PESD has studied natural gas for a number of years, with previous research examining the factors driving the success or failure of international gas infrastructure projects, the role of LNG in connecting what were previously regional markets, and the potential for natural gas to play a larger role in China and India. A key observation of previous research was the importance of a reliable investment climate and assured demand in enabling the development of the especially capital-intensive infrastructure (LNG or pipeline) required for gas transport. Today, research on natural gas markets is as relevant as ever due to a convergence of factors. The US-led revolution in techniques for extracting unconventional gas has overturned previous assumptions about global gas supply and in the process called into question the viability of traditional gas pricing regimes as well as assumptions of an inexorable march towards market globalization through LNG. Climate mitigation pressures also put the spotlight on gas, which at half the carbon intensity of coal in power generation probably offers as much potential for near-term greenhouse gas emissions reduction as any energy supply alternative.
Our current research on natural gas is focused on Asia and particularly on China, where even a modest increase in natural gas usage at the expense of coal would have massive benefits for climate change mitigation. Natural gas makes up only about 4% of China's energy supply at present, but any finding of substantial unconventional gas resources in the country would immediately align domestic gas development with both energy security and air quality goals. As it is, the government is already moving aggressively to increase gas supply through construction of LNG terminals and pipelines from Central Asia. As we have seen in the case of coal, idiosyncratic pricing structures and forms of industrial organization in the Chinese gas sector are causing significant distortions in the market, and new models are increasingly being sought by the government. More generally, China faces a policy challenge common to many countries desiring to expand their gas markets: how to encourage domestic utilization of gas through attractive pricing for consumers without deterring investment in domestic gas resources or making imports non-competitive.
Our planned new research on Chinese gas markets centers around three main questions. First, how will Chinese price reforms shape patterns of gas use and use of competing fuels? A proliferation of new gas supplies in China, including imported ones, has put extreme pressure on the country's cost-plus pricing model, leading to speculation that China will try to shift over time to pricing that is more closely connected to what end users are willing to pay for gas. Our research methods in this area will include both systematic case study work and construction of quantitative models for gas markets under different policy constraints. Shanghai and Guangdong are promising regions for study because of their diversity in both gas supply sources and end uses.
Second, how does the political economy of the Chinese gas industry influence market outcomes? Upstream activities in gas are dominated by state-owned oil companies, while gas distribution and sales functions are controlled by a wide range of players including local governments and private and foreign enterprises. The structure of the coal industry is in some sense the inverse, with a multiplicity of coal producers selling to a limited number of state-owned power companies. We hypothesize that the differences in the respective structures of the gas and coal industries will affect how these fuels compete against each other in applications like power generation.
Third, what is likely to be the industrial structure of an emerging unconventional gas industry? This work will involve comparative study of shale gas and coal bed methane (CBM) development in China, the US, and possibly other regions with significant unconventional resources. One of our broad hypotheses is that the different investment profile of unconventional gas, which requires continuous new drilling to keep the gas flowing, might lead the industry to develop a characteristically different industrial structure from conventional hydrocarbon development. The US is an important case as the only country that has developed unconventional gas resources on a large scale thus far, while China merits study as the country for which significant development of unconventional gas would arguably have the most significant impact on global climate policy and energy markets.
