Natural Gas Shortages in Developing Countries

Natural gas: The bridging fuel in the next decadesBent Svensson

World Bank

ENERGY WEEK 2006

Background

Study on Gas Shortages In Developing Countries by

Mourad Belguedj, Marc Heitner, Eleodoro Mayorga-Alba, Bent R. Svensson

The issue: Some Developing countries are affected by gas shortages The costs are high:

$1/Kwh or higher when black outs occur Swap to costlier fuels for industry and households Lower economic growth

What are the main causes? What can do done about it?

Five countries

Argentina, Bangladesh, Brazil, Pakistan, and Vietnam Rapid growth in gas consumption Gas producing countries, but facing difficulties

in keeping up with demand Brazil is also importing gas Others planning to import gas in the future

Different Pricing mechanisms and stages of gas market development

Why Gas Shortages Prevail

Upstream

Only Vietnam replaced its gas reserves since 2000

Little exploration took place because the fiscal and commercial terms were deemed inadequate (Argentina, Bangladesh)

The level of exploration did not result in sufficient significant finds (Pakistan)

Why Gas Shortages Prevail 2

Transmission and distribution Bottlenecks in T&D systems T&D companies are expected to carry the market

risks by matching the demand for gas with the supply Financial ability of the T&D utilities comes into play,

as they need to mobilize the financing for such expansions

Upstream-downstream Upstream companies hesitate to invest unless they

can be persuaded that the T&D companies will do their part of the development investment as well.

The main reason: Gas pricing

Pricing: poor gas pricing policies are often the main reason for system shortages

Governments for all practical purposes set retail tariffs Correct price signals are fundamental for optimal

investment and consumption choices Sound energy pricing provides the correct signals to

producers when and how much to produce and expand production what, where and how much to consume

Pricing in Five counties

Upstream gas price The upstream gas price framework in the five countries studies

were elaborated in the 1990s (Bangladesh, Brazil, Vietnam) or earlier,

During a time period characterized by relatively low energy prices, These gas prices have only been slightly increased as a result of the current high oil price level

Transmission and Distribution tariffs Regulated in Argentina, Pakistan and Brazil

Current gas consumers benefit from low gas prices Often households in Middle –income urban areas

Governments will have to revise the terms (i) high differential between gas and petroleum prices will result

in a massive, unplanned shift from petroleum products to natural gas, if available

(ii) IOCs compare the exploration and production investment terms and risks for both oil and gas worldwide, taking into account the prospectivity of an area, before deciding where to invest

Gas Pricing considerations

In competitive markets Efficient gas prices should fulfill the following primary requirements: Economic or Allocative Efficiency: This objective promotes an

efficient allocation of resources Cost or Productive efficiency: Production costs are minimized

Gas prices should be within the following range: Minimum: Competitive prices or Cost of supply

The gas price at the wellhead determined by market forces or Where competition in supply is limited, the cost of supply (often

expressed as Long Run Marginal Costs) Maximum: The market value of gas:

Alternative fuel prices (or the opportunity costs)

Actual gas prices

If gas prices comply fully with Economic objectives, they will promote efficient allocation of resources and be cost reflective

However, Economic Efficiency pricing may lead to tariff levels below financial costs Strict marginal cost pricing leads to tariffs that distinguish between

the various costs of supply for each customer

Financial adjustments should be recovered from the inelastic component of the tariff Under a two-part tariff the standing charge related to fixed costs

Not to the commodity charge

Conclusion

The five countries have developed gas grids and made gas available for industry, power generation, and households at affordable prices Gas has made a significant contribution to economic

growth Gas use could have grown even faster had

administrative restrictions not been in place the supply chain has not been able to follow, given

the perceived economic risks and benefits As a result, shortages are becoming systemic

in four of the countries

Conclusion 2

Governments have two choices Business as usual approach:

current pricing policies will be maintained, and will result in an increasing inefficient infrastructure, serious shortages, and ultimately imports of liquid fuels, at a very high cost.

Alternatively, realize that the current policies are unsustainable and socially inequitable who gets the benefits? formulate a transition program to realistic gas pricing policies

Through realistic pricing systems, consumers and producers can make rational decisions and gas will be used where the value added to the economy is the highest