by Leslie Palti-Guzman
Recent discussions about the impact of falling energy prices on oil-producing states overlook the significant effects that these falling prices will also have on natural gas-rich nations. Countries such as Qatar, Russia, and Algeria will be forced to contend with major economic and political challenges, particularly given the emerging era in gas markets—one characterized by an abundance of cheap gas resulting from the U.S. shale gas revolution, growing competition for market share, and shifts in pricing dynamics.
Although many resource-rich nations are both oil and gas exporters—with oil being the main moneymaker—gas sales are still an important source of government revenue. Because long-term gas prices remain predominantly indexed to oil prices, gas prices will start falling early next year. Indeed, if crude remains below $80 in 2015, gas prices will drop more than anticipated since global gas supply will likely exceed demand. For these oil and gas ‘rentier states,’ coping with a new reality of a sub-$100 price for Brent crude and an Asian gas price probably below $12/MMBtu in the first quarter of 2015 will be a shock after an annual average of $105-110 Brent crude prices last year. As a result, Qatar, Russia, Nigeria, Algeria, Malaysia, and Indonesia, just to name a few, are likely to see natural gas rents shrink significantly in the coming years, putting a strain on their economies. The struggle to balance public budgets and stabilize currencies could create political instability. Some countries, such as Algeria and Russia, are even at risk of dipping into economic recession if oil and gas prices continue to sink. Others will have to drastically adjust their budgets and cut public expenses.
If Brent and gas prices remain at depressed levels, Qatar, the world’s largest liquefied natural gas (LNG) supplier, will have difficulties sustaining the government’s ambitious investment strategy and infrastructure development plans. Its hydrocarbons sector, primarily natural gas, accounted for 60 percent of government revenues over the past five fiscal years (through fiscal year 2012-2013). These gas rents have supported the tiny Emirates’ multibillion-dollar investments in symbolic companies overseas, along with its rising diplomatic role in the Middle East. As Qatar prepares to host the Word Cup in 2022 amid single-digit economic growth, it will need gas revenues to fund its estimated $200 billion budget for the mega-event. Although Doha has enough of a liquidity buffer in the short-to-medium term, sustained lower gas prices in the post-2020 outlook would rapidly deplete Qatari cash reserves and could put a dent in its political aspirations.
As the world’s largest gas exporter, Russia’s natural gas rents were drastically challenged even before the drop in oil prices. The changing market conditions in Europe—declining gas demand, increased competition from cheaper sources of energy and gas, and the push to move away from oil-indexation in gas pricing formulas—have eroded Russia’s bargaining power. Since 2010, Russia’s Gazprom has granted significant price discounts to its main European customers in order to retain market share and price out competitors. But the Kremlin may have conceded too much, assuming that oil profits would offset losses from the lower gas-pricing environment. Hydrocarbon rent remains central to Russia’s economy and contributed at least half of the state’s budget revenues last year. The combination of tightening sanctions over Ukraine and the drop in the commodity prices is already threatening to push Russia’s economy into recession next year. This could jeopardize in the medium-term the leadership of President Vladimir Putin, whose popularity has been mostly driven by promises to make Russians richer and restore Russia’s power status on the global stage.
Algeria is in a similar position as an exporter largely dependent on oil and gas revenues. It, too, was already suffering from lower production, growing domestic energy consumption, softer market conditions, and a lack of foreign investment in its hydrocarbon sector. The country, which supplies large amounts of pipe gas to Europe and LNG to Asia, will also lose revenue in quarter one of 2015 as its supplies, which remain predominantly oil-indexed, get cheaper. That is a worrying prospect. For Algeria’s long-term political stability, the government must be able to generate and redistribute sufficient oil and gas revenues, thereby supporting economic growth and buying off social discontent as part of its 2011 program to avoid Arab Spring-inspired unrest. With hydrocarbon revenues accounting for about 30 percent of GDP, more than 97 percent of export earnings, and 60 percent of budget revenues, falling commodity prices portend grave political and economic consequences for the country.
In today’s pricing environment, the winners are the consumer countries that benefit from more affordable imports and greater energy security enhanced by supply diversification. Suppliers will continue to adapt their export and pricing strategies in response to more competition and improved pricing leverage on the part of buyers. For expanding and emerging gas suppliers, such as Australia, the U.S., Canada, and East Africa, looser market conditions and tough price negotiations will limit new project advancement. Finding new investments to support production and infrastructure will be more difficult, constraining suppliers’ long-term export plans. Insufficient, timely investments in new gas projects could lead to the risk of another cycle of supply tightness in the gas market post 2020, triggering price spikes.
While the world is currently focused on dropping oil prices, those countries that rely on both oil and gas revenues, such as Qatar, Russia and Algeria, must prepare for a double threat this upcoming January: not only will oil sales drop, but their gas revenues will also fall. These lost revenues threaten to undercut funds that support tenuous social contracts between ruling governments and societies in those countries the result of which could be a wave of instability.
About the Author
Leslie Palti-Guzman is a Senior Analyst at the Eurasia Group where she focuses on global natural gas markets, both cross-border pipeline politics and liquefied natural gas (LNG), with a particular emphasis on geopolitics, suppliers' export strategies, pricing evolution, and regulatory framework. Leslie appears regularly in the media as an expert commentator on global gas politics and is widely cited in publications including the Wall Street Journal, Financial Times, Reuters, Dow Jones, CNN Money, Associated Press, Platts, and Interfax. Leslie holds an MA in International Affairs from the Fletcher School of Law and Diplomacy at Tufts University. Leslie also holds both an MA and BA in Political Science and International Affairs from the Institut d'Etudes Politiques (Sciences Po) in Paris.