first of all you see when the Soviet Union breaks up you see a huge increase in volume such as complete an accounting artifact it’s simply because a lot of trade that used to be internal to the country is now for

Example exports from Russia to Ukraine which is now an international trade and then you see this increase in volume that’s about twenty BCM during the 1990s and that largely but not completely that largely is due to the efforts this volume strategy connected to this this pipeline how well the gas prom do in

Meeting its initial commercial ambitions in this project we’ve spent a lot of time working on this and let me just summarize it briefly which is our assessment is that the effect on margins was minimal that they that gas problems sold more gas into the German market but

Arguably it was a long baseline if they hadn’t been messing around with winters hall they probably would have sold roughly the same increase in volumes to roar gasp into whatever came out of the Troy hand efforts in eastern Germany so it was largely we think along the

Baseline it is probably the case we use this word gas on gas competition haltingly but it is probably the case that the willingness by gas prom to sell gas the ventures hall helped accelerate a little bit more of a competitive gas market in Germany than would have been

The other than would have occurred otherwise that’s the argument that we made in the in the paper and that’s part of the reason why they never saw this increase in margins that they were that they were so much hoping for because what happened is that the margins got

Squeezed and and gas prompt didn’t get those additional margins I think disaster may be too strong of a word and but it is not unfolded as gas Bromhead as it had expected but let me caution that there’s one part of this story that is still unfolding that is arguably the

Most important thing to watch without Russia and the European gas market which is that part of gas prompt strategy here has been to take stakes in a whole set of downstream gas distributors and got and players in the European gas market stakes that allow gas prom to get information about marketing and

Information about trading and so on and if you think that the European gas market is unfolding into a more competitive world and you’re worried about the exercise of market power and this potentially is a keystone in that strategy on gas promised I’d to exercise market power in the European

Market I don’t think we see that yet but that’s because we’re just this market is still just unfolding and what we need to be really worried about is whether and how antitrust regulation would actually be able to identify these kinds of activities and and and regulate them

That’s a question about the future in the future of the European gas market that I won’t go into here we say a word about what’s happened in the German gas market it is I think certainly the case that the margins that roar gasp have been eroded as you would expect as any

System moves from a complete monopoly to something that has a little bit of a of competition in it vinters halls share in the market has risen over time and they probably would would have had a hard time doing that had they not had gas prom as though as their launch supplier

As it were and the German consumers is arguably been the bigger winner in this rather than than the marketers let me say a word in passing about Poland Poland is not the centerpiece of this project this project is designed first and foremost to go to the German market

The northeastern German market and a try and do things that we’d that I’ve just been talking about in the German market but Poland’s an interesting case along the way because you have lots of gas crossing the country and you have at the time enormous interest in selling higher

Volumes into the Polish gas market if you this slide just shows total primary energy measured we used to measure total primary energy and tons coal equivalent when the coal dominates aside and then where we’re using tons oil equivalent and BP statistics and now and the gas world will be using BCM equivalent so

This is showing primary energy and in BCM equivalent there’s coal measured in BCM which i think is fun there’s oil and here’s natural gas and what you see is a very very small role for natural gas in the in the Polish market over time and not a dramatic increase in the role of

Gas in the Polish market even as you see the beginnings of liberalisation in that in that market and I think what’s going on here is a pretty simple story that coal is fighting back that you have extremely well-organized miners give an extremely reasonably well organized electric power sector it’s not obvious

That even meeting the new environmental rules for the European Union that that involves shutting down all these coal plants and switching instantly over to gas and so on this I think this these stories you’ll see a few others over the next day and a half are cautionary notes about the assumption that automatically

Gas is is necessarily the winner in these markets as the gas gas supplies become become available let me just make a brief and I think very interesting a contrasting point which is contrast the role of gas in the Polish market with with the Soviet Union where Khrushchev

Basically in the 50s took off his shoe and hit the podium and said thou shalt use gas and people started building gas distribution systems and tapping much the state direction in favor of gas explains a lot of the rapid shift to gas in the Soviet you know the point where

It approaches about thirty five percent of total primary energy in the peak years in the late late 1980s let me briefly say that we have downplayed the importance of bypass around Ukraine as the call as the central reason for why this project went forward instead we argue that this project went forward

Because all the parties who were going to be involved in financing this thing could scale the size of the project to meet their expectations in their commercial strategies and that the the Ukrainian problem was not anywhere near as severe as folks have made it made it

Out to be on this slide here you see that that they’re not this is not the only option for moving around Ukraine it’s the most interesting option for moving around Ukraine but there’s also the blue stream project which goes directly from Russian territory into the Turkish market and then there’s another

Project that’s being considered right now the North trans gas project which would go along the Baltic Sea and access European markets directly and I won’t get into that here in any more detail with spend some time in the paper looking at that let me close by drawing out two possibly three main implications

For geopolitics the first one and I think this is why so important and we’ve learned so much and through our collaboration with our colleagues here at Rice who are principally economists is that the the key points about geopolitics I think our first and foremost as we move into this

More market-oriented world are first and foremost issues related to to geo economics and which kinds of projects go forward on the basic economic rounds this study and some others that you’ll see underscores that we need to pay a really close attention to the estimation of demand that in the case of Poland and

In the case of Turkey serviced by the blue stream project in both cases I think folks dramatically overestimated the potential demand for gas and found that the project ran into commercial trouble because of errors on the demand side not just on the construction of pipelines and upstream exploration and

Development we argue that the transit country problem has been maybe not ephemeral but it’s been largely overstated because over the long term these markets are some fundamental sense contestable and in the world of high capital intensity once something’s bolted to the ground the incentives are really really strong to keep the gas

Moving through it and find some way to work through contractual difficulties and so on art we think that era of the big 56 inch pipes one right after another is long gone now and these kinds of projects which this is really the only one coming out of Russia right now

These projects with smaller pipes smaller volumes scalable and so on are the way that this new more commercially sensitive world is going to be headed thank you thank you David next we’re going to hear from Peter Hartley who’s chairman the economics department here at rice on the world gas trade model Peter

Thank you very much and appreciate very much the opportunity to talk to you about the work we’ve been doing at Rice and on this model and what we intend to do going forward the genesis from our perspective of this world trade gas mileage grew out of project we had

Started with the Japanese looking at Sakhalin natural gas the use of cycle in natural gas and was discussed earlier this morning the the options of the pipeline versus the LNG and one thing that became evident when we were looking at that project was that these two alternatives were very competitive and

We got to thinking about what might happen given the and one reason why the competitive was because they’ve been big changes in the costs of LNG shipping and they’ve got us thinking about the what the consequences of those big changes in the cost of LNG would be for the gas

Market and got us thinking about a world gas market then we were sort of repay a little bit well David’s compliment saying he had some advantage working with economists one advantage we had was and we were thinking about trying to make our model which I’ll say a little

Bit about a bit more practical by actually building in facts about where gas is located where the demand is and so on when the Stanford group suggested this geopolitics study and the advantage of that from our perspective as economists is that we wanted to build in

