NEW GLOBAL ENERGY MAP TAKING SHAPE

new global energy map is taking shape as Canada, Russia and Qatar come to play new, more decisive supply-side roles and the U.S., India and China continue to lead global oil demand growth.

Sustained high oil prices are allowing Canada to develop its massive reserves of unconventional oil, of which at least 175 billion barrels are deemed recoverable. China is in the midst of striking large oil deals with Venezuela and is also deeply involved in the Iranian, Kazakh and Sudanese oil sectors.

Russia's combined oil and gas production of nearly 20 million barrels per day of oil equivalent will give Moscow great geopolitical influence in the European and Asian energy markets.

Qatar has the world's third-largest gas reserves, and enjoys low development and production costs because its gas is concentrated in the massive North Field. Qatar's Middle Eastern location makes it equally favorable to sell liquefied natural gas (LNG) to both the Atlantic and Pacific markets. As the LNG market grows, these factors will make Qatar the global LNG kingpin.

Canada, Qatar and Russia will gain heightened strategic and economic importance. Interaction between these suppliers, newly powerful national energy companies, and large consumers like China, India and the U.S. will shape the global energy and security architecture.

China's growing energy ties to "rogue states" like Venezuela, Iran and Sudan, as well as to others like Saudi Arabia, Nigeria and Angola, will strongly impact global energy politics. Certain existing geopolitical relationships will grow, for example U.S.-Qatari ties, while other relationships will emerge. China will strengthen energy ties with Australia, Canada and Russia.

Qatar and Russia may become global gas price setters because they can sell to both the Atlantic and Pacific markets. The interplay between Russian and Qatari LNG supply, and U.S. and Chinese demand, will likely help determine global LNG prices in coming years.

PetroKremlin

Russia aims to increase its energy supplies to the Atlantic market by means of pipeline oil and gas exports to Europe, and perhaps LNG and oil exports to the United States. Yet Russia also sits atop largely untapped hydrocarbon deposits in Eastern Siberia and Sakhalin that are ideally situated for exports to the rapidly growing Asian-Pacific market, particularly China. The Russian Arctic's reserves will also become more accessible as companies improve Arctic-drilling technology. An Arctic thaw may also open up additional maritime energy shipping routes from Russia.

Russia is the world's largest producer of combined hydrocarbons-each day producing the equivalent of 20 million barrels of oil-and its increasingly state-controlled energy sector has been developing in an unprecedented way.

But Russia will not follow the OPEC path of maintaining 100% state-controlled companies. Instead, it will permit foreign investors to own up to 49% of the state companies through means such as the upcoming initial public offering for state-owned oil and gas firm Rosneft, and the recent share liberalization of its national gas company Gazprom. Under this system, the Kremlin can use foreign capital to maintain and boost production while preserving ultimate control over what may be the world's largest combined oil and gas reserves.

Organizing oil and gas production along "51% state/49% private" lines will strengthen the Russian state producers' finances, and reduce their need for cash-rich but reserves-poor Western partners. From the Kremlin's perspective, this new structure is beneficial because the state companies can use foreign capital to take over private Russian competitors. In October 2005, Gazprom bought Sibneft for $13 billion, and the capital to do so came primarily from a consortium of Western banks. The government can also use equity offerings to solidify international energy partnerships while retaining control of hydrocarbon resources.

Additional benefits may surface once Western investors acquire large stakes in Gazprom and Rosneft; they may pressure their governments to take a softer line towards Russia. This has been the case in Sino-U.S. relations, where the American business lobby has consistently advocated engaging China.

The Kremlin now controls more than 10 times the amount of oil production it did in 1998-and all Russian pipeline oil exports are controlled by state monopoly Transneft. Russia is unlikely to privatize oil- and gas-producing assets and pipelines because hydrocarbon exports are among Russia's few foreign-policy levers. Russia's oil and gas geopolitical influence is not restricted to its own exports because it has a near monopoly on export pipelines from the Caspian Sea and Central Asia. Washington wants to see diversification of export routes out of this region and as such, pipeline politics pit Russia against the U.S. in Central Asia, which could complicate the Russo-American energy relationship.

It will be interesting to see how energy ties evolve between Moscow, Brussels, Beijing and Washington. Russia's relations with the EU and China already are primarily based upon energy ties. Moscow sees China as a way to diversify away from a stagnant European market obsessed with cutting energy demand.

In the next decade, Russia hopes to increase oil production 14% and gas production 26%, so it will need vibrant markets like China and India to absorb this increase. Russian observers believe that energy exports could be the key to broader economic relationships with China and other Asian countries, enabling Russia to diversify away from Europe.

