Gas-electric power growth markets offer opportunities for E&D firms

Feb. 7, 2000
Experienced international explorationists may be familiar with the important sources of oil and gas, but they are often not familiar with the markets for these commodities.

Experienced international explorationists may be familiar with the important sources of oil and gas, but they are often not familiar with the markets for these commodities.

Location and transportation are more substantial issues with gas than they are with oil, and as additional exploration is focused on gas, an understanding of the markets becomes more important.

Utility companies have probably already conducted detailed studies of these markets. Explorationists need to become knowledgeable with the location and magnitude of future markets.

Electricity is included in this discussion, because power generation is an important use for gas, and specific data are available on each country's use of electricity. This allows some predictions to be made on one segment of the gas market.

Data, methodology

The data for this article focused on economic and demographic factors and energy use trends in most of the world's nations and were derived from publications of the International Energy Agency and the US Central Intelligence Agency (see Data sources, end of article).

The data were entered into a spreadsheet so that energy consumption and composition per capita and per income could be compared among the countries.

The range of annual consumption of energy per capita among countries represented a ratio of 69:1, ranging from 1.3 boe per capita in Bangladesh to 90.5 boe per capita in Bahrain.

Consumption per $1,000 of gross domestic product narrowed the ratio of endpoints to 30:1, with Switzerland consuming 0.75 boe/$1,000 GDP and Vietnam consuming 22.8 boe/$1,000 GDP. Although the size and growth rate of a country's economy may be difficult to measure precisely, these factors are more important in determining energy consumption than are the size and rate of change of the population.

Regional patterns in energy consumption per income were noticed. The countries were sorted into the following geographic regions, with the corresponding number of countries: North America (3), Central America and Caribbean (11), South America (10), Western Europe (19), Eastern Europe (23), Middle East (14), Africa (23), and Asia (25).

Regional energy use vs. income

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The average consumption of total energy, gas, and electricity per income are plotted versus the average income per capita for the eight regions.

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Figs. 1-3 show that Western Europe is the most energy-efficient area and that Eastern Europe is the least energy-efficient. The values for the US and for the world averages are also shown as reference points. The low efficiency of Eastern Europe may be a result of these factors:

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  • The region has concentrated on energy-intensive, heavy manufacturing industries rather than on high-tech industries.
  • The size of the economies has decreased as a result of the political break-up and economic decline of the former Soviet Union, but there has not been a corresponding decrease in energy consumption.
  • Inefficiencies have developed from decades of having centrally planned economies, rather than having market-dominated economies.

Gas, economic growth

A recurring and semi-predictable component of additional gas consumption is the annual growth in total energy consumption caused by economic growth.

An additional 1.7 tcf/year of gas will be needed under the following assumptions: The energy efficiency of a country does not change; the percentage contribution of gas does not change; and world economies maintain their 1998 rates of growth.

The US absorbs one half of this increase, or 780 bcf/year. Canada, the UK, Germany, and China are the rest of the top five countries in this category. Mexico is a close sixth, which places all three countries in North America in the top six of this list. These increases would occur each year if the rate of economic growth remains constant.

In reality, the increases should become larger, especially in Asia, as many economies currently have higher growth rates than they did in 1998 during the economic downturn. The world economy would have been $380 billion larger than it was in 1998 if the 19 countries with economies of at least $100 billion each and growth rates of less than 3% had reached that economic growth level. This slowed gas consumption by 1.1 tcf/year, based on world averages of consumption and efficiencies.

Gas, energy mix change

Gas supplied 20% of the world's energy consumed in 1997. Gas contributed more than 25% of the energy supplies for 36 of the 128 countries studied.

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What would be the increase in gas consumption if all countries used a minimum 25% gas in their current total energy consumption? Table 1 shows that over 34 tcf/year of additional consumption could be added to the 76 tcf consumed in 1997, or a 45% increase. Over 60% of that increase would come from Asia.

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Table 2 shows the potential additional gas consumed by regions as a sensitivity to the minimum contribution of gas. No time frame is suggested for these potential changes in energy components.

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Fig. 4 shows the 14 countries that would each use an additional 1 bcfd or more if gas were to supply 25% of their energy needs. These countries cover the full spectrum of personal incomes. Under this scenario, China and India would have the largest increases in gas consumption because of their newly emerging gas systems. Japan could potentially be the third largest incremental user because of its large economy and use of gas for only 10.7% of its energy in 1997.