From the start this ability to look at a lot of political factors the effect of political factors on the gas mark and so that led us into a modeling framework which is very flexible we wanted to be very flexible so we could we could override a lot of the economic factors

And look at the consequences so that’s basically the genesis of the sort of modeling framework we’ve got the spirit of this model is indeed we view it more as a means for doing lots of sort of experiments thinking about the consequences of various factors that will influence the

Market and trying to trace those through what’s the basis behind the model well basically the model tries to capture these key facts first of all as with many speakers of emphasized so far today the world’s supply the potential is very very large but a lot of the potential

Supply is concentrated in areas that are remote from markets areas that don’t have a lot of infrastructure and and also in areas that may not be politically stable that’s where a lot of the political factors are important on the other side of the market the potential for demand growth also is very

Large and we’ve heard a little bit about a lot of the factors that have led to the growth and demand for gas what we wanted our model to do was to be based on first of all looking at what the economics implies about how the gas is

Going to be where it’s going to be developed where it’s going to be used how it’s going to be shipped and then talk about or use the model 20 to analyze some of these factors that may override the economic considerations with those things in mind we looked around we’re very fortunate having Ken

Medlock join the Baker Institute soon after that we got going on this and Ken came from the NPC study where they had used market builder model to model these kinds of markets and it seemed to be very well suited for our purpose and indeed what the project has done is sort

Of moved on from the work cameras doing a 10pc extended that on a world basis ken is going to speak you speak to you tomorrow about a couple of the experiments so give you a flavor for how you can use this model to do these experiments I talked about and so you’ll

Hear from him tomorrow morning on some of those what I’m going to do now is talk a little bit about what we call in the base case and it’s going to give you sort of a flavor for what the economics are saying give it given our assumptions about where the supply

Supply is how the man’s going to grow and various costs involved in both exploiting resources and developing the transport links give you a feel for what the model implies about how the world’s can look over the next few decades the economic model that we use is a dynamic

Spatial equilibrium model so its spatial in a sense we have so we have these different areas of supply different areas of demand we want to connect them up but it’s also important that the model is what we into temporal aspect that’s linked over time and so what that

Means is that producers can decide when to bring resources online and that decision is based on expectations about what’s going to happen to the price path over the horizon that you’re looking at and so what the model has to do is solve for the likely path of prices at the

Same time that it’s solving for bringing on the capacity and bringing on the transport links and an implication of this kind of model is that as you build these links on the one hand you transport gas in one direction what happens is the prices move in the

Opposite direction so if you take gas to a high-priced market it tends to bring a high price back to where the gas is flowing from similarly if and it produces anticipate prices are going to go up they will have an incentive to delay bringing on the capacity to take

Advantage of the higher prices that they anticipate in the future also they have an incentive to bring forward projects from beyond that period back to an earlier period both of those things tend to lower the price so that’s how you get this this arbitrage your prices through

Time as well as across locations okay I go through this rather quickly I guess because everyone’s been talking about this this sort of factor so as I mentioned they’ve been there are a number of reasons why the demand for gas natural gas has been growing important one is the environmental regulations but

Another one is the deregulation of electricity markets so one of the consequences of deregulation of electricity markets particularly the regulatory systems that are promoted competition is that one can show that in a more competitive environment you want to bring on capacity more frequently but a smaller scale and that’s something that

Advantages gasps particularly combined cycle gas turbine relative to the call and then of course there’s also been technological change partly that’s correlated with this the demand for lower capacity plants has encouraged people to invest in that kind of technology we’ve had this development of the gas technology and then economic and

Population growth increased the demand for energy but also particularly the demand for gas because of the environmental this is called the environmental Kuznets curve as people get wealthy one thing their demand is more environmental quality one thing we’re going to do with the model is we

Also want to look at some of the people David emphasized this idea that there could be potential hazards associated with this big growth and demand for gas one thing that may be a positive factor is that it’s possible that the see if I can figure out where this goes mine is

Going well I guess it’s important to push that one okay so one thing that could increase the demand for gas is as possibly using transport fuels one thing that things that could work in the opposite direction are alternatives for producing electricity and two in particular we’ve been interested in here

Or rice the use of potential development solar technology and coal gasification another one is development of high-voltage direct current transmission which would be an alternative transporting gas as i mentioned part of the origin of this project was the idea that we’re going to develop a new kind

Of market which is going to involve much more spot market trades of gas more liquid market or gas and that’s going to lead to this change in structure and the point of our previous analysis was that the expectation of a new market structure can actually itself tend to stimulate the development of that’ll

Turn I in the model that I talked about we have estimated demand based using data from the IEA we looked at related the demand for energy first of all to the level of economic activity that the population growth and the level of economic development and the key idea is

There’s a nonlinear relationship between economic growth and the demand for energy this is something that can and festus Lego who’s also done some work for this study on the possibility of a gas OPEC have worked on and basically the idea is that as the economy develops

As measured here by per capita GDP the extra growth in GDP leads to less than proportion of increase in demand for energy and then on top of that we have a similar kind of equation that relates the demand for gas and particular role teeth alternative fuels to changes in

The relative prices and again the level of economic development and putting those things together you get the demand on the demand side of the model of course to to use that the forecast you have to forecast economic growth at forecast prices at the forecast population growth we’re not modeling all

Those things we can’t we take the forecasts of those things from others and combine them with the demand forecasts on the supply side you’ve seen this picture before the major supply sources another way of looking at it in terms of numbers so here we have proved natural gas reserves by region in two

Double A three the numbers and the little boxes and below that we have undiscovered natural gas what we actually use in our model in terms of supply is we have the regional resource potential the median level of the resource potential resource estimates that come from the world resource

Assessment of the USGS which includes associated unassociated natural gas resources both conventional and unconventional gas deposits in North America but not outside of north america and conventional gas deposits in the rest of the world and the resource is divided into three categories proved growth in the non and

Undiscovered and all of this work is based on a model the USGS has developed about how given geological structures probabilistically were related to future resource potential and are going along with this database developed by the USGS and Altos resource cost estimates the cost of developing the given resources

In the different regions and then what the model does is it brings on these supplies dependent on the assessment of the cost of exploitation but also the current and expected future prices net of transport costs netting back subtracting out the transport costs for getting the resource to market the total

Available resources will also influence how the resources exploited the capital cost of development as well as the operating and maintenance costs and these production profiles by region that I mentioned we also have in the model the ability to influence tax rates required rates of return and other economic parameters which would give us

A lot of flexibility looking at different kinds of policies and then the model similarly determines new transportation links based on capital costs and operating and maintenance costs and of course an implication of the model is it supplies earning the greatest rents we’re going to be extracted first so here’s an example of

Some of these supply curves for a number of regions and given the remarks that were made this morning about guitar we’re going to have to revisit this one I think but but here’s an example so so we have this is the green one is North Alaska that there this one is Saudi

