The combination of strong demand for natural gas in both North America and Europe, together with a maturity in their own resource bases, is driving purchases from further afield. The developing markets of China, India and Brazil are bound to conduct the same search.
Ask a dozen oil executives from around the globe "what's the price of oil?" and the chances are you will get 12 similar responses. The price of oil - expressed in dollars per barrel - is a familiar concept, prevalent across the media as much as the boardroom.
Ask the same executives "what's the price of natural gas?" and the answers will be more confusing. Indeed, you will be lucky to get a common unit of measurement or a single currency. "Which market do you mean?" will be a common response.
For whereas oil is, by most measures, the largest globally-traded commodity in the world, natural gas trade has remained regionally bound. So, natural gas has never generated a global marker price similar to the headline prices for oil, gold, coffee, or copper.
Expensive
The reason is what we might term the "law of immutable distances". It is expensive to transport natural gas over long distances, especially by sea.
The cost of transporting natural gas from the Middle East to the US Gulf Coast, for example, is seven times more than moving an equivalent amount, in energy terms, of oil.
Historically, it has therefore usually made sense to harness natural gas as much as possible for local use and free up oil, as much as possible, for the export market.
The exceptions are where the local market is too small to make full use of the gas, as in parts of the Middle East, or if the exported price of natural gas is higher than in the home market, as has been the case for Russia.
The trade statistics illustrate the regional nature of gas trade: in 2006, about half of all oil and some 15 per cent of coal was sent across water in intercontinental trade.
Seaborne trade of natural gas was less than eight per cent. In this fragmented world, the price of gas in one market was irrelevant to that in another.
However, natural gas is rapidly turning global. The combination of strong demand for natural gas in both North America and Europe, together with a maturity in their own resource bases, is driving them to buy gas from further afield.
The developing markets of China, India, and Brazil are also expanding into the global gas market in search of supply to fuel their economic rise.
Cooling
The enabler is liquefied natural gas (LNG). By cooling natural gas to low temperatures (minus 262 degrees Fahrenheit/minus 161 degrees centigrade), it becomes liquid and occupies one six hundredth of its original volume.
Gas can then be economically transported across the world's oceans in large ships. On delivery, the LNG is regasified and piped to consumers in the regular manner. LNG extends the reach of natural gas beyond the areas accessible to pipelines.
LNG trade has been around for more than forty years. However it has been a niche market, predominantly used by the resource-limited but developed Asian economies of Japan, South Korea, and later Taiwan. It has also been an important, if secondary, source of natural gas imports into Europe.
Now LNG is entering a major new phase - both in terms of volume growth and global spread. Global LNG supply capacity will increase from 196 million tonnes (mt) in 2007 to 284 mt by 2011, almost a 50 per cent increase in just four years.
Massive project
Over half the growth will come from a single country - Qatar - which has a massive construction programme well under way.
Within the Middle East, Yemen will become the world's 17th LNG exporting country in 2009. The high-profile $20 billion Sakhalin project in Russia's Far East will mark Russia's entry into the club of LNG exporters.
There are currently 17 LNG importing countries. That number could multiply. Import projects are under consideration in places as far apart and diverse as Argentina, Brazil, Canada, Chile, Cyprus, Dubai, Germany, Ireland, Jamaica, Kuwait, Mexico, Morocco, the Netherlands, New Zealand, Pakistan, the Philippines, Poland, Singapore, Thailand, and Uruguay. The list is not exhaustive.
But, overwhelming all, the major growth for LNG will be the United States. There, local production has reached a plateau and will start to decline gently; meanwhile gas demand is set to continue to rise on the back of gas-fired power generation.
LNG will fill the gap between flat domestic supply and climbing demand. CERA expects that the United States will overtake Japan as the world's largest importer early in the next decade.
Demand
By 2020, US LNG imports will be as high as 137mt and account for 28 per cent of global LNG demand.
LNG will therefore bring the world's largest gas market - and the most deeply liquid traded market - into contact and competition with Asia, Europe, and Latin America as each seek to acquire, for the first time, gas from the same sources.
This will have a major impact on gas prices. The globalisation of LNG and natural gas is at variance with the mosaic of different gas prices across the world, and can only increase the tension between different pricing regimes.
In North America - and the United Kingdom too - prices are set by the clearing price in a constantly-changing traded spot market.
In Japan and Korea, most gas is procured under long-term contracts - often 20 or 25 years in duration - with the price specifically set as a percentage or ratio of oil prices. Contract prices are usually confidential.
Continental Europe is caught somewhere in the middle, with most gas sold under bilateral contracts linked to oil product prices, but increasingly spot price references are emerging.
Prices
In the Middle East, and many other gas-rich countries, gas prices are mostly administered by government and are set below international price equivalent levels. As a result, gas prices vary across regions and they can even move in opposite directions.
So when will we have a global gas price to match a global oil price, and what will be the impact of increased LNG on regional gas pricing?
This has become one of the main subjects of discussion in the gas business as producers look to optimise their sales into the highest value markets, traders eye emerging arbitrage opportunities across continents, multinationals begin to construct global risk management strategies, and consultants attempt to model future LNG flows and gas prices.
Natural gas is fast becoming the new global energy commodity.
The writer is Senior Director, Global Gas at Cambridge Energy Research Associates (CERA).
