Macro Market Insight – Natural Gas Takes the World Stage: Gimme CH4

Isaac Leung
senior economist D&B’s Global Data, Insight & Analytics team

 

Natural gas is the wonder fuel on which mankind’s hopes rest.

Maybe so, but with this great potential comes enormous economic and political risks.

Countries such as Russia that can readily supply natural gas (methane or CH4) are in a strong position to influence events unfolding around the world today. The conflict in Ukraine is the most visible example, but there are others.

To determine just how dependent some countries are on high-risk countries for natural gas, D&B economists have created a gas-supply country risk index for 37 countries that import natural gas.

D&B’s index weights natural gas imports (by pipeline and tanker) by D&B’s proprietary country risk score, a comparative, cross-border assessment of the risk of doing business in a country. The score spans seven risk bands, from lowest risk for a country such as Sweden, to highest risk, for a failed state like Syria.

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The proportion of imported gas in domestic supply is then calculated, creating a country risk index that charts how dependent a country is for its gas supply on countries with high country-risk scores.

While no country is 100% dependent on foreign gas for its energy supply, some countries in Western and Eastern Europe and in Asia rely heavily on Russia and other high-risk countries. and that creates higher country-risk exposure.

Belarus is the country most exposed to country risk in terms of imported natural gas — primarily supplied by Russia. But Turkey, Belgium, Slovakia, and Italy are not far behind in terms of the riskiness of their natural gas supply. And Germany is only slightly less dependent on high-risk sources of gas than Ukraine.

Italy relies most heavily on Russia (high risk) for its natural gas but also purchases fuel from countries such as Algeria (high risk), Libya (highest risk), and Qatar (slight risk). Germany buys nearly half of its supply from Russia while the rest comes mostly from Norway (lowest risk) and the Netherlands (low risk).

Turkey gets more than half of its natural gas from Russia, with Iran (very high risk) supplying the next largest amount of the fuel.

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The UK buys its natural gas from Qatar, while Japan, anxious to avoid high-risk sources, has most of Australia’s current supply locked up.

Russia’s heft is obvious: It is an energy superpower, which must preoccupy Pentagon planners and German corporations alike. The US, thanks to a natural gas boom from fracking, has ended its dependence on foreign suppliers in recent years.

The world’s appetite for natural gas is expected to continue growing, and for good reason: Gas offers clean power for homes and industries, and an adaptation pathway for climate policy. The UK has cut its carbon emissions 20% since 1960 thanks to gas. Gas is essential for most countries’ long-range energy plans.

Over 1 trillion cubic meters of gas were traded globally cross-border in 2013, by pipeline and as liquefied natural gas (LNG) by tanker, valued at US $600 billion at Japan prices.

Gas consumption is expected to hit almost 4 trillion cubic meters in 2017, or the equivalent to 36 million barrels of oil per day, according to the Organization for Economic Cooperation and Development. BP forecasts natural gas demand to double from 2012 levels by 2035.

What does all this mean?

Ultimately, the relationships between importers and exporters that are embedded in global energy trade will likely have an impact on foreign policy: for example, the dynamics of the NATO alliance.

And corporations with big power bills and energy-hungry facilities will need to carefully watch their gas supply at the source — and the diplomacy of host governments — as world events unfold.

 

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