The highly touted "btu convergence" of the deregulating natural gas and electric power industries took on new dimensions as the decade of the 1990s came to a close.
At first this trend had been limited largely to the US, where the shining success of natural gas industry deregulation and restructuring was seen as a model for a similar change in the electric power sector.
As deregulation and privatization proceeded to spread across both sectors in Europe in a more or less orderly fashion during the 1990s, the trend seemed to gather new momentum worldwide at the end of the decade. It seemed at the turn of the century that a vast range of energy assets-from pipelines to gas distribution systems to electric power generating plants to power transmission lines-were shifting from the public to the private sector worldwide.
There were still missteps along the way-Mexico`s aborted electric power privatization initiative, for one-but there seemed to be no stopping the general shift toward unfettered markets, open access, increased competition, and private ownership and operation of gas and power assets in country after country.
And as these initiatives unfolded, gas and power developments emerged hand in hand. Many of the companies that pioneered the move toward btu convergence in North America-Enron Corp., Duke Energy Corp., Coastal Corp., El Paso Energy Corp., Nova Corp., Dynegy Inc., TransCanada PipeLines Ltd.-were leading the charge in other parts of the world, particularly in the fertile markets of the developing nations.
It was, in large part, the forecasts of robust, long-term growth in energy demand in these nations coupled with fossil-fuel air-emission concerns emanating from the Kyoto Protocol on climate change that fueled the gas-power juggernaut. The supply and price benefits of free-market gas and power were increasingly evident, as well.
Even conservative forecasts suggested that demand for both gas and power could double during 2000-20.
But gas and power trends were about more than growth.
Power consumption growth
By any measure, the outlook for global electricity consumption growth at the beginning of the century was strong.
Enron Corp. forecast that world electricity consumption would rise from the 1997 level of 13,100 billion kw-hr/year to 26,960 billion kw-hr/year by 2020 (Table 1). The company based that forecast on an expectation for average worldwide economic growth of 2.9-3.2%/year during that time and factors in assumptions that included continuation of the trend toward private ownership of electricity generation and distribution assets; increased activity in worldwide electric industry restructuring, deregulation, and liberalization; growing development of new energy products, services, and networks; and accelerating intensity of worldwide competition for energy infrastructure capital.
"This rate of increase will require new power generation capacity as well as the refurbishing and repowering of existing capacity," said Margaret Carson, Enron director of corporate strategy and competitive analysis. "Such improvements increase generation output in markets with less-efficient power plant output levels and greatly improve asset utilization rates and competitiveness."
Enron saw electricity consumption in Asia and Latin America almost tripling during 1997-2020 and almost doubling elsewhere in the developing world.
The most aggressive growth rates would be in Asia (4%/year) and Latin America (3.5%/year), according to Enron. Overall, world electricity consumption growthwasexpectedtoaverage 3.3%/year during 2000-10 and 3.1%/year in the final decade of the forecast, as emerging markets matured. Electricity use growth rates were expected to stabilize in markets such as Asia after 2010, as subsidies lapsed and private ownership accelerated in favor of market-oriented pricing, Carson said.
Power privatization
Carson noted the importance of electric power privatization in efforts to bolster economic development in the developing world.
Because effective competition allows new entrants into a market, she argued, these new entrants help drive out excess profits and better align prices of products and services with costs.
"Open energy markets ensure that the future development of the market will be predominantly in response to market signals rather than dictated by government or regulatory policy," she said. "Price transparency evens out the playing field for all participants, new and old, in the marketplace.
"New entrants, via privatization, can bring new cash flow into energy operations, allowing an industry or region to develop faster than if it were held to a strict public budget. This is especially true in energy producing and exporting countries with budgets that wax and wane with world commodity prices. Energy pricing becomes a business issue, and the political importance and profile of energy pricing in the economy are shifted to a more-commercial perspective. This is favorable to banks and investment institutions, both domestic and global, and helps attract capital investment. New entrants bring new management and technical skills that can lower prices and raise service standards."
Gas consumption outlook
Enron foresaw a comparably strong growth track for natural gas consumption around the world.
It predicted in 1999 that global natural gas use would increase by 3%/year during 1998-2020, essentially doubling in that period (Table 2).
Spurred by a flurry of new pipeline, gas distribution, and LNG projects, growth in natural gas demand would outstrip that of all other major energy sources, especially as economies stabilized in the Asia-Pacific and Latin American regions-both underrepresented in terms of world pipeline assets, Carson noted.
