January 30, 2008
Oil companies have struck a potentially rich vein with respect to stranded national gas reserves. They no longer need to flare it. They can now bring it to market in the form of liquefied natural gas, or LNG.
But a central question is whether the oil companies and the host nations trust each other enough to allow this development to occur. Dissension from locals who fear being ripped off by Western capitalists is high. But the oil companies say that they work hard to fulfill their social compact while still honoring their investors.
The relationship can be lucrative for both sides. In its third quarter financials, Shell Oil Co. says that LNG made a significant contribution to net profit. One division, Shell Petroleum Development, is expected to invest $3 billion over the next six years in Nigeria and all to collect stranded natural gas. The purpose is not just to sell a valuable commodity but to also avoid criticism that it is acting environmentally reckless by burning off gas. At the same time, Nigeria hopes to share in the wealth.
The biggest havens for LNG deposits include Qatar, Indonesia, Malaysia, Algeria, Australia and Russia, which are reported to hold 70 percent of global gas reserves. Nigeria, Egypt and Trinidad are well behind those nations. When tallied up, the Middle East holds 41 percent of the world's natural gas while Russia contains 26 percent of it, says the International Energy Agency in Paris. Developed nations have 9 percent of proven natural gas reserves.
In the next five years, global gas demand is projected to increase to 113 trillion cubic feet, or 2.4 percent per year, says the International Energy Agency. Even if high gas prices persist, a decrease in that demand is only likely to be felt after 2010. The LNG industry currently constitutes only 6.5 percent of the gas market but is set to attract half of the sector's investments, it adds. As far as the United States goes, LNG currently provides approximately 2.8 percent, a figure that is predicted to increase to 16 percent by 2030, according to the U.S. Department of Energy.
At issue is whether the United States and the West in general should rely upon such an essential commodity from nations whose economic and social values may not be in synch with each other. Many say "no." Many others, however, say we have no choice.
While Western nations are asking if they can depend on others that are less-in-tune with their values, the developing countries are debating whether they should give the big oil companies carte blanche over their oil and gas basins. The reality is that most of those nations have well-positioned national enterprises that control the processes. They seek Western partners primarily for their technological knowledge.
Winning Investment
Shell, BP, France's Total, ExxonMobil Corporation, British Gas and Chevron are among the biggest players who are investing about $10 billion in LNG facilities. Certainly, much of the world has moved beyond the stereotypical images of the multi-national corporation as preying upon their people and their profits. Progressive reformers largely see them as sources of prosperity and economic development.
Take Chevron, which says that 90 percent of everyone it employs in Angola and Nigeria are locals. It says that it is also addressing energy poverty in the remotest sections of the Niger Delta, where many communities lack commercial electricity. It is building transmission cables and installing power-generating facilities -- all to provide 100,000 Delta residents in 20 communities with electric power.
"To succeed today, a company like Chevron must demonstrate world-class performance across every aspect of our business, from our technical and financial performance to our impact on society and the environment -- the so-called triple bottom line," says Peter Robertson, vice chair of Chevron. "Nearly every single Chevron employee integrates these values into everyday activities and decision-making."
To be sure, the host countries and the oil companies often have uneasy relationships. Consider the 663-mile pipeline from Chad to Cameroon in West Africa: The $3.7 billion deal that culminated in 2003 was a combative process. Critics said revenues from construction activity would not be invested back into the country, pointing out that French, German and U.S. companies had won all the contracts.
Ever-increasing costs are also a deterrent. Chevron has seen escalating cost at its Greater Gorge project in Australia. The facility was expected to come on line in 2010 and to cost about $11 billion. Now, though, the company says it won't be completed until 2015 and that it will now cost about $14 billion. Shell, meantime, says that Sakhalin 2 LNG project in Russia is going to rise from $10 billion to $20 billion.
In the end, more projects will get built because of the promise that the host governments will reap millions in new tax revenues. High global demand will help ensure it. In fact, Scottish Consultancy Wood Mackenzie says that worldwide LNG demand will triple by 2020. It is predicting consumption will blossom from 7 trillion cubic feet a year now to 25 trillion cubic feet a year in that time frame.
"The big challenge facing the LNG industry in the foreseeable future is actually getting access to sufficient gas reserves, or enough gas supplies to feed growth," says Frank Harris, head of global LNG for Wood Mackenzie, in a speech. "We think this is an issue in the short, medium and long term. The national oil and gas companies' strategies are evolving. To keep growing, the international companies have to do more exploration."
Big oil companies and the nations in which they do business are linked at the hip. It's a symbiotic relationship and one that will require the hosts to lessen restrictions and the industry to maintain a firm social compact. It's about creating prosperity and helping to feed the global energy demand.
More information is available from Energy Central:
• Shaping the Future of LNG, EnergyBiz, Nov/Dec 2005
• LNG's Bright Prospects, EnergyBiz, Nov/Dec 2007
• Global Big Boys in Natural Gas - Developing LNG Resources, EnergyBiz, Jan/Feb 2008
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Ken Silverstein EnergyBiz Insider Editor-in-Chief
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