Arabia and this is Western Siberia and you can see that this picture implies an enormous resource potential in Western Siberia and that comes through in the model now as we work with the model things like that at our example the model is going to tell us how we think

The resources going to be developed we could compare that we think should happen and in that way we sort of work on the model iteratively so who is always a work in progress as as we develop results we go back and and look that’s the supply side the next

Thing is the transport links so what you do with these transport links we got Ken’s got all these maps up in his office of all the different pipeline networks you sit down and try to aggregate these pipeline well first of all you aggravate the demand so for

Example Germany has put the total demand in Germany we did into three different regions aggregate the demand into three nodes imagine it’s concentrated at three major points and similarly with some of the other larger countries like Frances on we have multiple demand nodes and then you also aggregate the pipeline

Capacities so the parallel pipes you imagine it’s just sort of one link aggregate the pipeline’s connecting the major supply regions and the demand region so you’ve got to discretize the the demand and supply system and in order to get a feasible set of feasible models you can work with as it is this

One takes several days to solve so I mentioned all this when it comes to LNG also we want to have a model which is flexible enough to accommodate different kinds of routes for getting the lng to market so one way we do that is we use a hub-and-spoke system so what this means

Is that is that getting from this hub to these different regions here it’s not this so depending on whether a particular project and the supplier country goes ahead through a number of different ways of getting gas here so that if any one of these supply projects doesn’t doesn’t get going you still may

Be able to get gas from this hub through the demand no see this way you by representing that the system is a hub-and-spoke system in this way rather than a series of bilateral trades it’s much more flexible less and less contingent on particular project going ahead the physical analogue of that

Would really be that if someone can fulfill a contract because they don’t have the supply essentially they can arrange a swap some sort of swap agreement so they can still fulfill the terms of the contract now we need to have estimates of the cost so we also use some econometrics to

Get estimates of the pipeline costs to using data on 52 different projects related the cost of those projects to the length of the pipe the weather crossed mountains with it across the ocean whether it was going through more populous areas and also the capacity of

The link and from that we get a sort of an equation that relates the cost of a pipeline to the various characteristics of that pipeline route and we use that to get these cost estimates for putting in new pipes in new parts of the world LNG costs we didn’t have quite the same

Database we consulted a variety of sources and that led us to number of cost estimates I don’t want to go into detail here but we have a table of some of the cost estimates and I guess our latest information is that possibly we’ve overestimated the shipping part of

This but we think that the these costs seem to be in the ballpark and sort of numbers that people have talked about and we’ve gone backwards and forwards a lot of people in the industry about that now some of these proposed LNG routes don’t go ahead in the model and some do

Okay so let’s talk about some of the base results so putting the model together one thing you see here is a price projection ad dollars per mbtu and here’s the range of prices for key locations and you can see it much as time goes on these range of prices is

Decreasing this is where this world mark is developing part of the Wiggles in these prices come about because of these new projects coming on because you bring on these new projects that have to come on in discrete increments so you build a big new pipeline that can lower prices

Temporarily and then they increase again and then the next increment capacity comes on so even though in the model there’s this incentive to arbitrage through time the offset to that is that you’ve got to bring on the capacity in discrete units Ken’s going to show you some more examples tomorrow

Of some some alternatives some alternative scenarios here’s what happens the model says about the supply in as it is in 2wo 22 20 20 20 40 and you’ll see this green here is Russian supply stays about the same percentage but of course the overall market is growing phenomenally throughout this

Period an interesting thing that happens in this this world is that in the end in fact Russia ends up building a pipe under connects its west and east and so we end up having for initially gas is supplied to China from East Siberia and then as those reserves start to decline

The model wants to connect in West Siberia with a new pipeline and so you end up with Russia being in the business of selling gas by pipeline east and west and by ong so it ends up being a key arbitrage point within the whole system

The the United States is in this red and you can see its share really declines as the u.s. deposits get depleted and then the other interesting thing in this is the Middle East grows picked at the end of our forecast period the middle eastern region really increases a chair

Another interesting one is the purple here Latin America something which I’ll say something about an amount in fact Latin America you end up not having such a large export because the yellow is this is the demand chairs and the point is that the demand within Latin America

Also grows a lot and you can also see here the biggest demand is is the US again now is the green and so it’s share though actually as a percentage of world demand declines that reflects the fact that we’ve got this nonlinear relationship between the level of economic development and and the demand

For gas so as these other countries develop that it accelerates the demand for gas faster than as the mature economies developed for the share of the US and Western Europe and overall world demand actually declines over time here’s what happens to LNG in this world

So we have a big increase in a knee showed you this picture earlier this morning the big increased big growth in LNG coming from the Middle East here at the tail end of the forecast period and then the finally I have two pictures one of major exporters here the big exporter is

Russia so this is russian exports this is all done as a share of world demand actually at one thing this picture shows overall is that there’s much more trading as the world develops here we have much much more trading of gas so exports become a much bigger share of

Overall world demand as as the as the time as time progresses but then also well the Russian share goes up a little bit but again you have coming in here Saudi Arabia and some of the Middle East another big one is Iran interestingly in this model what the model says that Iran

Should do is export natural gas to India via pipeline and so the big growth in Iranian exports use via pipeline to India finally that was the export side the import side here are some of the key countries that are importing according to the model as we as we progress

Through time so again the green is the US so imports less than twenty percent to double 02 but they rise closer to forty percent the end end of the horizon yellow and red here a china and india the the bronze brown bar is mexico the mexico is actually exporting down here

But then becomes a very big import in terms of its percentage of gas that’s met from from imports as i say the key point of this model is not so much to say this is what’s going to happen the key point is that’s a framework for us

To do a lot of these experiments thinking about what’s going to happen we going to change so one thing Ken’s going to talk about tomorrow as two of these experiments one where we change the costs of LNG in of them where we increase the required rate of return on

Projects in Russia that’s another way of saying the Russians side exercise the monopoly power and we see what that does to the rest of the market then a lot of the the experiments we’re going to do a look at some of these other technologies high-voltage direct-current like I

Talked about coal gasification and then we’re going to work with the Stanford people to develop a whole bunch of interesting political scenarios we’re also going to pinch impose on the model and see what that does thank you very much Peter thank you I’m sure we don’t

Like to get our hands on that model looks very interesting at this point I’d like to invite the expert panel up so Peter Bruce and John if you could join us up here for brief commentary on this and then we’ll have the other speakers come and join them for the question and

Answer after they are done right good afternoon again ladies and gentlemen I’ve been asked to go first and I’m operating under strict instructions because i was asked verbally and then with a follow up by email indicating it was actually serious to keep my comments well below eight

Minutes so I will attempt to do so and as a result which I have no graphics to show you I was asked to comment on a couple of couple of issues firstly you’ve heard a lot about the need for stable legal and regulatory frameworks to into our facilitate promote allow the

