The US and the Russian Federation (Russia) are not only the two largest producers of natural gas in the world, but its two largest consumers as well.
Notwithstanding their sprawling gas industries and associated bountiful gas supplies, both countries might face natural gas supply problems if winter 2002-03 is unusually cold. But, if the approaching winter is as mild as last year's, they both could enter next spring with record gas reserves in storage.
Gas production
For the better part of the last decade, Russia's natural gas production slightly surpassed that of the US. With the dawn of the new century however, the top order was reversed (Fig. 1) in favor of the US; the crossover was the result of surging US output and dwindling Russian production: a sure sign of the times.
In 2001, the two countries together accounted for almost 45% of global natural gas production.
Gas consumption
On the consumption side, the US has always been far ahead of Russia and during the past decade that difference was further widened as US demand soared while Russian consumption fell off (Fig. 2). Their relative domestic gas requirement patterns clearly underlined their respective economic predicaments.
In 2001, the two countries jointly made up for 41% of global natural gas consumption.
Imports-exports
A succinct comparison of the above production-consumption figures indicates that the US is a net natural gas importer and Russia, a net gas exporter.
In 2001, the US imported about 116 billion cu m (bcm) of natural gas (or 18% of its natural gas needs) and exported about 11 bcm. Canada supplied 94% of US natural gas imports and LNG made up the rest.
In 2001, Russia's exports amounted to some 204 bcm—with 37.8% going to other former Soviet Union countries, 42.5% to western Europe, and 19.7% to eastern and central European countries.
Winter 2001-02
The natural gas industries of both the US and Russia were most fortunate to have faced an abnormally warm winter 2001-02.
In the US, temperatures had been warmer than normal by an average of 12-19° C., depending on the region,1 as the US had one of its warmest winters in the past 25 years. The warm weather led to a 6% dip in US natural gas consumption to 616.2 bcm in 2001 from 647.1 bcm in 2000. It must be mentioned that the previous winter of 2000-01 (of skyrocketing gas prices fame) had been unusually cold, the fifth coldest in the last 25 years.2
In Russia, too, the 2001-01 winter was relatively mild so that internal natural gas consumption even slumped to 373 bcm from 377 bcm. OAO Gaz- prom's management heaved a sigh of relief, but "in February 2002, company executives warned the so-called 'super-governors' who watch over the seven 'super-districts' of the Russian Federation—created in June 2000 by President Vladimir Putin to oversee the Federation's 89 regional governors—that if next winter was unusually cold, Gazprom would be unable to provide domestic consumers with all the gas they needed."3 Thus, Gazprom had sent a timely warning to the highest authorities in the land to be ready for any disruption in supply if winter 2002-03 happened to be unusually cold; the company based its timely warning on the experience acquired during the past winter.
Winter woes
During 8 months of the year, gas demand is rather easy to forecast and fulfill, with the inevitable surplus going straight into storage to be used during the 4 winter months that are problematic in case of cold weather.
It almost goes without saying that natural gas demand must be related to the degree of coldness and average daily temperatures. The relationship is almost linear (Fig. 3),4 and changes in demand can be momentous, even increasing five-fold, depending on temperatures.
For example, in the US, during the harsh 2000-01 winter, maximal weekly withdrawals from storage were more than 6 bcm, and the season closed with only 19 bcm in reserve. But during the mild 2001-02, one maximum withdrawal occurred during the first week of January at around 5 bcm and the season closed with over 44 bcm in reserve.5
Winter 2002-03
In case of a very cold 2002-03 winter, both the US and Russia will be under pressure to secure adequate natural gas supplies to meet internal demand. But the two entities will face different predicaments, with the US holding more trump cards to handle any eventual crisis:
•Gas price. In the US, total price flexibility is an insurance for market balance, and the Henry Hub spot price changes by the hour. But in Russia, domestic natural gas prices are fixed annually by governmental decree—it being a sensitive, political matter; in 2002, a 15% price increase across the board was implemented on July 1 (Gazprom had called for 25-35%).
•Futures market. In the US, there is the New York Mercantile Exchange's natural gas futures market to accommodate hedging and speculation, whereas in Russia, Gazprom has yet to create a domestic gas exchange—it is planned for early 2003—that initially would market 10 bcm/year before eventually ramping up to 20 bcm/year.6
•Economic flexibility. All sorts of economic flexibility are built within the US system to cope with potential imbalance, and regulatory commissions act as watchdogs over the gas industry's performance (although in the 2000-01 winter it would seem some companies were able to get away with much during the brouhaha occasioned by the unprecedented surge in demand).
