From the first of a three-part series about global gas, sponsored by ExxonMobil, DCFR President Jennifer Warren interviewed panelist Mikkal Herberg, research director on Asian energy security at The National Bureau of Asian Research (NBR).

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‘ Global Themes
an issues brief series of the Dallas Committee on Foreign Relations
DCFR
Dallas Committee on Foreign Relations
Issue No. 1 May 24, 2011
Global Gas
Changing trade routes and geopolitics
By Jennifer Warren, President of DCFR
“‘The question is whether we are entering the golden age of gas—or is gas going to be
Introduction the fuel of the future, and always will be?’ In order for gas’ potential to be realized in this
The narrative of global gas begins golden age, we need huge steps forward in finding new supplies, infrastructure develop-
in Texas. But what started in Texas ment to move that gas, and developed markets.”
didn’t stay in Texas.
Who benefits from expanded gas to other regions and that’s because
In fact, the fairly recent discoveries supply, and for how long? What is the gas is expensive to transport over
and production of shale gas in North future outlook for past, present, and Asia’s long distances. Gas accounts
America have led to more self- future trading partners? for only 11% of Asia’s energy use
sufficiency in the U.S. We will no compared to 24% globally. If Asia
longer need to import liquefied natural From the first of a three-part series can expand its gas use, then hopefully
gas (LNG) to the degree that we once about global gas, sponsored by this reduces the expected growth
did. This has been called a gas rush, ExxonMobil, DCFR President in coal consumption and even oil
gas gale, a black swan event, a game- Jennifer Warren interviewed panelist consumption, particularly for power
changer… Mikkal Herberg, research director on generation use. Gas diversifies Asia’s
Asian energy security at The National energy slate and diversification of the
A robust U.S. supplied with its own Bureau of Asian Research (NBR). energy slate means stronger energy
natural gas resources has implications The interview with Mikkal Herberg of security. Gas is a reasonably priced,
for Europe and Asia. Europe benefits April 8, 2011 follows. cleaner, and a readily available fuel
from this in several ways. Its that improves Asia’s energy security
relationship with Russia as a primary and leads it toward a lower-carbon
supplier might change in the future. Natural Gas and Energy Security energy future.
Top importers such as Japan and JW: How does the increased use of
Korea also benefit from greater U.S. gas in Asia change energy security China’s Statecraft
resources. China and India are aided equations? JW: How might the use of natural
more from U.S. technical know-how gas in China impact their pursuit of
as they learn to exploit their own MH: Asia is deeply dependent on both relationships with large oil-producing
potential resources with global energy oil and coal. There are many historical countries?
firm’s knowledge, partly gained factors related to this. Oil is easy to
from U.S. shale developments and move around and easy to use; coal MH: I think oil is viewed very
innovations. is in abundant supply in Asia. The differently in Beijing. From my
biggest and fastest growing markets perspective, they view oil consumption
The market for natural gas is said to are China and India, but also Southeast as a particularly acute energy security
be evolving into a global one versus Asia. With respect to electric power issue, which relates to economic
the original trading blocs of the past. generation, oil and coal conveniently security. Gas is relatively new to the
Natural gas prices are quite low in the fit the bill. In particular, natural gas Chinese, but they are expanding gas
U.S. utilization is relatively low compared use rapidly, which is a good thing.
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2. 2
It now represents just 4% of their energy (LNG), and in the near future Papua gas long distances is expensive. It
mix, but is growing dramatically. New Guinea and Timor Leste will also includes both LNG and long-distance
become LNG exporters, meaning less pipeline gas, with a whole different set
Natural gas doesn’t really compete global reliance on the Persian Gulf. of geographical issues. I believe it will
with oil directly in most marketplaces. Greater use of natural gas offers a be very difficult for the gas producers
Expanded gas supply is unlikely to more diversified slate of suppliers as to develop a cartel similar to OPEC.
impact oil demand significantly, at well. Much of the global oil supply is
least in transportation, which is where coming from places that are unstable, Asian Gas Consumption: China and India
oil is the key fuel source. My guess is often unfriendly, or are members JW: Why has pipeline gas development
that the Chinese will continue to push of OPEC, which restricts supply to been more limited in Asia versus in
hard in acquiring oil fields, mergers, maintain high prices. the U.S. and North America? Is it just
and acquisitions to expand their supply the money?
portfolio and sources of oil. Much of JW: Do you think there will be a
what drives this kind of apparent state balance of power shift eventually from MH: It’s what’s often called “the
push to invest abroad is driven not by OPEC oil to the gas producers? tyranny distance”. There are huge
strategy or political leadership, but maritime distances around the
really by the national oil companies MH: I don’t think so anytime soon Pacific region to transport gas. This
(NOC) themselves. They are pursuing given long-term trends. Oil demand is means either sub-marine pipelines
commercially- and competitively- are required, which are particularly
driven strategies that make sense for
any large oil company. Then these
NOCs often bring the government
along to provide extra trade, aid, and
loans that help the NOCs seal the deal.
So often it’s the companies leading
the states, not the states leading the
companies. It is a collaboration.
Diversification and Security
JW: What are the implications for
US and European security given this
paradigm shift with gas usage?