Tremendous investment in infrastructure that’s going to be needed if the great demand future for gas is going to be realized and I was asked how quickly I thought that might happen and then I was asked to make a few comments on the risks and opportunities in power and for

Gas as a Power Cells that firstly with the legal and regulatory how quickly are the right conditions being put in place to our infrastructure built to take place the answers of course that you very easy it’s not quickly enough now there’s a huge challenge here which should not be underestimated because we

Are in the process and many speakers have made this point I think we’re on the process essentially have a transition from one industry model to another industry model the old industry model is the one most was very familiar with which is the the structure based on long-term take-or-pay contracts on the

One hand monopolistic franchises by buyers with captive markets which therefore enable them to say to enter into these take-or-pay contracts as buyers on the other hand and those that contractual structure of the industry was basically the underpinning for a lot of the investment that’s taken place and

Therefore a lot of infrastructure to be financed on the project finance to semi non-recourse basis because that model is effectively on the way out and being replaced over time by the new industry model which is the more competitive competitive liquid fungible market model and this year there of course the big

Issue which has been raised by many is what therefore will underpin the investments that need to be made if the old underpinnings of discipline have disappeared the answer is sort of our frameworks legal and regulatory frameworks which inspire the confidence to invest because at the end of the day the substitute for long-term

Take or pay contract is called rapid market growth is called market volume market fungibility and if that market growth and confidence in that market growth is there people by and large will invest to bring the hydrocarbons to market but to make that investment of course you do need these stable legal

And regulatory frameworks and therefore that is the challenge and what we’re looking at whilst those frameworks are put in place to allow the investment is potentially a hiatus period where people don’t have the confidence in the newer model don’t have the confidence in the old model because that seemed to be on

The way out and therefore infrastructure bill does not take place so there’s a big challenge here and the challenge is to put those frameworks in place as soon as possible there is a sort of virtuous circle you can you can refer to you can identify here which is all about another

Consult / issue raised several times this morning risk and reward because if those frameworks are put in place to the satisfaction investors then essentially that will mean that people’s perception of risk is lower now if people’s perception of risk as investors is lower they will seek lower reward that is the

Risk-reward trade off and the lower reward reward aspirations by and large of course means lower cost and that’s lower costs for to be netted off the net back to the producers and it’s lower costs for consumers in terms of delivered prices so that is the virtuous circle that we’re looking for basically

Is that confidence I referred earlier this morning to the climate of confidence and this is I’m going to two minutes already I’m starting okay I was warned I can’t complain okay well so i mean i will so basically restrict my comments on legal and regulatory frameworks to that and move quickly onto

Power because in terms of the confidence for people in to invest the confidence of mature markets and growing markets as you’ve heard again and again a lot of that demand growth will come from the power sector or is forecast to come from the power sector now i think i sounded a

Warning this morning which I repeat now this is not a given now we look in a few places and we see that actually this is not happening I mean let me take one case in point Germany Germany has been mentioned as of today may surprise many of you in the room to

Find out that Germany’s as of today does not have one single combined cycle gas turbine in operation which is an interesting fact in itself why because the gas supply is not being made available to the power sector on the right terms and conditions this is all to do with indexation oil indexation and

The recent rise in oil prices has a course effectively priced gas out of the power market and therefore that Mar that market growth that latent demand is not being realized going forward if if we think consider that two-thirds of demand growth is going to derive from the power

Sector then clearly that is going to have a funding fundamental impact on the value of gas and I think as an industry one thing we do need to understand much much further as a function of fundamental power marking economics is what is the fundamental value for gas as

Power and if gas is to be sold as power what what are the mechanisms for ensuring that the maximum value is retained by the resource owner and the supplier if the if the value proposition is a sale of electrons and how do you ensure how do you minimize the cost of

Converting gas into electrons to maximize the net back to the supplier I think I’m out of time so I will stop there I was I was not asked to keep it 28 i was told 15 but view if you want eight you get 8 i’m bruce Kylie when I was

Asked to talk here the question was what kind of contribution could I make and I thought that I would talk about the importance of us streamlining the LNG terminal permitting process is that could be the big roadblock to preventing lng full potential in the United States

So I prepared this last week and then I listened to his Excellency this morning I listened to the secretary Baker and virtually every speaker and everybody says one of the real problems in the United States is the permitting process I think it’s important if we’re going to

Try to fix that process if we’re going to try to improve the potential of LNG in America we need to know a little bit about where this problem began where it is now and perhaps give you some suggestions and how we can improve the process there’s no doubt that the US

Policy today is pro LNG you heard it from you’ve heard it from alan greenspan you heard from secretary Abraham the NPC report deals with it USA Today a couple days ago even had an editorial in favor of LNG terminals so what’s the problem how come there are only four terminals

Today that’s a little cloudy but the out of all those dots there those are all the proposed terminals but 44 or in operation today one the Gulf Coast went off of Georgia one of the Chesapeake Bay one in Boston and the rest of those are all proposed Burke has approved one the

Cameron and Louisiana port Pelican offshore is almost approved Freeport in Texas is getting fairly close but here we have the potential people say eight to ten by 2010 but the permits aren’t being issued and I think supplying countries such as Algeria are nervous about whether the US will be in a

Position to receive lng qatar ought to be a little nervous about whether going to be in position receive lng we have exxon mobil with the big project conocophillips of the big project and will in fact the terminals be in place in time to receive that supply thinking at

It from the standpoint of Americans are the LNG terminals going to be in place in time to be a meaningful contribution to the overall natural gas mix I come at this a little bit from perspective of a lawyer I represent a project in New England it’s been on file for over a

Year and its opposition after opposition after opposition and if that opposition succeeds there’s going to be a problem if the op if the opposition is not successful firkin see fit to issuing a certificate that will start to put confidence in the lng industry industry overall that maybe LNG is doable in

America the dynamics of onshore regulation are interesting FERC used to have an open access policy they used to treat LNG terminals as if they were pipelines as you heard this morning from various speakers who are the suppliers the major producers they’re not interested in building a terminal incurring the capital costs if they’re

Not sure they can use it for their own LNG that was an impediment to a lot of projects the four projects built today are on the old pipeline cost a service open access model the new ones are on a new model right now they don’t have to

Be but they’re on the model where you can you can apply for a permit if you get the license to build it you can use it one hundred percent for yourself or if you choose you can share it with others that was a big breakthrough and

That got a lot of people interested but what is the difference between the old model and the new the old is a kind of a tolling model like cove point the coke point owners don’t own L&G they just own the terminal and the various users pay a

Fee same thing was true at elba island lake charles the new terminals coming along are just part of the lng value chain and people want to keep the cost of those terminals down as opposed to in the pipeline days when you want to build up rate base so you could earn a return

Under the new structure a hundred percent of the benefit of the terminal is for the owner one hundred percent of the risk of the terminals for the owner part of the overall value chain now the fact that that FERC came up with a better proposal for projects is good

