Pipelines and the Exploitation of Gas Reserves in the Middle East
The Middle East is endowed with approximately 20 percent of the worldﾒs proven reserves of natural gas in the world. The cost of transporting Middle Eastern gas, however, is so high that it is difficult to exploit it commercially outside the region. The European market for gas can be supplied in the foreseeable future from North Africa, Russia, the Transcaucaus region, and the North Sea. These suppliers have a significant locational advantage that dominates any edge that Middle Eastern gas may have in the cost of production. The high cost of transporting liquefied natural gas also limits the amount of Middle Eastern gas that can be sold to the Far East. Gas can be transported by pipeline or liquefied and then shipped by sea on special liquefied natural gas carriers. The cost of transporting 1000 cubic feet of gas 1000 miles by pipeline is approximately $.50. The cost of transporting 1000 cubic feet of LNG a distance of 1000 miles by sea is approximately $.30. However, the cost of liquefaction and regasification is approximately $1.40 per 1000 CF. Thus, for natural gas, transporting the energy equivalent of one barrel of oil a distance of 1000 miles costs $3.00 by pipeline and $10.20 if it is liquefied and transported by sea. By contrast, the cost of transporting a barrel of crude oil is approximately $.10 per thousand miles. Natural gas and oil are not perfect substitutes. Gas has environmental advantages and natural gas is a more efficient fuel in electricity generation. However, this advantage has been reduced by new oil fired combined cycle technologies; it is unlikely that in the long run the cost per kilowatt generated with gas can deviate far from the cost per kilowatt generated with oil. Natural gas and oil compete in the energy market. Thus Middle Eastern countries that produce oil are competing with their oil when they export gas. Selling gas reduces the market for oil. Producing LNG or producing middle level distillates at a cost of $10 to $20 a barrel does not make economic sense when the marginal cost of crude oil is under $1 a barrel. These activities can be way to avoid OPEC restrictions on crude production. Exceptions may be countries like Qatar, that have large endowments of natural gas and limited endowments of oil. It is not difficult to show that a rationalization of the OPEC cartel structure and some side payments within would lead to dominant strategies that would eliminate the export of gas from the Middle East to many markets. Paradoxically, the difficulty of exporting natural gas outside the Middle East creates an opportunity for the economic development of the region. Abundant energy at a very low cost would provide a stimulus for economic growth if the appropriate institutional and economic infrastructure can be developed.