Part 2 of 3: The strategic role of gas in the world

Lord John P. Browne, Group Executive Chief BP plc, London

Across Asia natural gas now supplies 11 percent of energy demand outside the transport sector.

The development is underway but we believe that we are on the verge of an even greater shift in favor of natural gas.

A number of factors are combining to transform an already growing role, into something very dynamic which could bring enormous economic and environmental benefits.

That is why this is such a historic moment.

Let me describe the four factors which are making such a difference. First, the gradual liberalization of gas markets across the world. This is not just about deregulation though that is clearly important in specific markets.

It is also about the changing needs of the consumer in a global economy where the availability of choice drives competitive forces to lower costs.

That means that we are seeing the beginnings of a shift away from the purchase of fixed volumes for extended periods to arrangements which involve greater flexibility of supply, and of price.

We are seeing this trend in the liberalized markets of North America and Europe -- and in the Atlantic Basin for LNG.

Now in the past it would have been said that without fixed contracts investment, particularly in LNG, would have been regarded as too risky and would therefore not have been made.

Equally it would have been said that without fixed supply contracts some consumers would not invest in switching to gas.

Those arguments may have been valid in the past but their force has been diminished by changes in technology which have altered the economics of the global gas business.

But long-term contracts are and will remain a feature of this industry.

They can coexist with competitive markets as we have demonstrated in signing long term gas supply contracts for supply to liberalized markets in Europe.

What we see developing is an industry whose growth is underpinned by a flexible mix of contract types and terms which reflect the realities of each particular marketplace.

Secondly, technology has changed the economics at many different points in the supply chain.

Upstream, the unit costs of the Majors fell during the 1990s in contrast to the trend of the industry at large principally through a mixture of technology, increasing scale and fiercer competition which drove down the costs of exploration and development by around 2.5 percent per year.

We, and others, continue to find world-class reservoirs. Technical advances have dramatically improved the economics of development. In Trinidad just three or four wells can supply a full LNG train.

Moving down the supply chain technology has produced a dramatic reduction in the cost of new gas liquefaction plant. In the 1980s such plants typically cost US$400 per ton to develop. Now the cost of comparable plants is $200 per ton and still falling. In the 1980s the unit cost of new LNG shipping capacity was $1,900 per cubic meter.

Now it stands at $1,200 and is still falling.

In regasification we have seen costs fall over 25 percent since the 1980's because of economies of scale in vaporization and storage equipment. Overall, we expect those gains to continue and overall we see the cost of LNG declining through this decade by as much as 25 to 30 percent.

And in the power business, the price of installed combined cycle gas turbine (CCGT) capacity has fallen from more than $800 to below $500 per kilowatt as manufacturers have introduced and then standardized new technology. And that cost calculation is before you take into account the huge improvement in heat rate which CCGT enjoys against steam boiler technology.

Indeed, one dollar invested today in gas-fired generation capacity produces three to four times the amount of electricity of the same dollar invested in coal-fired generation capacity.

There is one other important structural factor which contributes to the change in the market.

The growth and consolidation of the major players in our industry has altered the way in which we view an LNG investment.

Only 10 years ago the total investment in the creation of an LNG project through the chain from liquefaction, plants, ships, to regasification and power generation would have represented around 25 percent of our total market capitalization.

Now, 10 years on the same investment would represent less than 2 percent of our market value -- because we've grown and the costs have fallen.

Of course size and scale are not the preeminent features for success in this new global gas industry that is emerging.

But they do confer a capability to take on and manage new and increased types of risk which arise as gas markets require increasing flexibility of supply.

Flexibility, in physical and commercial terms, lies at the heart of what will be a new order in gas. Flexibility which underpins the development of the stranded resources of gas that exist around the globe. Flexibility that optimizes the supply of that gas to markets.

And most importantly, flexibility that meets the needs of traditional and new customers for gas -- promoting choice and enhancing security of energy supply.

Tomorrow (in June) a vessel filled with liquefied natural gas will enter Tokyo Bay to discharge her cargo -- a common event for the world's largest importer of LNG.

But this particular cargo marks the completion of an extraordinary chain of physical and commercial arrangements which began in the Atlantic -- and now end in the Pacific -- a distance of over 4,000 nautical miles.

The chain was initiated by a long-standing customer in Japan -- Tokyo Electric Power Company -- seeking additional volumes of gas at relatively short notice. It was enacted with a long standing LNG producer Adgas -- where we are a partner.

And it was executed successfully because we are putting in place a range of flexible physical and commercial assets and positions which recognize the new order I describe.

The vessel -- the British Innovator -- has been commissioned without being tied to a dedicated gas supply source or end customer. She is designed to service every large liquefied natural gas terminal in the world -- not a single region.

Her cargo was destined for Spain from the Middle East -- but the flexible nature of our customer and producer contracts allowed us to divert her to Japan.

And our portfolio of gas supplies in the Atlantic allowed us to honor our commitment to our Spanish customer.

This is not an isolated case -- nor are we standing still.

Today we have reached agreement with the government of Oman and Oman LNG for the purchase of LNG over a six-year period commencing in 2004. These supplies will add to a growing portfolio of highly flexible and divertable gas sources.

The above article is based on a keynote address delivered by the writer at the 22nd World Gas conference held recently in Tokyo.