But it didn’t change the fact that you need regulatory approvals and that’s where the problem starts no matter what you have to go through environmental review and I think everybody in this room is happy to have environmental review we want to make projects that are clean do minimum damage to the

Environment the problem with environmental review is it becomes a tool for delay even a tool to block or thwart a project the from the first side FERC does a pretty good job they got a fairly good team they just established a new LNG processing group they tend to be

The lead agency among the federal of the federal agencies and they move at a pretty good pace but the NEPA process takes time and today if FERC has that prior chart if FERC has under wypall some boatman’s to burn down but a FERC if FERC has 38 cases before it’s going

To take a while for them to work their way wade through that backlog so the permitting process is important but where are we finding the biggest challenge today is not so much on the federal side but when you get to the state’s those of you in the room to

Remember the 1970s when there’s natural gas shortage oil prices were high the the environmental groups were opposing infrastructure projects NIMBYism was in full full bloom now we’re in 2004 we have a high oil prices we’re starting to have a supply-demand imbalance on natural gas we need infrastructure we need LNG terminals the environmental

Zarb act and the NIMBYs are back in full force and they’re there they’re back and they’re not worried about environmental issues nearly as much as they are about we do not want a project one of the one of the more difficult things that’s happened recently is their zeal to block

The projects is so strong that they’ve now created the specter of fear back in the 70s when LNG terminals are first being built in the u.s. they worried about the storage tank and people who really worried about the storage tank I’m got debunked overtime because there are safety mechanism

In place since nine eleven since the USS Cole incidents like that people are now raising the specter that an LNG vessel when it’s near land near a community perhaps when it’s offloading will be hit by a terrorist attack of some sort there’ll be a massive spill of liquid on

The water the liquid will vaporize and it’ll turn into a fire and so so that and and so that is a serious issue everybody wants a safe industry everybody wants to have an industry that if the customers are comfortable the local community is comfortable and the industry’s comfortable but this is a

Problem FERC a couple weeks ago you should report called an ABS report which purported to deal with this LNG vessel safety issue and if you’ve read the report if you’re in the business if you’re in the shipping business it probably gave you pause and the industry will probably reply strongly on this

Friday is to the issues FERC has raised so FERC means well but in its own permitting processes create another hurdle where people have to start disproving the safety issue all over again when I say dis proving yet I think each project applicant is going to have to put on a Major Case demonstrating

That its particular project and the unique features that project can bring a vessel in in a safe and secure manner of course a lot of that goes to the Coast Guard the Coast Guard is going to have to become more involved in the front process all LNG shippers know that you

Have to deal with the Coast Guard you have letters of intent to operate you’ll have a Coast Guard protocol but that’s going to become increasingly important to this business if we’re going to satisfy the communities that LNG can be delivered safely can be offloaded safely and does not present present a threat to

Their community one final word out of the processing mess we’re in is the most important thing I believe that the US industry needs is prefer to start issuing some approvals of projects for merit and the Department of Transportation start issuing some approval zuv offshore projects so that the industry knows projects can

Get done in America the supply starts to flow the supplying countries and the major sponsors the major oil companies know that LNG will be a viable source of supply in America John thank you very much I don’t have any prepared comments or slides what i thought i would do is

Maybe just wrap up with a few comments on some of the issues that were presented this morning and then also a few thoughts that i had listening to the very intriguing remarks about this modeling study that have been undertaken over the past two years as an industry

Practitioner i have to point out that i’m not often found in in a academia typesetting dealing more day to day on the challenges of developing the rege ass however many of the issues and some of the findings are quite interesting to me nonetheless particularly with regard

To this to the issue of security supply brusa just highlighted a few of the issues involved around citing nuri gas facilities those happen to be the ones that are the opposition highlights initially to safety security these types of things one I think that is going to get more and more attention however as

We do in fact see these facilities being certificated and built is going to be the ? around the security supply and people are going to look to the upstream and look at particularly at the host countries in terms of how secure are these new supplies the Americans North

Americans in particular have been used to having domestically supplied natural gas and now we’re changing that process to where our gas will be a combination although still the preponderance of the volumes will be coming from North American production the the consequence of having to import natural gas is going

To be a new one as was pointed out earlier something new is always to catch the attention and be hard for people to accept second point I intrigued by the work being done under this new study is Bob knows well I was involved as a head of the LNG subgroup

For the NPC study and one of the things we did not have either a mandate or the resources to do was exactly this type of work to look at the upstream and to look at some of these consequences of international supply and I think this is

A much needed work and and I’m glad to see that many of the results that are being hinted at in terms of the presentations are actually falling in line with some of our assumptions that we made in terms of that study assuming that the volumes we’re going to be there

That the markers would act rationally and that North America would would be a preferential destination for from any of these supply so that that was also keen interest to me long-term the underpinning of these projects through long-term contracts I think we keep hearing again and again but that’s a

Theme that we’ve heard throughout the morning I think that we are on the verge of seeing a some dramatic changes in the industry people have talked about these swaps and being able to ring out more efficiencies in the system and surely there there are many of those that that

Yet to be remained to be enacted and so therefore I think as we talk about these swaps and talk about these activities they’re coming I see them day-to-day in activities going on as we speak from the commercial side they are however more difficult and then people might believe

Having us having to do a swap having to gain the get the commercial frameworks in place legally regulatory agreements from the host countries and even the participants themselves to become comfortable with their counterparties is all taking some time but it’s it’s coming and so we we certainly don’t see

That short-term or speculative projects are going to be built because of the magnitude of the rege ass and in the full chain that’s involved however we see more efficiencies coming throughout this the process so those are the some of the key points that I’ve taken note of this

Morning and I’m very pleased with what I’m hearing and I’m glad to see that much of this work is going forward thank you John we have our three speakers up here I’ve been asked to ask you to ask questions to move to one of the microphones and we’ll try to introduce

Say your name and your affiliation and if you want to direct your question towards a specific panelist if you could so indicate that as well so we have 25 minutes or so for questions does anybody want to start sir from the World Bank my question is directed to David David Rita

You mentioned the the case of the gas prom as targeting essentially the German market you do know also that the rule gasps did by 5% of Gazprom so how do you explain that that’s the first question the second question concerning the transit countries i think is perhaps

Missing a point after the collapse of the soviet union many of these countries were faced by Gazprom to pay the price that the Germans were paying and with an economy that it has collapsed they turned around and they said can we also get the same transit fees as the others

And this is what you know the whole thing started turning sour and last but not least I think Gazprom has also targeted like Suze gas export before it the French market the Italian market and the the Spanish market eventually and the Austrian market have you mentioned

That in your model and is it taking into account you know those dynamics to thank you thank you very much let me just take the trying to take them in reverse order the this particular project was first and foremost focused on the German market because of both the size of the German market

Because of capacity constraints in the northeastern Germany and because of the routing of this pipeline allows you direct access there there’s a part of the story that it didn’t talk about here that is in the paper which in which Troy hand is is managing the sale of the distribution companies at least Germany