Although 23.5% of US energy comes from gas, an additional 1.3 tcf/year would be needed if the 25% contribution threshold were reached, because of the large economy and associated large energy use. This arbitrary threshold is reasonable, maybe even conservative, as gas supplies 33.7% of the UK's energy needs. Obviously, the gas volumes would increase even more dramatically if countries increased their gas component to the 47.1% level achieved in Argentina or the 47.8% level of the Netherlands. The high end of Table 2 approximates these levels by regions. On the extreme end, 10 countries use gas for 60-89.8% of their total energy needs.

Profitable gas projects of much less than 1 bcfd can be developed in many other countries. The thought process and methodology for determining the magnitude of need for gas would be the same as described for the regions and for some of the countries.

Electricity opportunities

The additional electricity use from annual economic growth would be 390 billion kw-hr, assuming that energy efficiency does not change.

Assuming a 50% operating efficiency, 89,000 Mw/year of generating capacity needs to be added to meet this demand growth. If 100% of this additional electricity is generated by gas-fired power plants with an energy efficiency of 40%, 3.3 tcf/year of additional gas demand would be added.

The US has the largest annual growth at 137 billion kw-hr, or the gas equivalent of 1.2 tcf/year with the stated assumptions; China, India, Canada, and Germany complete this top five listing.

Note that this volume of gas is about twice the size of that mentioned in the gas section from purely economic growth. The apparent discrepancy can be explained by the assumption of gas supplying 100% of the energy for new power generation.

As new gas-fired power generation capacity is added, the contribution of gas to the total primary energy supply in a country will increase unless all previous power generation is already gas-fired. In this scenario, 1.7 tcf/year of gas use increase would be from economic growth and 1.6 tcf/year of the increase would be from an increasing shift towards gas used in new capacity power generation.

This 100% level of gas for new power generation may not be reached, but a high percentage is not unreasonable, as the capital and environmental costs of gas-fired power generation are lower than those for coal, nuclear, and most hydro. This percentage could go over 100% when an existing coal or fuel oil generator either is converted to or is shut down and replaced by a gas-fired unit.

The argument can be made that the economies of some of the developing countries would grow even faster with an increased supply of electricity. This important issue is outside the scope of this article.

Gas-to-liquids

The international gas exploration and production industry would receive a tremendous boost if technological advances could make gas-to-liquids conversion more economic.

A market and attractive prices for the liquids are significant components of these economics. End-user liquids receive higher prices than does crude oil. In the ideal scenario, technology would allow a small-scale plant to use natural gas of any btu content to produce gasoline, diesel, or fuel oil, depending upon the catalyst and plant variables employed at that time. This would allow small, isolated gas reserves in areas of no crude oil production to meet the local demand for these liquid products.

On a larger scale, gas producers in Trinidad and Tobago and Venezuela would be the major beneficiaries of economic GTL technology, because the Western Hemisphere is a larger importer of oil and refined products than it is of gas.

Country, region specifics

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Table 3 shows a geographically diverse sampling of some of the world's largest economies with some of their energy-related parameters. The final three columns of the table list the additional annual gas consumption under three scenarios:

  • One in which gas supplies a minimum of 25% of the total energy for each country.
  • One in which the increase is calculated from economic growth rates with 1997 consumption data from the IEA and 1998 GDP growth rates from the CIA.
  • One in which the increase is from growth of electricity assuming that 100% of its growth is from gas-fired generation. (These 3 columns should not be added together as they include overlapping categories.) Argentina is included as the best example of a medium-developed economy making excellent utilization of its gas resources while remaining efficient in total energy consumption. Western Europe is included as one economy because it does not have a single dominant country, and its gas grid is integrated to the point of being considered one user for this exercise.

Brazil and Argentina represent 55% and 20%, respectively, of the economies of South America. Argentina anchors the continent's gas industry because it has had a progressive energy policy and its sub-Andean producing basins are in close proximity to its Atlantic Coast population and industrial centers.

A pipeline importing gas into northwestern Argentina from the southern part of Bolivia spurred gas exploration in Bolivia. Sufficient reserves were then found in Bolivia to support a pipeline to southeastern Brazil with a capacity of 20 million cu m/day, or 387 bcf/ year. When used at capacity, this pipeline will increase Brazil's gas utilization to 8.8% from 3.1%. This should lessen the country's high dependence on oil and renewable energy sources. Exploration for gas in Bolivia has accelerated as a result of the opening of this pipeline.

TotalFina SA and Petroleo Brasileiro SA reported that their exploration has contributed to Bolivia's gas reserves more than tripling from 7.6 tcf to 23.7 tcf in 1 year. E&D planners should be asking in what other parts of the world would a strategically placed pipeline create equal exploration results.

