The Quest For A New Energy Prize

Daniel Yergin talks about the critical role liquefied natural gas is destined to play

Business books come and go. Very few of them make much more than a ripple in the wider world. Yet a decade ago, Daniel Yergin, the co-founder and chairman of Cambridge Energy Research Associates, created quite a splash. By translating his deep knowledge of the oil business into a century-spanning history of the industry, Yergin produced a national best-seller.

His opus of 900-plus pages, The Prize: The Epic Quest for Oil, Money & Power, shed light on an insular industry that has been at the crux of fortunes, scandals, and wars ever since John D. Rockefeller's Standard Oil Co. rose up a century ago. Yergin's tome won the Pulitzer Prize for nonfiction and was later adapted into a PBS/BBC documentary TV series.

These days, Yergin says, a new quest is under way for a different prize: liquefied natural gas (LNG). This fluid form of the clean-burning fuel is created when gas is pressurized and chilled so it can be compactly stored and transported by ship. Lower-cost methods to convert gas into LNG -- a process known as liquefaction -- and transport it are clearing the way for what Yergin estimates will be a $200 billion expansion of the global natural gas biz. The growth will reorder both America's energy consumption habits and the balance of power among the world's energy producers.

In just the past four years, rising demand and a looming shortage have more than doubled the prices for natural gas, forcing a tapped-out U.S. to turn increasingly to LNG to meet its growing needs. The shift "will have a far-reaching impact on the world economy, bringing new opportunities and risks, new interdependencies and geopolitical alignments," says Yergin.

BusinessWeek Dallas Correspondent Stephanie Anderson Forest recently spoke with Yergin about the world's energy future.

What's the biggest challenge facing the energy sector today?

We've got to ensure that we have sufficient natural gas supplies, both from domestic and imported sources. Since the second half of the '90s, the prices for natural gas have doubled, placing a burden on the economy and portending a shortage. Over the last few years, there has been pessimism about the ability to continue to expand North American gas production. It's a big challenge to simply keep production where it is or near where it is. At the same time, there has been a great deal of demand growth, driven mainly by the addition of 200,000 megawatts of new electric-power capacity -- 90% of which is gas-fired -- over about five years.

How important will LNG become?

Today, LNG supplies about 2% of U.S. natural gas needs. We anticipate that by the year 2020, LNG could be providing 25% to 30% of the country's total natural gas needs. It is on track to become a very major factor in America's energy picture.

What role will LNG imports play in helping to alleviate the natural gas supply crunch?

LNG will become an essential element in balancing the market. There are several reasons that have come together to bring LNG to the fore and hold out the prospect that natural gas becomes the world's second-largest global energy business -- after oil. One is that there is a lot of natural gas in the world that is stranded and that countries and companies want to monetize. Of course, countries want to monetize their gas reserves because it increases their national revenues. The second reason is that over the past six or seven years, LNG costs have come down by as much as 30%, driven by technological advances in liquefaction and shipping. The third reason is that the world has made a real shift. In the '70s, the whole effort was to drive natural gas out of the power market, and now natural gas is the favored fuel for new electric generation.

Is there concern that the U.S. could be become as dependent on natural gas imports as we have on crude imports?

Yes. That will be an inevitable question, and it does mean that by becoming integrated into a global market we will become dependent for some part of our supplies on other countries. But it doesn't look like there's much alternative.

What are the major challenges of making a global natural gas/LNG market a reality?

At the top of the list is financing. Capital, the cost, is a big challenge. We estimate to really develop this industry to its full potential will take over $200 billion of investment. That will have to come from bank financing or balance sheet financing. The larger energy companies [such as ExxonMobil, BP, and Royal/Dutch Shell] that have the financial heft to absorb the risk to the balance sheet and to absorb the volatility will play key roles in this.

Will LNG bring natural gas prices down?

Yes. However, we're on a considerably higher price plane for natural gas nowadays. LNG supplies are going to be essential to getting us down to a lower level.

Still, it looks like it will be 2007 at the earliest before LNG begins to have a meaningful impact. In the meantime, what does that mean for the natural gas market and for prices?

It means until we start to see additional LNG supplies coming in, there will be upward pressure on natural gas prices. That's just a function of the reality of supply and demand. Meanwhile, back at the ranch, in the Lower 48 the independents are going to have a big job ahead to replace existing production. While LNG will absorb a lot of the demand, at the same time it's going to be a tremendous job to simply keep production more or less in the range that it's in. Companies are going to have to work pretty hard at that.

Is U.S. energy policy helping to open the door to new energy supplies?

The basic objective of the government's energy policy is clear: to ensure that the country has reasonably priced, environmentally sound energy supplies. That means being able to produce supplies in responsible ways, it means greater efficiency, and it also means research and development support for new technologies. But as [Federal Reserve Chairman] Alan Greenspan has recently pointed out, by their effect, national environmental policies and regulations sometimes turn out to be de facto energy policy.

What roles will conservation and renewables play in future energy policy?

Conservation has been much more effective than most people realize. The U.S. uses only half as much oil per unit of [gross domestic product] as it did during the 1970s. The really lasting gains from energy efficiency come from new technologies and turning over our capital stock. As renewables' costs come down and technologies advance, they will become more important. But at this point, their impact is small. Wind and solar together are less than two-tenths of 1% of our total energy supply. Our $11 trillion economy rests on an energy foundation -- 94% of which is oil, natural gas, coal, and nuclear power.

Where does hydrogen fit into all this?

Hydrogen is a potential option for the long term. But there are a number of major technical, economic, and political hurdles in the way. If it is going to become a realistic option, it needs investment to develop the technology and drive down the costs. It's important to avoid unrealistic expectations and recognize that -- if hydrogen is to succeed -- it will require decades of sustained, focused effort with a lot of government and private-sector resources.

Our thirst for oil in the U.S. has left us dependent on other nations for our supplies. Can we ever become self-sufficient?

We're moving steadily in the opposite direction of self-sufficiency. In the early 1970s, at the time of the first oil crisis, we imported a third of our oil. Today, it's around 60%. The challenge we face today is how to stabilize imports and how to manage our dependence on and integration into the global oil market. The way to do this is through diversification of supplies and promotion of good overall relations with a wide variety of exporters.

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