As well and so that’s going on at the same time and you have the same players that gas prom is trying to work with in this case get around roar gasps those same players are trying to take stakes and actually together end up taking a joint stake in the same company in East

Germany and I think that helps answer your question about so it seems kind of bizarre that gasps prom then takes the the largest foreign stake a roar gasps maybe that wasn’t maybe that was freudian Rory has takes the largest foreign stake of gas prom and the only

Non Russian member of gas proms board is the head of Rho gas now part of young I think along the way that because the German government was highly ambivalent during this period about whether they really wanted this kind of restructured gas market and that’s why we never

Really saw any clear policy signal from the German government as to whether this was a good thing or a bad thing if the German government had really wanted this then I think you would have seen for example prohibitions on cross holdings in the East German distribution companies instead what happens you had

All the same players who were nominally competing actually owning part stakes and the same companies in East Germany and that’s helps understand then roar gases interest in taking this stake in gas prawn what I see going on here is a kind of reintegration of this industry along lines that are formally possibly

In compliance with the European concepts of competition but in reality allow information to flow in ways that I think there’s going to be very very hard for competition authorities to to to address and then you had another very important point which I’d completely forgotten transit the expansion cannot get down to

The transit country story is is very complex here because these are not countries that are just sitting there with gas flowing across there are also enormous enormous users and the Ukrainians are I believe even using more gas than is ultimately transiting leaving the country as as export we

Document this in some more detail in the paper the outcome of the transit country negotiations largely reflects the the relative power and influence of these countries so we don’t argue that the transit country question here is totally irrelevant for example when when the Russian government and gas prams settled

The matter with largely settled the matter in the middle 1990s with Ukraine it was settled long lines that were I think very favorable to Ukrainian interests because they were still nonetheless in a very very strong position but we wanted to underscore in the paper that the contestability of

These markets over the long term is what’s really important because of the lumpy nature of these projects but if you blow it as it were and it results in forcing another project that allows substantial bypass then you’re going to live with the consequences of that for a

Long period of time the same issues going to come up tomorrow morning when mark Hayes speaks about the transmitted project which exports gas room from Algeria to Italy next yes David pruner Wood Mackenzie wanted to ask you all we’ve seen a lot of interest from the LNG suppliers who are trying to

Determine whether or not this LNG swap market is going to develop and kind of if so when we’re also seeing though people that are not in the LNG game but are very well capitalized rather large entities that are looking to try to participate as a middleman in potentially LNG suave so the two-part

Question is when might a market developed kind of timing wise and you’ll see a role for a large credit where the counterparty third-party to come in and fulfill some of the swap activity one of the dreams of LNG is to get these swaps and the reason why they didn’t

Develop earlier on is that there were these mono trades and LNG ships did not cross in the night so there was no logical swap now with literally contracts if not ships crossing in the night that’s I’m going to talk about tomorrow this swaps are now finally being done though I’d agree with John

That there be there very complex and as the question about the middleman if you call shell and BP middlemen then perhaps but I it reminds me of when the the middle men tried to establish themselves in the UK in the beginning and went to the producers and one of my friends at

BP said why do we need you we can place it ourselves which they did so I would argue that in LNG so far for a long time that to play a role you need to be anchored somewhere you need to either be a producer or a major buyer and have an

Interest other than being a middleman otherwise I don’t actually think you can make a strong case that you bring commercial value to the value chain indeed you add costs and probably complexity and as far as I and most of the people in L&G are concerned there’s already enough complexity without

Voluntarily adding more Peter Hughes or John you want to take a shot of there sure I certainly agree with that I just add to that that I mean we we sort of consider that the LNG business as it develops will over time develop on the lines the oil business but because of

The particular character characteristics of gas and energy particular it is unlikely to reach the same degree of fungibility what we do expect is a far more integrated structure of the gas value chain we think the the rewards and risks will best be managed by virtue of

An inter as a function of an integrated approach to this market in terms of the the ability to derive benefit from the arbitrage and sort of seasonal seasonal variations and price variations I mean I think our view certainly it’s that the best way to do that will free

Be through a portfolio of advantaged supply positions and market access positions which will enable that to that arbitrage to be realized i think the scope for middlemen to come into this market will be fairly limited for some some time to come it just would like to

Add one other point that was brought out during the morning discussions as well regarding risk of downstream market and the fact that many of these large players are in fact taking the risk of being able to make the gas go away from the rhee gas terminal into the US market

People often talk on a conceptual level that it’s a very deep and liquid market however you still have to underpin those with contracts and the ability to move that gas away and one of the elements here not only do you have the contractual concerns upstream and with

The shipping that have to be taken into consideration and built into the system but also the fact that if you’re diverting supplies and something happens in that diversion and being able to play in that game you have to be able to cover those long positions that you

Might have in the downstream market as well so these are all things that tend to indicate that you have to be a large player and a middleman role is going to be long and coming this one will reinforce what Amy said this morning this is quite profound that you have

People here talking about how and when rather than if this is going to be done one of the comment I would like to make on that is that I think we can learn something from electricity markets as well that a lot of the deregulated of Crisa d markets now about eighty-five

Percent maybe of electricity soul and long term contract but there’s a very active market in contract for differences and situations where governments have tried to force a lot of spot trading we’ve got into trouble and on the other hand situations where you require you know the vast majority much

Bigger than eighty-five percent of electricity to be traded on long-term contract there’s also a problem and you leave up to market because they seem to go for about eighty five percent there’s about fifteen percent left left uncovered in terms of long-term contracts or contracts for differences and the other lesson from

That is these is that the organized exchange markets can actually facilitate a lot of this risk trading saying if welded up options and futures markets based on I think that’s one advantage of having LNG being traded in to to the United States and possibly also Europe where you have you have more developed

Gas mark thank you Peter next question hi John beers with dow jones newswires we’ve seen some recent indications about renewed interest in both nuclear and coal i’m just wondering how you see that if that’s seen as sort of hypothetical if gas doesn’t work out or what how we

Should read that especially in light of the uncertainty around lng permitting in the u.s. they might take go ahead haven well i mean this is a huge question and so i’m sure others are going to want to say something about this as well i don’t think this is just hypothetical I mean

The pre approval of a few designs by NRC for under the nuclear front along with the possibility of even announcements within the next few years citing issues are not trivial in the case of a nuclear power plant but the sighting issues are not trivial trivial in the case of

Regasification facilities and there’s an enormous danger that this LNG business is going to become at least in terms of citing like the new nuclear power that the industry won’t have paid enough attention to this problem and it’s very important to go back and look at what the industry and nuclear did especially

In the aftermath of Chernobyl nuclear operators association the effort to disseminate best practices because an incident anywhere in the world is a content will have a contagion effect everywhere in the world and you can the engineers are always telling it’s safe and you know I’ll drink the stuff or

Whatever they’re saying and that’s all I’m sure true but it’s also almost totally irrelevant the fact that a gasoline truck driving through your neighborhoods a lot more dangerous just doesn’t matter in terms of the real problems on the ground in terms ciety this is a public relations at

