Natural Gas Could Be the Cheap Power of the Future

July 19, 2012 RSS Feed Print

Michael Lynch is the president and director of global petroleum service at Strategic Energy & Economic Research.

In my last column, I argued that the preference often shown for renewables in developing countries reflected bias and is illogical, promoting an expensive solution for the energy impoverished. Now, let’s consider a promising approach that is becoming more attractive every day: natural gas-fired turbines.

In the past couple of years, the growing global surplus of natural gas has become increasingly apparent. While much of the focus in the United States has been on shale gas, overseas the discovery of enormous gas reserves in areas like offshore East Africa and the Caspian Sea has made it obvious that fears about scarcity were never well founded. Unsophisticated analysts have failed to realize that natural gas resources have long been underestimated because the high cost of transportation means that discoveries in isolated areas were often ignored.

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But a perverse pricing policy has prevented the economic exploitation of much of the isolated gas reserves. The decision in the 1970s to link natural gas prices to oil prices based on their relative heat means that soaring oil prices see natural gas prices follow along. This was no more logical than if tea prices were set equal to coffee prices on the basis of their relative caffeine contents.

Unfortunately, major exporters have tended to leave discovered gas in the ground to wait for demand to grow, rather than cut prices to increase market share. This de facto oligopoly behavior has paid off in some ways, by allowing existing exporters to make very high profits, particularly when oil prices are very high. But it has depressed trade in what would otherwise be a cheap, relatively clean fuel.

Thus, new discoveries such as the supergiant Atum/Golfinho field off Mozambique, are aimed at the lucrative export market, with the expectation that demand for the fuel will probably not materialize for a decade or more. It is better to get $10 per one thousand cubic feet in a decade than $5 per one thousand cubic feet now, goes the reasoning.

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But it would be greatly beneficial if much of this stranded gas were instead delivered to local electricity generators at modest prices. Natural gas turbines have many benefits for less developed countries, including the fact that capital costs are low and plants can be small in size without sacrificing economies of scale, something coal plants cannot do. Emissions are also very low.

The only drawback has been the unwillingness to sell gas at a price that covers costs and allows for a nice profit, as long as the export market is potentially extremely lucrative. But the shale revolution could change all this, if exporters come to believe that future liquified natural gas prices are likely to be much lower than they are at present. And with cheap natural gas, gas turbines could become the source of cheap power.