It is in energy consumers' interest to see that Russia establishes rule of law and stability conducive to attracting the more than $11 billion per year in investment necessary to maintain and expand its oil and gas production. Russia has the necessary resource base to be an energy superpower, but the "X factor" will be Byzantine internal politics that stifle investment and reflect the sharp divide between the interests of major energy exporters and major consumers.

Tap the Rockies

Structural changes in the oil market-like demand in emerging markets in Asia-are sustaining high oil prices and allowing Canada to profitably produce oil from its 175 billion recoverable barrels of oil-sands reserves. This means a new oil supply center is emerging right at Washington's doorstep, with potentially massive geopolitical implications.

Canada is a dream oil supplier for China because, unlike many African and Middle Eastern energy suppliers with which it has dealt, it is politically stable. Unlike Venezuela, which also has massive unconventional oil reserves, Canada's stability is attracting the investment needed to develop the resources and make it the global unconventional oil leader. This is an important selling point in Beijing's eyes because much of the regime's legitimacy hinges upon economic growth sustained by secure energy supplies.

China's national oil companies are actively trying to buy into the Canadian oil sector through buyouts of Canadian producers, like Calgary-based Husky Energy. Chinese firms are also seeking a 49% stake in the Enbridge project, which by 2010 would carry 400,000 barrels per day of tar-sands oil to Canada's Pacific Coast, where up to 300,000 barrels a day could be loaded onto Chinese-bound tankers.

In 2005, Canadian Natural Resources Minster John McCallum suggested that China could import up to 400,000 barrels per day of Canadian crude by 2012.

Canada's newfound oil presence is geopolitically sensitive because China would be importing Canadian oil from the United States' backyard. Most Chinese overseas energy deals do not occur along market lines, as those conducted by Western producers typically do. Instead, they involve state-owned companies able to deploy a full array of government assets when vying for reserves.

The political fireworks accompanying China National Offshore Oil Corp.'s attempt to buy Unocal in 2005 may just be a harbinger of things to come if China continues deepening its energy interests in the Western Hemisphere. It might not be far-fetched to see calls on Capitol Hill for a 21st Century Monroe Doctrine.

A Gulf gas giant

Qatar's huge and well-located gas reserves may feed a global boom in the LNG trade. Qatar can supply both the Atlantic and Pacific LNG markets, meaning that world LNG prices may gradually become linked through arbitrage between the two basins. Qatar has slowed development of the North Field as it evaluates the field's characteristics and future productive ability-yet despite that, it is already the world's second-largest LNG producer, shipping nearly 20 million tons in 2005.

The U.S. is preparing to import massive amounts of LNG from Qatar. In 2002, Qatar exported 15 million tons of LNG and, judging by its signed contracts, may produce almost 70 million tons per year by 2010. The U.S. Department of Energy has forecast that the U.S. will be importing 52 million tons a year of LNG at that time and 23.4 million tons of this will come from Qatar. In a nutshell, this means Qatar will become the centerpiece of the global gas market and the U.S. has another strong strategic reason for maintaining significant political and military involvement in the Persian Gulf.

Ties between LNG producers and consumers will likely be tighter than ties between oil producers and consumers, due to fundamental differences between LNG and oil markets. LNG is still sold primarily on the basis of long-term contracts; there is essentially no swing capacity available to "turn on the tap" on short notice and offset a major supply disruption. If Qatar miscalculates demand and overbuilds its supply capability, it might become the swing supplier. Nonetheless, spare LNG capacity cannot compensate for large and sudden shortfalls the way shut-in oil production can.

Conclusion

In the end, Saudi Arabia will remain the core of the global oil market because its reserves are huge, relatively easy to tap and, with their seaside location, well situated for export. Canada's reserves are technically nearly as large, but are more difficult and expensive to produce and are farther from the sea. Yet if oil prices stay high, Canada's massive oil-sands reserves will make it a global unconventional oil leader and may lure significant Chinese investment into North America.

The United States and China will be major players on the demand side. A key geopolitical fault line will be between China and the U.S., given China's growing ties with Australia, Russia and Canada, and its continued propensity for dealing with energy-rich rogue states such as Iran and Sudan.

Bringing China into the IEA (International Energy Agency) and cooperating on energy- related port security can be first steps toward Sino-U.S. energy trust-building. Russia will also be a key factor in the world oil, pipepline gas and LNG markets. Qatar and Russia will shape the global gas market because they will be the largest exporters, bridge the Atlantic and Pacific markets, and may contribute to the globalization of gas prices.

Global oil and gas markets will undergo many changes in the future as supply struggles to meet demand. A new global energy map may take shape as China, India and the U.S. drive global demand growth and as the world comes to count on Canada, Russia and Qatar to supply new LNG, oil and unconventional oil streams.

A native West Texan, Gabe Collins is a graduate of Princeton University and is now a research fellow at the U.S. Naval War College in Newport, Rhode Island. He can be reached at gabe.collins@gmail.com.