Genuine public relations problem let me just say a word about carbon we tend to forget that here in this country because we don’t really have a climate policy but this is not an irrelevant issue the climate change problem and and it’s unclear though how carbon works out

Because you’d think that if you’re if you expect as I think most people in the industry do that there’s going to be a limitation on carbon dioxide and then in the not irrelevant future so in the time horizons that these plants are going to operate you think that folks would be

Wary of citing a coal-fired power plant but the reality of how carbon is probably going to be addressed in this country as is happening right now in Europe is it’s going to happen probably through an emissions trading system in which the allocation of the permits probably will follow more or less the

Status quo so it’s not actually a terrible strategy to have a big carbon emitting facility sitting there if you think that there’s going to be an allocation of carbon permits sometime in the in the future because it gives you a baseline from which permits worth billions tens of billions of dollars it

Will be the largest single creation of property since the opening of the American West when we allocate these emission permits that could be a big deal and I think that’s part of the reason why you don’t see as much aversion to new coal plants in light of

The climate change problem as you might as you might expect with a lot of other elements that story but I’ll be quiet another’s one sure would want to comment anybody else want to take a shot at that well in a lot of our work we’ve argued

That they will work on the basis that we think integrated gasification coal is as an alternative to gas at least in the short term in the longer term we’ve been looking at solar strategies we don’t doing done doing a lot of work looking at solar cells and we the other thing I

Mentioned in my talk was high-voltage direct current transmission we’ve been working with the nanotechnology people here at Rice they’re very interested they think that a lot of opportunities for using nanotechnology a for improving solar cell efficiency and I notice there’s a news item about a week ago that some nanotechnology developments

Look like they can double the efficiency of solar cell but also the nanotechnology people think there are a lot of opportunities for using new materials to greatly improve high-voltage direct current transmission that could involve decreasing resistance of the wires but can also involve making them stronger and lighter which also

Greatly reduces the cost of you could reduce the amount of land is a very important expense and putting in those lengths so that’s another another way that you can get a lot more efficiency out of the electricity system and it also would advantage sort of solar

Plants if you could put them in a place like Arizona where land is cheap and then transmit the power at low cost so slightly longer term is another alternative to gas a couple other quick comments on yeah I just wanted to say that you there’s your political and your

Technical answer I just like to give a commercial gas answer which is first of all what gas has to do by kohls keep its price lower and if it can keep it’s priced lower people are not going to cite the coal plants because the confidence in emission trading it

Remains theoretical though I agree with the theory it just remains theoretical the second thing is that the logical thing to do about the inefficiency of the electricity system in my view long before you get that technology is to do distributed energy because right now with existing technology gas pipelines

Are a far more efficient way to move energy than high-voltage lines and so the gas should be generating power right in our houses or in our industrial sites and if the gas industry were more attuned to that commercial opportunity and a lot slower and less slow to adapt

To it then I think that that would be that’s a more logical evolutionary step towards the efficiency and both of those are possible technically but seem to be beyond the commercial innovation of the industry Peter Hughes I’m going to make a similar point on economics because

Mean this is this is the number the issue and if you look at the United States today the United States has added since 2000 I think about 220,000 megawatts of new gas gas turbine and capacity mainly combined cycle gas turbine capacity since 2003 a lot of that capacity today is not firing I

Think an average utilization rate for all that capacity is about thirty percent whereas the basis on which that investment was made was that it would fire about seventy percent base load why because the price of gas is simply too high it is not competitive in The Dispatch curve and it is not dispatching

As such as a in an economic catastrophe for the investors what is going to resolve this what is going to bring the gas price down to level which allows that that capacity to come back on streak the aren’t the answer is lng the answer is LNG without large quantities

Of LNG coming down into the US market and the US market will clear because markets are efficient the market will clear it will clear at a lower demand level a lower volume and a higher price that lower demand level will not include not much gasified capacity and if the

High price is maintained because the elegy doesn’t find access this market the next generation of power generation capacity will be coal or will be nuclear because of fundamental economics and when that capacity comes on the stream because of its very low marginal cost dispatch characteristics it’ll actually

Force gasps what gasps flood capacity is dispatching back down merit order so there will be less demand for gas so we had a lot of talk today about demand growth for gas predict in the u.s. there was actually a scenario which says which I alluded to this morning which actually

Is of no demand growth and even demand decline in this market okay went comment on that too which is at the end of the the forecast horizon in the little model that I spoke about prices were getting toward the end of that period would bring on coal gasification so even there

Where you have all the the natural gas being developed so forth an LNG coming in still toward the end of that at horizon there are these alternative alternatives out there they’re going to be very competitive with gas thank you next question thank you Alex Farrell UC Berkeley and this question is really for

Mr. Bradley and mr. Hughes but it reflects some of the discussion that’s just been going on and the restriction needs for the energy systems that we have a need for in the future are quite dramatic in the question really is what do we need to do in changing the processes by which we

Come up with the schemes for these infrastructures and so for instance the nuclear option that David mentioned if you pay attention to the nuclear industry as I pay a little bit of attention to their really worried about what happens after Yucca Mountain Yucca Mountain is approximately sized for the

Waste for once to reactor of fleet that we have today and it’s difficult for investors to think investors anyway maybe not do e to think about a new nuclear power plant fleet without a new Yucca Mountain imagine that problem and so this question of trust i think mr.

Hughes was really quite interesting you brought it up in multiple dimensions not just the trust that either exists or doesn’t exist between the enviro s and the developers but the trust and not just between the investors and the producing countries but also the fair trade issue and so I’m wondering the mr.

Blindly the process that you sort of described and maybe miss hearing it does sound a little bit like we come in with a development project we argue about it we go to the formal legal processes FERC or whatever I might be wrong about how I’m hearing that but are the processes

That we have set up today and it might not just be on regasification terminals really feasible for solving these citing problems where citizens don’t want many of these infrastructures knew them at all the process right now it’s possible that’ll work that the the bay the biggest problem I think you’re saying is

You do have the local opposition it truly is and not in my backyard they’re not they are not thinking about the alternative to shutting down an LNG terminal that you might have a nuclear plant they’re not thinking that there won’t be another Yucca Mountain they’re thinking they don’t want it in their

Backyard and it doesn’t matter what the economic benefit would be it doesn’t matter that it would or would not have any adverse impact on the community they just want to shut it down the solution is I think under the current statutory framework is FERC has to keep with it to

Tip extense an onshore terminal FERC has to keep pushing ahead exercise the full extent of its jurisdiction and start issuing some permits so there’s a sense of confidence we have one or two new terminals built they work there’s plenty of mitigation measures with the Coast Guard and others to keep

The safety factor under control and if you have that kind of momentum building then I think there’s a chance that you get to your seven or eight terminals in the u.s. a problem you have though life is never simple state of california’s is challenging today whether FERC has the

