The old energy order is upended

On a recent chilly winter morning, Iran was in a state of palpable excitement with the presence of Putin and several other heads of state in the capital, Tehran. As the Iranian press spoke about the ‘real coalition against evil”, the limited social media platforms in that country saw youngsters in convivial overdrive over the once powerful giant, Russia.

During his address to the heads of state and the Rouhani government in Iran, Putin decided to wear something uncommon — a smile.

Let’s put the events together. Oil prices, following a 15-year boom-and-bust pattern, have shown a common thread so far, that is, the reorganisation of the oil supply structure. The familiar cycles of output cuts and gluts, price controls, embargoes on unfavourable alignments, and so on have long defined the central theme in the theatre of oil politics. The players, in effect, remained the same, with Saudi Arabia, the US and recent entrant China, followed by Russia and the rest.

Despite the characters playing mildly differing roles in the last two decades, it is just possible that the very theatre of energy play is due for a shift in the coming decade.

The recent fall in oil prices are being blamed on the insistence of OPEC to maintain peak production, plausibly to preserve market share and drive out expensive producers of oil (read non-OPEC and US shale).

But is it really that simple? Yes and no.

The US, over a period of a decade, has been inching towards energy self-sufficiency, though by best estimates, it’s still a good 5 or 6 years away from possible energy utopia. (The US produces 14 million barrels/day as against its consumption of 20 million barrels/day.)

Its recent easing of sanctions on Iran (conditionally) signify something deeper, such as less dependence on Saudi Arabia and a desire to balance global power alignments again. Saudi Arabia now realises that the US red carpet is getting shorter with its strategic partner now embracing its bête noire , Iran.

Though relations between Saudi Arabia and Iran have long been strained over differing interpretations of Islam, aspirations for leadership of the Islamic world, oil export policies, relations with the US and the West, and so on, the future may hold something even more lethal in store: the struggle for energy leadership.

The theatre of energy may soon have a new commodity defining the conflict. Natural gas.

Iran and Russia, as the primary players, had strung together the Federation of Gas Exporting Countries, (GECF), which analysts initially wrote off as the poor man’s OPEC.

Today, the GECF’s 12 member countries account for 67 per cent of the world’s proven gas reserves and 64 per cent of global LNG exports.

Saudi’s fear stems from speculation that the world’s largest producers of natural gas, in particular Russia and Iran, through the GECF, intend to create a gas cartel equivalent to OPEC which would set future energy quotas and prices.

In recent times, no single commodity has defined geopolitical alignments, global conflict and flow of wealth more than oil. Oil is the most politicised commodity globally. It is too fundamental to the global machinery to allow free markets to operate without political guidance and complex controls.

Any substitute for a precious commodity rebalances power equations unfavourably for monopolists of the original commodity. The simplicity is no longer defined by the oil haves and have-nots. Gas has entered the equation as the substitute to oil.

The biggest differences in oil and natural gas are volatility, prices and producers. Natural gas tends to be consistently cheaper over time than oil and less subject to shocks, and is controlled by a different set of geopolitical muscle.

What we see in the oil price dips, is a guided drop to ensure minimal difference between oil and gas pricing. Someone worrying about a substitute for oil catching on guides this drop.

Last year, the spread between oil and natural gas (on an energy-equivalent basis) was over $80 a barrel. Last month it was lower than $15.

At the third GECF summit, held in Tehran, a seasoned journalist remarked that the GECF will soon be the gas cartel playing energy king in the 21st century. His claims are highly plausible.

Proven gas reserves put Russia and Iran at the top of the pack. So we may be staring at a world with an energy self-sufficient US, a GECF controlling close to 70 per cent of the next energy commodity at less volatile prices, and an OPEC staring at a market with fewer buyers.

What choice does Saudi Arabia have currently? They are to keep oil prices low to compete with gas, and prevent Iran and Russia from creating infrastructure around transporting and exporting gas. (Gas logistics are far more complicated than those for oil and require substantial time, inter-country cooperation and investment).

There is little doubt that these measures are shortlived. Unless a major catastrophe reverses the existing direction of global politics, the next few energy decades belong to the GECF.

Apart from renewable sources and nuclear energy which can produce a limited amount of electricity but require a large investment (so far, wind and bio-fuel have contributed less than 2 per cent of total global electricity production), the most immediately available replacement for oil, requiring the least amount of change in end-user equipment, is natural gas which is already being used.

As an abundant and affordable energy resource, a safe and reliable fuel and the cleanest burning hydrocarbon, natural gas is a fundamental element in the future energy supply mix. Its combustion emits far fewer harmful pollutants such as nitrogen and sulphur compounds and thus can help create a cleaner and more healthy environment. Combustion of natural gas produces 30 per cent less carbon dioxide per end user than oil.

There are two clear shifts in the remaking of the energy order. The future of energy is gas and, by extension, the energy muscle belongs more to the Iran and Russia bloc than the OPEC. The theatre of energy will have newer faces and a newer plot. We live in exciting times.

The writer is with Marico. The views are personal

COMMENT NOW