The Quest: Energy, Security, and the Remaking of the Modern World

by Daniel Yergin

  By the beginning of the 1970s, natural gas provided fully 25 percent of America’s total energy. It was produced either jointly with oil or from pure gas wells. But then a natural gas shortage gripped the country. In the cold winter of 1976–77, parts of the Midwest ran so short that schools and factories had to shut down. Companies were already scrambling to find new supplies. LNG looked to be a very good—and timely—answer. Several utilities, including the Cabot Corporation (the company Thomas Cabot had created in sorting out his father’s taxes) contracted with Algeria for supplies. The Texas-based pipeline company El Paso ordered enough LNG tankers to constitute a virtual floating pipeline. Receiving terminals for re-gasifying the liquid gas were built on the Gulf Coast and the East Coast. The most visible, designed to help meet New England’s gas deficit, was Cabot’s in Everett, Massachusetts, right across Boston Harbor from the USS Constitution (“Old Ironsides”), the famed frigate launched in 1797. Another big project was planned for the West Coast, at Point Conception, California’s elbow into the Pacific, north of Santa Barbara.

  But it turned out the natural gas shortage was not an act of nature but manmade, the consequences of inflexible regulation. The federal government, which regulated natural gas prices, had set them at such an arbitrarily low level as to stifle supply. The obvious solution was to let the market determine prices. But what was straightforward economics was hardly the same when it came to politics. The single biggest domestic political battle during the presidency of Jimmy Carter was over natural gas price deregulation. “I understand now what Hell is,” Energy Secretary James Schlesinger said in 1978 amid the battle over natural gas pricing between House and Senate negotiators. “Hell is endless and eternal sessions of the natural gas conference.”6

  Finally, the Natural Gas Policy Act of 1978 started to decontrol prices. The act was a wonderful example of what happens when economics and politics interact in the same test tube. It provided distinct pricing schedules for some 22 different categories of a commodity that, in molecular terms, was more or less all the same—one carbon atom and four hydrogen atoms. Still, the end point was pretty clear: deregulation.

  As part of the compromise, Congress enacted the Fuel Use Act. But the law might as well have been called the “Fuel Non-Use Act” as it banned the burning of natural gas in power plants to generate electricity. Natural gas was deemed the “prince of hydrocarbons” and was to be kept for higher uses—heating and cooling, cooking, and industrial processes. It was too “valuable” to be used to make electricity.

  To the surprise of some, markets actually worked. Deregulation of prices led to a surge in supplies. Moreover, as supplies increased, prices did not shoot through the roof but settled at lower levels. Indeed, so much additional natural gas came onto the market that it created an extended oversupply that was known as the gas bubble. After a time, it seemed that this was one bubble that would never burst.

  The oversupply of low-cost domestic gas did in the prospects for LNG, for LNG was simply too expensive to compete. The expected boom in the U.S. LNG business turned into a bust. Projects were canceled; companies defaulted on contracts for LNG tankers. Companies that had committed to LNG teetered on bankruptcy. Cabot Corporation was losing $5 million on every cargo of LNG .7

  Yet by the 1990s, the market was changing again. The fears of shortage had long since faded away, and the prohibition on using natural gas in electric generation was lifted. Instead of being banned, natural gas became the fuel of choice for electric power. New technologies made natural gas turbines much more efficient and thus lowered costs. Gas was seen as a cleaner, more environmentally attractive fuel than coal, and the development of new nuclear power in the United States had already come to a stop. In contrast, power plants fired by gas could be built more quickly and at a much lower cost than the competitors’.

  By the mid-1990s the U.S. economy was booming, and, as a result, electricity demand was growing. To meet this demand, power generators were frenetically building natural gas-fired power plants. But where was the gas supply to come from? In response to rising prices, drilling did increase, but in contrast to the traditional pattern, new drilling brought forth only a paltry increase. It was proving harder to step up gas output from existing basins, which were said to be mature. Access to new areas was difficult, owing to increasing regulatory delays. Moreover, many prospective areas, both onshore and offshore, were closed off to drilling altogether for environmental reasons.

  In the face of rising demand and flat supply, the market tightened. Consumers saw their bills increase dramatically. Even harder hit were energy-intensive industries, like petrochemicals. They could no longer compete against products from the Middle East that were made from far less expensive gas. Chemical plants were shut down in the United States. If supplies did not increase, and costs did not come down, companies would have to close even more of their U.S. plants and lay off still more workers.

  The answer once again seemed to be LNG. Innovation had made it available by attacking costs at dramatically increasing scale. Cabot, which only a few years earlier had been desperately trying to extricate itself from unviable LNG contracts, now started to look for new LNG supplies.

  One possible source was Trinidad, where significant natural gas reserves had been discovered offshore. But could gas from Trinidad be competitively landed in the United States? “The conventional wisdom was that the cost of LNG was going to continue to rise,” recalled Gordon Shearer, who worked for Cabot at the time. “But then we realized that the cost structure of LNG didn’t make sense.” Cabot succeeded in bringing down these costs substantially by simplifying designs and promoting much more competitive bidding.8

  Trinidad demonstrated that LNG need not be the high-priced alternative but rather could compete with conventional pipeline gas. By 1999 this cheaper LNG was starting to flow in growing volumes into the terminal at Everett, near Old Ironsides, across the bay from Boston.

  “THE CROWN JEWELS”

  But then there was Qatar.