In Russia, the "Federal Energy Commission" is supposed to supervise the whole energy sector, but it is clearly overshadowed by the awesome power the giant natural gas company Gazprom wields on the Russian domestic scene.
•Natural gas companies. There are a large number of independent gas companies in the US that have decades of experience behind them, although the gas industry is still reeling from the Enron Corp. debacle.
By comparison, Russia's Gazprom dwarfs all of its local competitors with its production of about 480 bcm/year. Together, all other Russian gas companies, some of which have direct links to Gazprom, produce less than 65 bcm/year—12% of total output.
•Storage. It is only in the natural gas storage sphere that Gazprom equals its US rivals. In its 22 underground storage facilities, Gazprom controls 56.5 bcm/year of active natural gas volume (Table 1).7 In 2001, Gazprom stored 46.4 bcm and withdrew 48.8 bcm from its storage system.
As for the US, it relies on a sophisticated storage system that had accumulated more than 87 bcm of natural gas by early October—an 11-year record.
•US natural gas imports. As previously mentioned, the bulk of US gas imports comes from Canada. But these imports, which have almost doubled over the past decade, seem to be reaching the end of their supply tether, especially now that prolific Ladyfern field (in northeastern British Columbia) is about to peak at about 20 bcm/year, and eastern Canada's Sable Island output seems to have its own set of constraints.
The other neighbor, Mexico, has become a net gas importer itself, importing a total of 4 bcm from the US in 2001, and its efforts to double its Burgos basin output from the present 28 million cu m/day by 2006 face momentous obstacles.8
•LNG imports. In the 1990s, the US revived this extra source of imported gas, and LNG input soared to more than 6 bcm/year in 2000-01 (Fig. 4).9 Total LNG import capacity at the four available US receiving terminals—three on the East Coast and one on the Gulf Coast—is estimated at 27 bcm/year,10 leaving a safe margin for potential imports. To stave off any future crisis, the US could, among other things, play its LNG trump card.
Russia's exports. In contrast to US imports, Russia is saddled with gas exports to former FSU states, as well as to eastern, central, and western European states. These exports amount to 37% of total internal production. In case of an unusually cold winter, Russia's only solution for keeping up with internal demand would be to somehow curtail exports to other FSU states (with Ukraine, the main importer, particularly vulnerable) because exports to European clients are under long-term agreements and are being paid for in hard currency.
Final analysis
Even though analysts Jon Davis and Mark Russo of Salomon Smith Barney Inc. have predicted "a normal winter" in their "2002-03 Winter Outlook,"11 there is no way to be sure of the ways of nature—and the next winter could still prove to be unusually cold.
If Davis and Russo are right, however, the present US gas supply of 87 bcm in storage will be amply sufficient to see the country through the winter. But should the weather go astray, a crisis could ensue that would then require all the flexibility of the American system to get resolved.
In contrast to the relatively safe US position, Russia faces a much tougher predicament. Maybe Gazprom executives were right after all to warn the seven 'super-governors' in February of the dire consequences of a harsh 2002-03 winter.
Acknowledgment
The author thanks Behdis Islamnour for assistance provided during the compilation of this article.
References
- US Energy Information Administration, "Winter Fuel Outlook" report.
- Ibid.
- "Petroleum Economist," April 2002, p. 35.
- Fig. 3 is based on measurements made during January in a number of German cities.
- EIA, "Weekly Natural Gas Report" (2000, 2001, and 2002).
- "World Gas Intelligence," Sept. 25, 2002, p. 1.
- EIA, "Natural Gas Weekly Report," Oct. 10, 2002.
- "World Gas Intelligence," Sept. 25, 2002, p. 1.
- Colleen Taylor Sen, "Global LNG industry expanding to meet heightened gas-demand projections," (OGJ, Aug. 12, 2002, p. 56).
- Edward J. Swain, yearly reports, "US LNG Imports and Exports" describing and analyzing activities of the four existing US LNG receiving terminals as well as details on the fifth terminal being implemented at Hackberry, La., by Dynegy Inc.
- NGI's Daily Gas Price Index, Oct.14, 2002.
The author
Ali Morteza Samsam Bakhtiari is a senior expert in the corporate planning division of National Iranian Oil Co., Tehran. He specializes in questions related to the global oil, gas, and petrochemical industries, with special emphasis on the Persian Gulf and the Organization of Petroleum Exporting Countries. Formerly, he lectured on design and economics in the chemical engineering department of Tehran University's Technical Faculty. He holds a PhD in chemical engineering from the Swiss Federal Institute of Technology at Zurich.