A second line from Bolivia's southern sub-Andean gas-rich area to southeastern Brazil is now under consideration. Peru's gas reserves at Camisea and surrounding structures have not yet been developed, and Brazil is a potential market for this gas. However, the recent Bolivian gas discoveries are direct competitors and are more favorably located for sales to southeastern Brazil than are the Peruvian reserves.

China is one of the countries of greatest opportunities for increasing gas consumption and gas projects. Most people associate these opportunities with the size of their population, but this is not the most important factor. China's population of 1.3 billion is the largest in the world and represents 21% of the total, but its economy of $810 billion ranks seventh and represents only 3.3% of the total.

The magnitude of the opportunities is a combination of its high rate of economic growth at 7.8% and its current low gas utilization of 1.7%. Air pollution in the large cities is a major problem, especially in the winter, from burning low-grade coal. The authorities began to grow concerned about this problem and mandated that gas projects be given more priority during Beijing's efforts in 1994 to capture the 2000 Olympics (which eventually went to Sydney). Coal still supplies 60% of the country's energy.

Gas exploration and development are continuing in the onshore Ordos and Sichuan basins and in the South China Sea and East China Sea. As the gas market and associated infrastructure grows, gas reserves will probably be found in several other areas. China is currently constructing the world's largest hydroelectric project at Three Gorges in the middle Yangtze River, so it follows that gas will not be supplying all of the additional electricity needed in future years in China.

India has the world's second largest population (960 million, or 16.5% of the total) and the world's 11th largest economy ($450 billion, or 1.8% of the total). Like China, the gas opportunities stem mainly from the high rate of economic growth (5.4%) and the current low rate of gas utilization (3.9%), not just from the large population.

Neighboring Pakistan has one of the most mature gas infrastructures in Asia. If politics were not an issue, Pakistan could anchor a regional gas grid that could expand into India, much like Argentina has done in the Southern Cone of South America and indirectly aiding the gas infrastructure of Brazil. Unfortunately, politics has been and continues to be an issue between India and Pakistan.

The Ganges Delta of Bangladesh has the potential to become a major gas producing area to support Indian gas demand. When officials of the Ministry of Energy and Mineral Resources of Bangladesh visited Houston in spring 1997, they said that their gas would never be exported to India. This stance may be changing, as India's demand for energy is 19 times larger, and substantial quantities of gas should be available for export after meeting Bangladesh's domestic needs. Gas exploration and development are progressing off India's east and west coasts and in the onshore basins. Additional reserves are needed, and a variety of international projects has been considered.

Proposed onshore pipelines from Turkmenistan and Iran are hindered by political difficulties in Iran, Afghanistan, and Pakistan. A proposed offshore pipeline from Oman was hampered by costs, technical performance guarantees, and available reserve concerns. The importation of LNG from the Middle East is a near-term solution, as India seeks to lessen its dependence on renewable energy sources.

Japan's $3.3 trillion economy is the second-largest in the world and is 13% of the total, but the country uses only 2.2 tcf/year, or 3% of the world's gas consumption in 1997. The recent nuclear accident in Japan could cause a decrease in current reliance on nuclear for 30% of power generation needs and for 16% of total energy supply.

Western companies have proposed gas pipelines from Sakhalin Island and from other potential gas-productive areas of eastern Russia, but Japanese officials are reportedly reluctant to become dependent upon a pipeline from Russia. Higher-cost LNG is preferred to this political risk. LNG producers throughout Southeast Asia and the Middle East, as well as Alaska (which currently exports LNG to Japan) should see increasing opportunities from this type of decision.

African economies are small by world standards, and only South Africa has a GDP exceeding $100 billion. Coal is the dominant energy source in this country, and gas supplies only 1.8% of the total energy. Therefore, successful gas exploration domestically and in neighboring countries would be met with a ready market.

Gas produced off the southern tip of the country is used in a synthetic fuels plant to produce gasoline, diesel, and kerosine. Kudu gas field, located off Namibia just north of the border with South Africa, is slated for development. Part of the production will go to a proposed power plant in the southwestern corner of Namibia, and the remainder would go through a proposed pipeline along the western and southern coasts of South Africa.

Western Europe's gas industry is almost global, as supplies from Europe (primarily the North Sea), from Asia (Turkmenistan and Western Siberia), and from Africa (Algeria) actively compete for market share. The recent Maghreb pipeline from Algeria through Morocco to Spain and Portugal is opening new markets for gas in these two countries. Gazprom, the Russian gas entity, has plans for development of large reserves on the Yamal Peninsula and adjacent offshore areas in the Western Siberian part of the Arctic Ocean.

