China Gasses Up for a New Golden Age

China will be the big driver of natural gas markets for the rest of the decade. And Europe is missing the bus.

Here's the future of natural gas, according to the latest deep dive by the International Energy Agency: China is really joining the party, both as a consumer and as a producer; the United States is poised to play an outsized role in the gas export market; and Europe will continue to struggle with declining domestic production and continued reliance on Russia as an energy supplier, with little help in sight from U.S. gas exports.

The IEA's medium-term gas report, out Tuesday, sketches the outlook for global natural gas supply and demand through 2019. The development of natural gas markets -- as well as the ways gas competes with other energy sources, both old and new -- matters for a host of reasons.

Gas will be one of China's main weapons as it carries out its declared war on coal pollution. That will make China the biggest driver of global gas demand over the next five years and turn it into a key battleground for gas exporters, including Russia and the United States.

Europe's unwillingness to take any strong measures in response to Moscow's aggression in Ukraine can largely be attributed to its heavy reliance on gas imports from Russia, a situation that's unlikely to change for the rest of the decade. And U.S. dreams of turning booming energy production into booming energy exports will depend, in large measure, on making sure that natural gas can compete on price with older, dirtier sources of energy.

The biggest takeaway from the IEA's report is that China, which overwhelmingly relied on coal and oil to fuel its 30-year economic boom, is finally getting on the gas bandwagon. Demand there is set to nearly double by the end of the decade, to more than 300 billion cubic meters a year, accounting for half the increase in global demand. The country is also on track to post the biggest gains in gas production.

"The golden age of gas has arrived in China," said IEA executive director Maria van der Hoeven.

China will partly meet that new demand with its own abundant gas reserves, including plentiful deposits of shale gas, the IEA says. But a big chunk will come from ramped up production of synthetic gas from coal, which is a mixed blessing for the environment. The rest will have to come from imports, such as China's recent mammoth gas deal with Russia and a spate of new terminals on the coast to import liquefied natural gas from the Middle East, Australia, and North America.

The United States could supply some liquefied natural gas, or LNG, to China: After a couple of sluggish years, LNG exports are expected to grow 40 percent over the next half-decade, much faster than gas shipped the traditional way, in pipelines. With a bevy of export projects awaiting government approval, the United States could grab 5 percent of the global gas trade in the next five years, the IEA says -- a dramatic reversal from just a few years ago, when the United States was scrambling to secure imported gas.

"We do foresee the United States emerging as a significant, meaningful LNG exporter," said Laszlo Varro, the head of gas and coal markets at the IEA.

Even more important than the volume of future U.S. gas exports -- which will still be dwarfed by traditional suppliers such as Australia and Qatar -- is the way that U.S. gas will be sold, he said. Shale gas frozen to a liquid and packed on tankers in the United States won't be linked to the high price of oil, as natural gas traditionally has been in Europe and Asia.

Rather, the gas price is linked to the low prices of natural gas at U.S. trading hubs. And that U.S. gas won't be earmarked for one specific country. The new business model being pioneered by the United States could help remove one of the biggest stumbling blocks to more gas use, especially as a fuel for power generation: the gaping gas price difference between North America and Asia. Indian energy firms, for example, plan to use those lower U.S. prices as they resell U.S. gas in the Indian market.

The United States "is going to play a disproportionate role in developing efficient, competitive gas markets," Varro said.

Unfortunately, that will be little consolation for Europe, despite a chorus of calls both in Washington and in European capitals for American energy to rescue the continent from its dependence on Russian energy. Instead, Europe stands out as the one region where natural gas production will decline over the next five years, the IEA said.

Although some European countries -- even environmentally conscious Germany -- are rethinking their opposition to hydraulic fracturing, or fracking, in a bid to boost European gas consumption, the IEA isn't predicting a European shale gale.

"We don't see a realistic chance for shale gas in Europe to turn around" declining production from traditional sources of gas, Varro said.

Europe is unlikely to shake its reliance on fickle Russian energy supplies, even though its demand for natural gas will remain sluggish -- the fruit of a painful recession, cheap coal, and aggressive government support for renewable energy.

The idea that U.S. gas will flood into Europe is "simplistic," van der Hoeven said. New sources will just compensate for declining domestic production, such as in the North Sea, the IEA said, rather than replacing problematic Russian gas. Supply from other potential exporters to Europe, such as Azerbaijan, will take years to materialize.

"There is little opportunity for Europe to diversify its gas supply by the end of the decade," van der Hoeven said.

Jeff Pachoud - AFP - Getty


Cambodia Sleeps With the Fishes

Southeast Asian countries were teaming up against China -- now they're at each other's throats over water, dams, and fish.

Vietnam and other Southeast Asian countries are spooked these days by China's aggressive behavior. But the real threat to Vietnam's future may come from a different communist neighbor.

