Remaking of the Energy Order

A recent chilly winter morning in Tehran, Iran, witnessed palpable excitement with the presence of Russia's President Vladimir Putin and several other state heads. The Iranian press spoke about the 'Real Coalition against Evil', and the limited social media in Iran saw youngsters in overdrive over bonhomie with the erstwhile giant. In his address to the state heads and the Hassan Rouhani government in Iran, Putin decided to wear something uncommon to this Russian strongman. 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, etcetera, have long defined the central theme in the theatre of oil politics .The players in effect stayed 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 past two decades, it might be possible that the very theatre of energy play is due for a shift in the coming decade.

The recent fall in oil prices is 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 decade, has been inching towards energy self sufficiency, though by best estimates, it's still a good five to six years away from possible energy utopia. (The US produces 14 million barrels/day as against its consumption of 20 million barrels/day)

The US's recent easing of sanctions on Iran (conditionally, though) signify something deeper - lesser 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 bte-noire, Iran.

Though Saudi Arabia and Iran's relations 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 etcetera, the future might hold something even more lethal in store. The struggle for energy leadership.

The theatre of energy soon might have a new commodity defining the conflict - natural gas.

Iran and Russia, as the primary players, had strewn together the Federation of Gas Exporting Counties, (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 Arabia's fear stems from the 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 most of the latter half of the 20th century, 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 to a precious commodity rebalances power equations, unfavourably for the 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 pricing of oil and gas. Is someone worrying about a substitute for oil catching on, and thereby guiding 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 as low as $15.

In the 3rd GECF Summit in Tehran, a seasoned journalist remarked that the GECF shall soon be the gas cartel playing energy king for the 21st century. His claims are surely plausible.

Proven gas reserves put the erstwhile pariahs Russia and Iran at the top of the pack. So we might 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 less buyers.

What choice does Saudi Arabia have currently? 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 oil and require substantial time, inter-country cooperation and investment.)

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

Apart from renewable sources and nuclear energy, which can produce limited amount of electricity but require large investments (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 change of end user equipment, is natural gas, which already is 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 like nitrogen and sulphur compounds and, thus, can help create a cleaner and healthier environment. Combustion of natural gas produces 30 per cent less carbon dioxide per end user than oil.

I see 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 Russian Bloc than the OPEC.

The theatre shall have newer faces and a newer plot. We live in exciting times.

The author is Business Head-International Business, Marico Ltd