However, when the sanctions against Libya are lifted, gas from that area should be less costly to develop for the Western European market than would be the incremental Russian gas. Algeria already has two Trans-Med pipelines through Tunisia and Sicily to Italy.

A third Trans-Med pipeline could bring Libyan gas through Tunisia and Sicily to Italy and into the regional gas grid. Gas producers on the northern tier of Africa (Algeria, Libya, and Egypt) have opportunities to export to Europe and to the western part of the Middle East. Algeria has several LNG export terminals in addition to its three export gas pipelines.

Algeria's internal political turmoil has cost many lives and has increased the cost of doing business in the country, but none of the oil and gas exports have been directly affected. Libya could be an equally important gas exporter after the economic sanctions are lifted.

The US has been importing large volumes of gas from Canada for years. With the passage of the North American Free Trade Agreement, increasing volumes of gas will be crossing the Mexico-US border. The three countries depend upon gas for 20-30% of their energy; therefore, fewer grassroots opportunities exist here than elsewhere.

Nevertheless, sizable opportunities are still being created for expansion of gas projects to meet the demands of the world's largest area of economic growth and of increasing environmental concerns. In geological terms, supplies come primarily from two flanks of the Canadian shield: the Alberta and Rocky Mountain basins to the west, and the Midcontinent and Gulf Coast regions to the south.

The Scotian and Grand Banks basins off Canada's Atlantic coast will become a third productive flank of the shield. These latter areas have the advantage of being located relatively close to the large energy markets of the northeastern US.

Conclusions

The size and rate of growth of economies are more important in estimating changing energy demands than are the size and growth rate of population. Most countries use similar amounts of total energy, gas, and electricity to produce a quantity of economic output, but Eastern Europe, on average, uses three to six times the level of the rest of the world.

Gas currently supplies 20% of the world's energy, and consumption would grow by 1.7 tcf/year just from economic growth alone. If all countries used gas for a minimum of 25% of their energy needs, world demand for gas would rise 45% from 76 tcf/year to 110 tcf/year. If this minimum utilization rate were raised to 45% of total energy supplies, world demand would increase 130% to 172 tcf/year.

Annual economic growth increases world electricity consumption by 390 billion kw-hr/year. If gas were to supply all of this new electricity, 3.3 tcf/year of new demand would be added.

Greater Asia has a majority of the world's gas reserves, and the subset of Asia used in this study has the lowest gas utilization rate of any region. Geography and politics are the culprits in this situation. Opportunities exist for those who can envision and implement transportation systems that connect the reserves to the customer and that merge various political interests into a common economic interest. Successful explorers need to anticipate which gas-prone areas will be connected to markets. Therefore, political and commercial evaluations and associated risks need to be considered as carefully as are technical evaluations and risks.

The Author

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William H. (Bill) Smith is a consultant for technical and economic evaluation and management of international oil and gas projects. He was directly involved in discovering the 100 million-bbl Prinos oil field in Greece and has spent much of his career exploring for gas and searching for ways in which it can be monetized. Smith received a BS and an MS in geophysical engineering and a PhD in mineral economics, all from the Colorado School of Mines. He can be contacted at [email protected].

Data sources

The International Energy Agency has key energy indicators in 1997 for 128 of the world's recognized 192 countries at www.iea.org/ stats/files/selstats/keyindic/country (and at .../keyindic/nmc). These 128 countries represent over 96% of the world's then-5.8 billion people and over 99% of the world's $25 trillion 1997 economy. Indicators for each of these 128 countries include population, gross domestic product in 1990 US dollars, total primary energy supply including component share, and electricity consumption. The population and economies of the remaining countries were obtained from the CIA World Factbook 1999 at www.cia.gov/cia/publications/factbook so that totals for the world could be calculated. The CIA site includes a large variety of data for each country. The population and GDP data were for 1998 and included annual growth rates. The CIA uses "purchasing power parity" rather than the official exchange rates used by the IEA in calculating GDP. The two estimates for GDP are very similar in open economies, but the CIA values are generally higher in closed economies. The purchasing power parity calculation does a better job of estimating the quantity of internally produced goods and services. However, the official conversion rate does a better job of estimating how a country could pay a multinational firm in hard currencies for additional goods and services, and it has been used in this study. The IEA and the CIA data sets are useful sources of information to a company first considering doing business in a particular country.