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The Oil and the Glory

Can natural gas keep China from destroying the world?

One of the strongest current global trends, as we’ve been discussing, is the world’s growing glut of natural gas. We are swimming in it, and yet more keeps coming. This has both financial and political implications. On the financial side, nations relying on gas income — Australia and Qatar among them — have years to ...

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One of the strongest current global trends, as we’ve been discussing, is the world’s growing glut of natural gas. We are swimming in it, and yet more keeps coming. This has both financial and political implications. On the financial side, nations relying on gas income — Australia and Qatar among them — have years to wait until prices recover from their current fire-sale lows. On the political side, the ocean of gas is likely to push its way on a much larger scale into China, which will be a much cleaner industrial power than feared.

But how much of a game-changer is this surplus? Could it, for example, seriously curb the world’s appetite for abundant and cheap, but dirty, coal? If it does, it will mean an additional political shift, since coal is the key driver of current projections of the rise of heat-trapping gases over the coming decades. John Malone, an analyst with New York-based Ticonderoga Securities, tells me that the chessboard extends to developments in India, East Africa and South Korea, and that a general gas-triggered shift away from coal “seems inevitable:”

On the supply side, there’s all the sources you mention, plus the domestic unconventional gas potential, plus the Turkmenistan supply, and further out, as Central Asian infrastructure supplying gas to China expands, you could finally see a real outlet for the world’s second-largest gas reserves next door in Iran. And there are going to be plenty of significant gas finds as exploration ramps up in East Africa, where I suspect the Chinese will be bumping up against India and the old-school Japanese and Korean LNG players to get export plants lined up.

On the demand side I think gas has a lot of support as well — plentiful, diversified supply, relatively cheap and clean (especially important given the anecdotes I’ve heard about local disturbances over pollution). China is putting serious effort into electric transportation, which gas will support until renewables take hold. They have the right idea about transportation — take the pain now of building the infrastructure needed to solve the chicken/egg problem, then use every means possible (gas, coal, hydro, solar, etc) to make the power — an electron’s an electron, doesn’t matter how it’s created. And after all that Beijing gets to brag about Chinese greenhouse gas cuts, all for doing something they’d have done regardless of the emissions reduction. Not a bad deal.

Still, the prevailing wisdom remains that natural gas and coal will follow similar growth trajectories. China, for instance, will keep burning much coal because of inertia, as Benjamin Sovacool suggests at Scitizen. I’ve argued that, for political reasons — meaning that the Communist Party wants to stay in power, and isn’t blind to popular restiveness in reaction to pollution — Beijing will make a massive turn to cleaner gas. In a new book, Guardian correspondent Jonathan Watts makes an even starker conclusion, as David Pilling writes in a review in today’s Financial Times. In When a Billion Chinese Jump, Watts writes that China’s energy appetite is so profound that China “will hit environmental limits before it becomes wealthy,” Pilling reports.

Malone thinks that China isn’t going to simply stop using coal “since there’s so much domestic Chinese coal, [and that] the Australians and South Africans are happy to export. But

I’m inclined to agree that gas will outpace coal in China, given the local pollution issues and the growing diversity of supply. There was always a question in LNG circles as to when gas would become a fungible commodity like oil; now we have 1) if not a glut of liquefaction capacity, then certainly more than enough; 2) plenty of LNG ships that aren’t tied to a particular long-term contract; and 3) lots of new, smaller scale import points coming online that can take cargoes at opportune or counter-seasonal times (like Chile, Argentina, Singapore, etc.). If gas isn’t quite oil yet, it’s a lot more fungible than only a decade ago, and pricing will only get more rationalized. I’m certain the folks at CNPC and CNOOC are seeing this too.

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