MH: For many countries, given
the extent to which gas becomes
a bigger part of the energy mix,
countries have a global energy slate
that is more diversified. That’s good
for everybody. The most important
trend relative to energy consumption
is that gas can help slow the growth going to grow another fifteen million expensive beyond 600-800 miles, or
of coal consumption which is rising barrels a day over the next twenty gas must be cooled to an extremely
dramatically in Asia. Gas can really years. The supplier base is still going low temperature to liquefy it for
make a material difference because to be very narrow. We will still rely transport in expensive LNG tankers.
coal and gas compete in power on OPEC for a major share of world Long pipeline distances in Asia and
generation, heating, and industrial use. oil supplies. The OPEC share of the Middle East tend to slow gas
40% today will probably be 50% in development and use. In China and
Additionally, greater use of the future, particularly the supplies India, the barrier has been more policy
compressed natural gas, such as coming from the Persian Gulf which oriented. Until recently they have not
natural gas used for transportation, will increase OPEC’s power over been sufficiently incentivizing the
can help diversify energy use. Natural pricing. Gas is a very different game. private or state sectors, or providing
gas comes from a slightly different There is a loose gas coordination the types of investment terms that
set of producer countries. For the group called Gas Exporting Countries will encourage building pipelines and
Asian region, Australia, Malaysia, Forum (GECF). But gas is a much developing the markets.
Indonesia, and Brunei are major more complicated industry; markets
exporters of liquefied natural gas are complex, and transportation of

3. 3
JW: What are the political implications “Gas is more complex and difficult than oil. With gas, there are relatively expen-
of natural gas as a base-load power sive pipelines, which require market development, tariffs and regulation—the
source in countries such as India and software of market development.”
China?
want to rely on Pakistan as a transit have recently been moving towards
MH: Natural gas is a vital state. The potential for Turkmenistan more realistic pricing, both China and
diversification of their supplies to gas flowing to India faces the same India have kept wellhead gas prices
a cleaner source. Right now coal problem—it has to cross Pakistan and extremely low.
dominates the market for electricity also a very unstable Afghanistan. New
generation. About 80% of China’s Delhi had hoped to access Myanmar There are also pipeline security
power is fueled by coal, and electricity gas from the East, but the Chinese issues. Will pipelines be built where
demand is expected to double over offered Myanmar a better deal and they need to be built? Additionally,
the next 15 years. Anything that that gas will go north to China now. pipeline infrastructure tends to be
brings gas into the picture offers There’s more gas being developed dominated by state companies. There
both diversification and pollution in Myanmar, so it is quite possible is a lack of coordination among the
reduction advantages. This is where that India may yet be able to access various governments’ bodies. Finally,
gas can make such a difference. Until Myanmar gas supplies. But so far China and India’s respective domestic
recently, a key barrier has been that their efforts in trying to access the gas markets have not been sufficiently
governments want to keep electricity big regional gas supplies have been developed by their governments to a
prices very low, which makes it frustrated. LNG is going to grow large extent. Tariffs, transportation,
difficult for gas to compete with cheap gradually in India, but much depends regulation, and distribution systems to
coal. This continues to be a problem on continuing to reform energy pricing move gas into large urban areas need
in both China and India. But they are to justify relatively expensive LNG. to be addressed. Market development
in the early stages of addressing these is complex and has been slow.
problems. JW: So how do Beijing and New
Delhi incentivize their national oil Both countries have only begun to
JW: You discuss India’s gas, regional companies and foreign investors? understand the great potential for gas.
pipeline and competitive constraints What kind of challenges do you see Building the pipeline infrastructure
in your recent paper on natural gas in for them in expanding gas supply? takes time and investment and
Asia. India has a tough road ahead. production returns have not been very
Does that add tension for India as MH: In my view, the problem is first attractive. Put that all together, and you
others countries increase their gas the wellhead price being paid for gas. have very limited activity. Shell is one
consumption? For a producer the wellhead price is exception with a large sour gas project
critical to making the investment in in China and new gas development is
MH: They recognize they need to new supplies possible. Although they beginning to accelerate. Some activity
use more gas, for all of the beneficial
reasons we have discussed. They have
had a major recent discovery offshore
in the Krishna Godavari Basin on the
East coast, which will help them boost
gas use in the future. But inevitably
India will rely increasingly on
imported gas; currently they already
import 30% of their gas. For India
to increase gas use, they will need to
increase their imports of LNG and
need to access large regional gas
supplies via pipeline like China has
done with Turkmenistan, potentially
Iran, and Myanmar.