France`s Cedigaz in 1999 predicted that worldwide demand for natural gas would increase at a rate of 3-4%/year during 1999-2010. That would boost the gas market share of the global energy mix to 25% from 23% in 1997 and represent total consumption of about 3.2 trillion cu m.
A longer-term forecast for the years following 2010 was offered by the International Gas Union in 1997, which called for growth to moderate at a rate of about 1.25%/year during 2010-30 (Fig. 1).
Market potential
Just what is the ultimate market potential for the interlinked gas and power markets?
Houston energy consultant William H. Smith in late 1999 undertook a statistical exercise to assess the scope of gas and electricity project opportunities worldwide.
Smith started with the International Energy Agency`s key energy indicators for the 128 countries that accounted for over 96% of the world`s population and over 99% of the world economy and then calculated gas and electricity consumption per capita and per income for eight regions of the world. He assigned an arbitary threshold of a 25% market share for natural gas in a country`s energy mix-a reasonable threshold, given the respective gas market shares of 24%, 34%, and 47% in the US, UK, and Argentina-and calculated the incremental demand that would result if all countries achieved a minimum 25% gas market share.
Smith concluded that, under such a scenario, global gas consumption would increase by 33 tcf/year over the 75 tcf consumed in 1996. Over 60% of that increase would come from Asia. Even the US, moving to 25% from a little less than 24%, would add 1 bcfd of demand. Furthermore, if energy efficiencies remained constant and the 25% gas market share held, consumption would increase by a further 1.7 tcf/year.
"In reality, the increases should become larger," Smith noted, "especially in Asia, as the 1998 growth rates were negatively impacted by the recession in many of the Asian economies."
Applying the same exercise for economic growth to electricity markets, Smith concluded that the incremental demand for electricity worldwide would be 380 million kw-hr/year, assuming no change in energy efficiency. The US alone would account for about a third of that increase, followed by China, India, Canada, and Germany.
"The argument can be made that the economies of some of the developing countries would grow even faster with an increased supply of electricity," Smith said.
Setbacks
This rosy outlook became a bit hazier in 1998 and early 1999 when a convergence of another kind-economic and market trends-threatened to derail the growth locomotive for gas and power.
As Enron noted, a critical component of the bullish prospects for gas and power demand growth had been the continued healthofthedevelopingnations` economies, particularly those in Asia and Latin America. The Asian economic crisis that started in Thailand in late 1997 and spread throughout the region and then contaminated economies in Latin Americastaggeredmanyenergysupply-demand forecasts. The other, related forecast-wobbling event was the collapse of oil prices in 1998 and early 1999.
Both factors contributed to a flattening of the projected near-term growth curve for natural gas. Cedigaz in early 1999 contended that a widely accepted forecast of global gas consumption in 2000 totaling 2.55 trillion cu m-vs. 2.3 trillion cu m in 1997-no longer seemed realistic.
Cedigaz noted that South Korea-especially hard-hit by the economic meltdown-had sharply reduced its anticipated LNG imports in response to the crisis, to 10.7 million tonnes in 1998 from 11.6 million tonnes in 1997. Imports of 18 million tonnes had initially been scheduled for 2000, but South Korea trimmed its short-term contracts, with Indonesia and Malaysia in particular.
But the French gas giant also pointed out that LNG demand growth in Japan wouldn`t be greatly affected by the crisis, as the contract volumes had already been fixed in view of an anticipated slowdown in economic growth. In fact, natural gas was expected to gain further market share in Japan`s primary energy demand by 2010 despite a strong increase in the market share held by nuclear power, largely on the strength of increased use of gas for industrial cogeneration as well as in power plants. Taiwan, only marginally affected by the economic crisis, wasn`t expected to see much change in the outlook for its LNG demand growth (Table 3).
More problematic was the outlook for new LNG markets. Thailand in particular was battered by the economic crisis, and consequently its demand for natural gas was expected to fall after 2000. Cedigaz estimated that Thai gas demand would reach only 32 billion cu m in 2005 vs. an earlier projection of 36-41 billion cu m. This shift led to indefinite postponement of Thai LNG imports from Oman and from Indonesia`s Natuna gas project.
Because natural gas prices are inevitably determined by the price of other forms of energy, low oil prices posed a threat to LNG and major gas pipeline planning in 1998 and early 1999. The prospect of sub-$15/bbl (West Texas Intermediate) oil threatened to make many big LNG and large-capacity transnational gas export pipelines in Asia subeconomic, as many of these grassroots projects required gas prices of $3-4/MMbtu vs. the $1.50-3.50/MMbtu gas price levels that prevailed across the world for most of 1999. While the rebound in oil prices to more than $25/bbl in second half 1999 and early 2000 might seem to have rendered such concerns moot, the preceding oil price collapse served as a sobering reminder to gas-project planners that a conservative energy price scenario works best, no matter how exuberant forecasters are about future demand growth.