Ambitious plans for hydroelectric development in the region, especially by Laos, pose a real danger to the food supply of Vietnam and Cambodia. Upstream dams will imperil the fish stocks that provide the vast majority of Cambodia's protein and could also denude the Mekong River of the silt Vietnam needs for its rice basket. Laos's drive to become the "battery of Southeast Asia" is producing plenty of sparks, but not the right kind.

Diplomatic tension over the dams -- as well as their effect on fisheries and agriculture in a river basin that is home to more than 60 million people -- threatens to drive Southeast Asian countries apart right as they are trying to present a common face toward China's increasingly brazen behavior in claiming parts of the South China Sea for itself.

"These things are really torquing regional relations," said Rich Cronin, director of the Southeast Asia program at the Stimson Center. Although the dispute probably won't lead to armed conflict, he said, "it sure could be the end of regional cooperation on a lot of issues."

The whole region is caught in a hydropower frenzy, thanks in part to China's plans to build multiple big dams far upstream. Laos is building several of its own on the Mekong to generate electricity -- for export. That includes the Don Sahong project, right near the Laos-Cambodia border, and the much bigger Xayaburi dam further upstream. The country of slightly more than 6 million people doesn't need more power, but it does need hard currency.

In all, about a dozen proposed hydropower projects on the Mekong threaten fish and farming that feed millions while offering distant economic benefits for a lucky few, according to an environmental assessment carried out by the Mekong River Commission, an intergovernmental agency. The study found that the dams would seriously threaten food security, increase poverty, and permanently damage the ecology.

Countries in the region, especially Vietnam and Cambodia, have tried to push back against Laos's hydropower dreams. But a regional summit of the Mekong River Commission in April that gathered all the affected countries together could muster only a generic statement about sustainable development in the Mekong basin, rather than condemning Laos's development outright.

They'll get a fresh chance to iron out differences at another meeting this month. But Laos has made clear that it plans to go ahead with the projects over its neighbors' complaints in spite of a 1995 accord meant precisely to avoid such unilateral power plays.

"It's really now or never," given all the projects on the drawing board, Cronin said. "The issue is: Is there any way to get Laos to play ball?"

The dams aren't just a cause for concern in Vietnam and Cambodia.

"No one country has a right to deprive another country of the livelihood and the ecosystem and its capacity for life itself that comes with that river," U.S. Secretary of State John Kerry said while visiting Vietnam in December.

For years Washington has encouraged greater cooperation among Southeast Asian countries, which China's latest regional saber rattling makes more urgent.

This spring, China aggravated relations with many Asian countries, especially Vietnam, Japan, and the Philippines. China's dispatching of a deepwater oil rig to waters claimed by Vietnam in early May sparked the most serious clash between those two countries in years. Vessels playing cat and mouse around the rig have clashed, plenty of Vietnamese ships have limped home with damage, and one Vietnamese fishing boat was sunk. Anti-China riots broke out in Vietnam, further souring relations between two countries that had steadily developed closer economic ties despite a bitter history.

China has also irked the Philippines by building infrastructure on a reef claimed by Manila and chasing away Filipino fishermen. Meanwhile, tensions between China and Japan over disputed islands in the East China Sea remain at a fever pitch. In all cases, Chinese diplomats angrily accuse other countries, including the United States, of provoking unrest throughout the region.

State Department officials urged Cambodia, Vietnam, and upstream countries to find a solution at that Mekong River Commission summit. But the water fights threaten to tear the region apart right when it most needs unity.

Daniel Russel, assistant secretary of state for East Asia, is in Myanmar this weekend for fresh talks, which will include discussing the Mekong's future.

The disputes are a reminder that hydroelectric development, more than almost any other kind of electricity project, can poison international relations. Egypt and Ethiopia are at loggerheads over the latter's plans to build a massive dam on the headwaters of the Nile. Leading politicians in India warn that China's hydroelectric development on the Brahmaputra River is an "act of aggression."

Just as Egypt is worried that the Ethiopian dam will choke the supplies of fresh water it needs for agriculture downstream, Vietnam is terrified that a series of upstream dams will spell the end of its rice production, which relies on the rich, fertile silt carried by the river. If all the proposed dams are built, silt loads downstream will drop 75 percent, according to the Mekong River Commission report.

Cambodia's fears are even more acute. The rich fisheries of Tonle Sap, the largest freshwater lake in Southeast Asia, largely supply the impoverished country's protein. But the lake is unusual: It all but disappears in the dry season and then expands massively as water flow from the Mekong backs up when the rains come.

"Those fish are so important for their livelihoods, both economically and nutritionally," said Gordon Holtgrieve, a professor at the University of Washington who researches Cambodia's freshwater fish.

"And none of these dams are pointing at good outcomes for the fisheries."

Photo by Christophe Archambault - AFP - Getty