NATURAL GAS-2 SHAKY POLITICS A KEY FACTOR IN GAS FUTURE

The world possesses a wealth of natural gas. And there are many good reasons for the world to use more natural gas than it does now-in absolute terms and in proportion to total energy consumption. But there also are political questions about whether the world will do what it must in order to convey gas from where it exists in greatest abundance to where it is needed most. Those questions have inescapable economic effects.

Aug. 2, 1993

4 min read

Last Jan. 1, world gas reserves totaled an estimated 4.9 quadrillion cu ft. Of that, 1.9 quadrillion cu ft was in the hands of the No. 1 reserves holder, and 700 tcf belonged to the No. 2 country. The premier gas reserves holder: the Commonwealth of Independent States. The runner-up: Iran.

INVESTMENT PATTERNS

The first editorial in this series cited investment requirements ranging from $800 billion to more than $1 trillion for the additions to gas production and transportation capacity likely to be needed in the next 20 years. If all else were the same, the C.I.S. and Iran would dominate gas investment the same way they dominate reserves.

But all else is not the same. The C.I.S. is splintering as the formerly Soviet states go their separate ways and struggle with economic reform. The international oil industry has marshalled people and technology to the flanks of Russia, by far the largest holder of gas reserves in the C.I.S. But it understandably hesitates to risk huge sums of money in an environment characterized by turbulent politics, uncertain regulations, and surprise taxes.

Iran is even less inviting. Like the C.I.S., it is emerging from a period of ruinous economic isolation and at least acknowledges the need for foreign capital. But its politics reflect powerful internal tensions. The government knows it must accommodate foreigners if it is to restore the Iranian economy to long-term health. But it faces strong resistance from Islamic revolutionaries still demanding the exclusion of outsiders. Iranian arms purchases and alleged support of international terrorists do not make the country more alluring to global investors.

Production capacity has plenty of room to grow elsewhere. But the C.I.S. and Iran will exert definite, if opposing, influences on development of future gas supply. On the one hand, they should show governments seeking outside investment what mistakes to avoid. On the other, they represent potential supply that investors cannot ignore.

Investments crucial to worldwide gas supply growth are by nature large and long-lived. Size produces essential scale economies; tenure gives projects time to return capital and profits. Investors do not commit funds to projects like these in areas prone to major political upsets and associated economic shocks. And they like to syndicate risks, spreading capital over a variety of projects with a variety of partners.

A PLANNING FACTOR

Future gas supplies, then, will develop where there are sufficient reserves, access to markets, reasonable political security, and freedom to manage risks. The C.I.S. and Iran so far don't pass the test on any broad scale, although parts of the C.I.S. are moving in the right direction and Iran says it wants to.

Other countries with abundant gas reserves can learn from these extreme cases. And investors must treat all that gas as a factor of planning. At some point, Iran, Russia, and other C.I.S. countries with big gas reserves may muster the stability and flexibility to become regular players in the world's financial big leagues. When they do learn to compete, when they do make solid progress toward their gas export potentials, formerly doubtful sponsors of major projects elsewhere will wish they had not.