"In the long term, natural gas prospects look bright," Cedigaz said. "The aftermath of Kyoto and the increasing concern with environmental protection, emission standards, and tax measures should further the expansion of natural gas on account of its efficiency and its cleanliness.
"However, there is a wide margin between long-term potential and short and medium-term constraints, and it is still difficult to see what path the growth of natural gas markets will take, and even more so to see how prices will evolve.
"The deregulations that are taking place in North America and Europe, in both the electricity and the gas sectors, will influence the future growth of this form of energy."
Market barriers falling
Privatization and market liberalization are key to such ambitious forecasts, and the inexorable trend in 1999 was for more of the same. According to Enron, since 1990, more than $150 billion worth of electric power plants and gas pipeline assets had been privatized worldwide (Fig. 2).
Nowhere had the succession of falling barriers been more profound than in North America, which accounted for almost a third of the world`s installed power generation capacity (Fig. 3). According to Enron, more than 75 Gw of private power capacity had been built in the US since Congress passed the Public Utility Regulatory Policies Act (PURPA) of 1978. This act enabled nonutility operators of cogeneration plants and generation plants fired by renewable fuels to compete in the wholesale market against utility generators. It forced utilities to buy power from these so-called qualifying facilities and small generators at prices reflecting their avoided costs, or what they would have paid if they had added capacity to produce the electricity or boght it from other utilities.
PURPA was followed by the 1992 Energy Policy Act, which allowed nonutility generators to operate without the ownership restrictions PURPA imposed. In 1996 the US Federal Energy Regulatory Commission implemented Order 888, which opened third-party access to the US electric transmission grid.
The result of these regulatory and legislative changes, Enron noted, was that the volume of wholesale electricity trade by US power marketers rocketed tenfold during 1996-98.
Accompanying this upheaval in gas and electric markets was a fundamental transformation in the way traditional conveyors of gas and power resources functioned and perceived themselves. The mergers and acquisitions among natural gas distribution companies, pipelines, electric utilities, and fuels trader-marketers represented nothing less than a revolution in the energy industry. Traditional, linear conveyors of one resource-or one part of the value chain of that resource-came to see themselves more as energy service companies, delivering btus (and related services such as arbitrage transactions) regardless of fuel origin across an integrated portfolio of the energy value chain (Fig. 3). Even more, as btu competition intensified, companies ventured, with varying degrees of success, into other, formerly unrelated services(telecommunications,entertainment, financial data transmission, other utility services, etc.)
Need for competition
For the US success in gas and power deregulation to be replicated in the developing world, speed was of the essence, according to Enron`s Carson.
"Developing and maintaining competitive natural gas and power markets is a complex, revolutionary process," she said. "A slow process impairs improvements in the gas and electric value chain in a market. Reliability in a market must be sustained or improved by competition. Specific dates when participants have the choice to supply or to enter a market to buy supplies or services are necessary to reduce uncertainty and the volatility such change brings to markets. All consumers must be beneficiaries of the competitive process.
"A flurry of cross-border investment activities, due to the ability of new entrants to participate in energy markets as a result of global liberalization trends, will introduce new technology and best practices into markets and speed up innovation.
"Customers will choose to purchase power and natural gas from the providers who offer the best combination of price and service for their needs. The key delivery systems will still operate and will reliably deliver power and gas, but technological innovation and more automation will do it more efficiently and competitively-instead of `one size fits all` service levels.
Carson also saw competition intensifying in the traditional power generation sector as btu convergence pushed further downstream in that arena.
"Changes in patterns of fuel procurement will emerge as competition changes fuelchoices,economics,contracting methods, and risk-management services over time. Competition forces suppliers to offer better products and services at a better price-or risk losing customers to other competitors.
"This is a new and exciting paradigm in an important segment of the worldwide energy industry. It is empowering new forces of change."
As dizzying as that change sometimes seemed, there was no stopping it for the worldwide natural gas and power industries.
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Enron Corp.`s Dabhol project in India, shown here still under construction in 1997, typifies the direction of the world`s gas and power industries. Conceived as an integrated energy project by a pioneer of the "btu convergence" trend, it features a flexible-fuel approach (fuel oil, then LNG) with capacity additions planned in phases to accommodate a ramp-up in demand and with output tied into the power grid of a developing country targeted for strong growth in energy demand. Photo courtesy of Enron.
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