International Natural Gas Trade Pricing and Policy Issues

Summary Rapid escalation of world energy prices has increased greatly the value of natural gas and has led most major oil- and gas-producing countries to re-evaluate the role of natural gas. The potential of natural gas to replace, oil is reviewed. The growth of international natural gas trade is reviewed and the problems and limits on such trade are discussed. problems and limits on such trade are discussed. International natural gas pricing and contractual relationships are considered also. The trade implications, pricing considerations, and the effect of U.S. import policy on the development of indigenous U.S. resources are discussed. Introduction A number of events in the world oil industry in 1979 had significant impact on the international gas trade. First was the downfall of the shah of Iran, followed by a substantial decline in oil production from that country. Although there was a temporary decline in world oil production (partially offset by increased Saudi Arabian production), importing countries tried to stockpile crude oil, and panic buying resulted in higher prices, especially for spot cargoes. Late in the year, OPEC increased its price for the marker crude (Arabian light), but this did not help to unify or stabilize crude prices. Some OPEC members did not observe the price guidelines, and crude prices ranged from $24 to $40/bbl as we entered the 1980's. This rapid escalation of world oil prices has been the most important single reason for re-evaluation of the role of natural gas in developed countries. Not only the medium-term, but also the long-term outlook for the consuming countries is very disturbing because of their dependence on an imported energy form that is subject to control by a handful of nations that control almost 70% of the world's oil supply.Natural gas is becoming an item of increasing international trade either by means of pipelines as liquefied natural gas (LNG) or in the form of upgraded products - i.e., fertilizers, petro-chemicals, and other readily transportable products. U.S. reliance on natural gas imports has been much less than for petroleum. But with the discovery of vast supplies in Mexico, the availability of Canadian gas, and the potential for development of gas supplies in countries accessible by means of LNG tankers, the prospects for increased imports are good.Although the international community is considering alternative long-term energy sources, the most promising medium-term and readily available source is natural gas. However, even with natural gas there has been a concerted effort by the oil-producing nations to raise its price and to tie it to the posted price of crude oil, thereby making it susceptible to price of crude oil, thereby making it susceptible to rapid increases.While it is not possible to deal with all aspects of the international gas trade, this paper presents an overview of the trade with specific reference to its effect on the U.S. as well as an evaluation of its future prospects. In the past, natural gas export prices usually have been cost based, but as the prices prices usually have been cost based, but as the prices of alternative energy sources have increased, natural gas pricing patterns have begun to reflect its premium value. There is currently no world price for natural gas but the major exporters are seriously considering correlating gas prices and world oil prices. The benefits and implications of such a pricing policy are discussed. JPT P. 703