India’s problem is that of being in a
geopolitical box. The effort to access
Iranian gas via the Iran-Pakistan
pipeline is blocked for a number of
reasons. Most importantly, they don’t

4. 4 May 24, 2011
exists in China, where Chevron and IEA is releasing a major new report Personally, I believe we are headed
other firms are developing China’s on this in June. My response, during for tremendous growth in gas use,
sour high-pressure gas, for which the our recent conference: ‘The question particularly in China. But it’s going
Chinese lack the technology. is whether we are entering the golden to be slower than people might think.
age of gas—or is gas going to be the Firms need investment terms that
Gas is more complex and difficult fuel of the future, and always will be?’ make sense; governments to follow
than oil. With oil, the resource can be In order for gas’ potential to be realized through on promises; stable contracts,
put on a tanker and transported pretty in this golden age, we need huge steps and confidence in sustained market
much anywhere in the world for less forward in finding new supplies, development.
than $3 per barrel. With gas, there infrastructure development to move
are relatively expensive pipelines, that gas, and developed markets. JW: If Beijing continues increasing
which require market development, its gas use, with China relying
tariffs and regulation—the software of JW: So are parts of Asia like the oil traditionally on coal for electricity and
market development. Gas is infinitely markets in the U.S of the 1950s, say huge employment in the coal industry,
more complex. Producers can’t invest six decades ago? how might this affect social stability?
in exploration and development
if the market is not developed. MH: In a lot of ways, yes, in most MH: In a sense, gas use in China will
If the supplies are not sufficient, of the developing countries around be largely incremental demand for
then governments don’t move to the world, and in developing Asia. power generation and residential and
develop the market. These things However Japan and Korea are commercial uses. China is growing at
all must be done simultaneously and different with their more developed such a rapid rate on such a huge scale
require strong coordination between markets for gas. But the real growth that even with a significant expansion
government policymakers and the forecasted is in developing Asia, in of gas use in power generation and an
industry investing in new supplies. China and India particularly. Indonesia expansion of nuclear and hydroelectric,
has been a massive LNG exporter for this is unlikely to undermine reliance
Future of Global Gas decades, yet Indonesia is experiencing on coal and the coal industry. China’s
JW: So it’s a huge infrastructure gas shortages (which also happened problem is that of mining enough coal.
undertaking to use more gas for these in the U.S. during the late 1970s). They must transport coal on already
countries? There are many reasons for shortages, overloaded rails and build power
often prices are too low to justify new plants fast enough and efficiently to
MH: The crux of this issue is the supplies. keep up with economic and energy
challenge of domestic development
to expand gas use, especially for
electricity generation. LNG receiving
facilities have to be built; pipeline and
distribution systems must be built,
and market prices and regulatory
systems must be created. All of these
things have to fall into place in a
relatively coordinated fashion. Oil is
different and fundamentally easier and
less expensive to transport and use.
That’s why oil use grows rapidly in
developing economies and why gas
use tends to lag.
JW: So these are all of the practical
issues and obstacles that must be
considered by the supporters of natural
gas expansion?
MH: Fatih Birol, chief economist
of the International Energy Agency
(IEA), recently suggested we may be
entering the golden age of gas and the

5. 5
demand growth. Growing gas use will Australia, Indonesia, and possibly work with. They’re intent on holding
slow the growth of coal use—but not Russia’s East Siberia, probably post- on to their share of the European
stop it. 2020. The Chinese are building 12- market. They are building other gas
15 LNG receiving terminals along projects and promising more gas
JW: How long do you think it will the east coast and three are currently supply and pipelines to Europe in the
take India and China, respectively, to operational. So there is massive future. However, the investment is not
raise their gas use toward much higher incremental growth in LNG supply, forthcoming for the new fields that
international averages? Is China one coupled with rising domestic gas can fulfill the promised supply. Their
decade off and India two? development that is moving quite fast. old fields are mature, and maybe even
Over the next decade, China’s gas the largest in decline; they have to
MH: I think the big story is that China usage seems likely to boom. India’s start developing the new fields. This
is ramping up its gas consumption on gas usage will grow strongly as well, is a big worry for the Europeans—are
a scale that’s hard to believe. In 2009, although somewhat more slowly. they investing enough to meet their
they consumed about 90 billion cubic Domestic gas production will help and future commitments? The Russians
meters (bcm) or roughly 3.2 trillion both LNG and pipeline gas imports express that they have never missed a
cubic feet (tcf). Their consumption are likely to grow. commitment yet.
rose by 18% to 105 bcm in 2010, and
the target for the 12th Five-Year-Plan JW: How does Russia fit into this The Russians have worked very hard
is to reach 250 bcm in 2015, a two- global gas market that’s expanding? to control Central Asian gas, making
and-a-half fold rise in just five years. sure that gas supply travels through
They plan to increase gas usage to MH: As you know, Russia is a big Russia, which also supplies Europe.
about 400 bcm (14 tcf) by just 2020. supplier to Europe, and that’s the big While Russia is a major supplier,
Growing from 3.2 tcf to 14 tcf of story. They are the world’s largest gas the uncertainty is whether they are
annual consumption in the space of exporter, supplying about a quarter investing enough. Their pricing
one decade is ambitious. Consumption of Europe’s gas, half of which is policies tend to be tough as well, again
in the U.S. is only 23 tcf, and we are imported gas. Russia has the potential reinforcing the challenges of working
the largest consumer in the world. to be a much bigger supplier if they with the Russians.
Chinese gas use targets have risen develop new fields in the northern
dramatically in the past few years. Yamal peninsula region. They have
They will be supplied by imported huge reserves in East Siberia. But the
gas from Central Asia, Myanmar, Russians are extremely difficult to
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