Jurisdiction to authorize a terminal in California or not if the if the you at the courts decide that California has either equal shot or a better shot at it than FERC however many coastal states there are you’re going to have each one of those states deciding what the

National energy policy is not the federal government if you have that the only solution is legislation legislation has been introduced within the last two weeks three weeks I guess that would make clear that FERC has is the lead agency for all LNG projects that has exclusive jurisdiction it is the lead

Agency within the federal government and it has to act within one year and if any federal or state agency does anything that conflicts with FERC for Trump cyl I don’t know that you have to go to that extreme if everybody were to start to cooperate but if people don’t cooperate

And the people building projects here can speak to this too but if people won’t cooperate and be fair and approved the best projects I think you have to have legislation otherwise you get to the point the gas prices are high you get your coal plants and other time I

Mean I I think the simple answer your question is something the it is down to initio trust I mean look at the fundamentals and it’s worth repeating that the world is not short of gas the world has lots and lots of gas as of

Today in RP ratio of 60 most of that gas actually has been found for one good reason called accident by an industry looking for looking for liquid hydrocarbons in which found gas by accident sins a lot of gas out there a lot more to come so that is not a

Fundamental constraint on on a very smooth and fairly rapid development of the global gas business it is all the other sort of in tution and structural issues that we’ve we’ve heard about and those barriers have to be removed and it is ultimately the enlightened self-interest of the United States and other countries to

Remove those barriers such as to allow gas to flow in the manner I’ve referred to if you sorta you restore the cost of the long-term cost the supply curve so we’re showing earlier I mean the only issue I would take with them is actually the the increase in the latter part

Appeared as I suspect that actually underestimates the ability the proven ability of our industry to secure ongoing cost reductions and to use technology internal technology improvements to drive down the cost of supply so there’s plentiful supply out there and plentiful supply at a very reasonable cost which if allowed to

Access market and will be well be forthcoming the trust is is all about as I think I said earlier I think trust that the key to trust its partnership is corporation it’s producers a producer supply-demand corporation I think there’s a huge role but then I would say

That would knife a company’s like my own for ExxonMobil for shellfish FTX for conocophillips in that respect in in terms of engaging mutually advantageous partnerships to provide the finance the technology and the access to market for gas predictive access to market that’s required to grow the cast business on

The demand side again all I can just repeat we have a fundamental need to educate people to make them comfortable to develop that climate have come for comfort and confidence that this is not a dangerous business there’s plenty of gas out there but there are lots of

Reliable suppliers and they can they can trust in it under the technology it is proven and the safety record of the industry is a very very strong and solid one okay we have two more questions max so though two standing will be the last to go ahead sir thank you chris ross

With jaws river associates one thing that puzzles me and david i think you brought up a very provocative point that you thought that gas pipeline Russia will be smaller more bite-sized in the future how is Russia going to fulfill its position in your forecasts with bite size / pipelines and with a monopoly

That is going to run out of money well let me let me have a brief answer and then Peter may may want to say something more lots of bytes it’s the big consumer is a big guy there you can eat a lot so lots of bite-size projects just remember that the earlier projects

Which were state to state agreements involved huge huge slugs of gas and I don’t think you’re going to see any commercial operator interested in doing doing projects on that scale now there’s the early parts of Jamal are going to have to probably involve larger slugs then simple expansion of some of the

Existing fields and all of that is is is correct the question of the future of the Russian gas exports in the gas system and Russia because one of the be great and crucially important questions in the world gas industry today they have as everybody knows a monopoly they

Put in this the numbers are just staggering they don’t they put almost none of the huge amounts of associated gas actually end up in the pipeline network and that’s one story after another I think we don’t know what’s going to happen with the future of gas

Prom if I were sitting a gas prom I would want to keep control over that network because that’s where the rents are going to are going to are going to reside but there are a lot of really interesting and important scenarios for possible reform I think we just don’t

Know what that is but there are a lot of good ideas out there comment in terms of that the model I mean we first of all the pipeline’s that we have added in the model i added gradually so capacities incremented but the second point I want

To make is that an act one thing we want to do with the model to improve is improve the way we treat economies of scale in building pipes so we do have some elements of economies of scale in there but we need to do more work on

That so I think to answer that question so you might want to say okay if we represent the economies of scale and building pipelines better than we currently do and then the model says you should be building these huge pipes but then Davis as well it ain’t going to

Happen here politically so then that’s going to be forced to just more continual add proper smaller pipes more continuously it’s going to raise costs and so on but it still happened one thing one reason in the model where you get these these illegals and so on is as I was saying that you

You want to add capacity in discrete laps because there’s a fixed cost of nana marginal cost I am the phenomenon that you described David is one that I that I called marker pen pipeliners it’s very easy to take your magic marker and write all over world map it’s a lot more

Difficult to lay a pipeline but the world has been plagued by marker pen pipeliners as long as I’ve been involved in the gas business and I’ve also noticed that they almost always get built in logical small connections and filled in later and I see no reason why that won’t keep that won’t keep

Happening we had an aberration where the economic radius of gas was artificially enlarged during the period of Soviet Union but even that’s economically logical because they could also force all those places it went to take large amounts of gas so they were actually doing both the supply and demand so you

Know I would argue that that wasn’t entirely logical though though that they can no longer do that they have lots of demand but not much just sorry lots of consumption but not much demand in in Russia and the other thing is that one of the things to remember and it’s one

Of the comments that are made in discussion yesterday and the model here is where LNG has a huge competitive advantage because as markets become more mature they’re going to be able to absorb smaller and smaller incremental amounts and if your pipeline project depends on a 10 BCM launch or 15 and LNG

Can put in one little train and capture the market then LNG will put in little eyedropper bits and the garden hose big pipeline will never get off the ground the fact it will stay a magic marker pipeline yes I’m going to appear take a shot then

We have to apologize so that we don’t push the next session we’ll just have to stop at this question but we’ll make sure you can corner get first dibs at these people when we break so Peter why’d you close it out with your answer and we under the break well right very

Quickly I just wanted I thing reinforce the point about economic rationality we should apply for the capacity decisions I mean in the good old days that the marker pen environment did exist and you’ve seen actually some results of that marker pen environment one of them is called the blue stream pipeline which

Is across the Black Sea which is pipeline of 400 kilometers length which costs just over 3 billion dollars and was driven by factors other than purely economic I mean going forward you’ve heard mention of gas bombs desire stated the desire to build a new North Baltic

Pipeline now this will be a new corridor and what really cost money in terms of gas infrastructure is creating new corridors so whereas you might be a gas won’t talk about it what you will see them doing practice is almost certainly compressed and loop the existing corridors because those represent the

The most cost-effective manner way of increasing capacity into a given market it doesn’t get a work get around the transit country is used which are still pressing ones for them but if you wanted a negotiating lever with the transit countries in question you would of course want to promote the idea that a

New pipelines getting them would be in the offing thank you let’s give a hand for a great session thank back here back here at four o’clock