  The North Field was discovered by Shell in 1971 in the waters off Qatar. At first no one knew how vast it was; indeed, it took decades for the full dimensions to be recognized. Today its reserves are estimated at 900 trillion cubic feet. This makes the State of Qatar the third-largest resource owner of conventional natural gas in the world. Ahead of it are only Russia and Iran, whose South Pars Field is really the same structure as the North Field.

  In the 1970s and 1980s, there was no obvious market for the North Field gas, no demand for it, and no way to get it to market. Eventually, Shell relinquished the North Field and moved on to the more immediately attractive Northwest Shelf project in Australia.

  In 1971, the same year that Shell discovered Qatar’s North Field, Mobil Oil discovered Arun, a huge offshore natural gas field in the northern part of Sumatra, the largest of the 17,000 islands that comprise the nation of Indonesia. As billions of dollars flowed into the project, Arun turned into the largest LNG development of the 1970s and 1980s. The onshore liquefaction plants were in the province of Aceh, and the supplies went to Japan. The project was absolutely crucial to the fortunes of Mobil and its profitability. “It was the crown jewels, no question,” recalled one Mobil executive.9

  But a problem emerged—Arun’s output appeared set to decline. Thus, with increasing urgency, Mobil searched for another supply of natural gas, unreachable by pipeline and thus stranded from markets, where its LNG skills could be applied. North Field stood out; Shell was now gone, and a discouraged BP had just pulled out of an LNG project there that existed only on paper. Mobil proposed a structure that would allow it to take a share in two Qatari companies, Qatargas and RasGas. This kind of structure made sense to the Qataris, especially as RasGas did not yet exist as a company. They did their deal.

  The new partnership needed to find customers, but it was very hard going. “We weren’t able to do much,” recalled one of the Qatari marketers.

  Every decade or so, however, Japan sought to ad
d another major source of LNG not only to meet demand but also as part of its diversification strategy. Chubu Electric, which serves the territory next to Tokyo and whose biggest customer is Toyota, contracted for the first gas from the North Field. A Korean utility, Kogas, signed on next.

  With these deals, Qatar had gotten in the door in Asia, the biggest LNG market in the world. But Qatar was a latecomer, and it ran a real risk that it would be relegated to a secondary position as a supplemental supplier. And Qatar had too much gas for that. But where else could they go? Finally, after a couple of years of study and debate, a senior Qatari settled the matter: “We should be heading west,” he said. That meant to Europe—and beyond.10

  During this same period, Qatar was going through political change that would reinforce its commercial drive. In 1995 Crown Prince Hamad bin Khalifa al-Thani sent a message to his father, the emir, Sheikh Khalifa bin Hamad, then vacationing in Switzerland. It was actually a pretty simple message: Don’t bother coming back. The crown prince had just deposed his father, who had been in power since overthrowing his cousin in 1972 and was not seen as a very competent ruler. Nevertheless, Sheikh Khalifa had insisted on being in charge of everything. Indeed, it was said that he personally signed all checks over $50,000. He was also thought to have been bleeding the country of revenues, and indeed, after the bloodless coup in 1995, the new emir, Sheikh Hamad, sued his father for return of the state’s money. That case was settled out of court, and the aged father found a new life for himself based in London.11

  Now in power, Sheikh Hamad initiated a far-reaching program of modernization and reform, ranging from permitting women candidates in municipal elections to the opening in Qatar of the Mideast branches of New York’s Weill Cornell Medical School, Georgetown University’s School of Foreign Service, and Texas A&M University. Qatar became home to the forward headquarters for the U.S. Central Command, which has responsibility for the Middle East. It also became home to, and indeed financed, the Al Jazeera satellite news network.

  The emir was determined to turn his small Persian Gulf principality into a global energy giant, based on LNG, with the revenue stream that would go with it. Accelerating LNG was the way to do that. But a huge amount of money would have to be invested. That meant that LNG costs—considered absolutely irreducible—had to be reduced. Even so, the capital costs would be enormous. “The more I learned about Qatar,” recalled Lucio Noto, former CEO of Mobil, “the more I realized the scale was beyond the capacity of an individual company.”12

  The merger of Mobil with Exxon in 1999 made the great expansion much more doable. The combination brought critical Mobil assets—the gas resource, LNG expertise, and relationships—together with Exxon’s financial strength and its skill in project execution. The combined company now had the size and wherewithal to think big in terms of scale and risks. Actually, very big. And scale was the way to bring costs down—much bigger ships, much bigger liquefaction trains, and much bigger turbines. Projects were managed with great discipline, capturing the learning and bringing down the costs of subsequent projects. One way to do that was by making facilities as standard as possible, doing the design very carefully, and then sticking to it. As one of the senior managers put it, “The rule was no change orders.”

  Hungry at the time for work, Korean shipyards tendered for much bigger LNG carriers—two times the size of those then afloat—at a very attractive price. RasGas accepted the bids. Higher volumes meant lower costs. Now, as they put it, Europe was “reachable.” The joint venture knew that it could compete against pipeline gas in Europe, and even beyond Europe. For with sufficient scale (and bolstered by the liquids with the gas) Qatar could deliver competitively priced gas anywhere in the world.

  By 2002 Qatar had emerged as a potent new competitor in the global gas market. It could dispatch large amounts of LNG into any major market—Asia, Europe, and the United States. Breaking with the traditional business, it could also do so without necessarily being tied to a long-term contract. It built its own receiving terminal, in Europe. Qatar was at the forefront in creating a new business model in which both buyers and sellers were willing to buy or sell LNG without complete reliance on long-term contracts. And the numbers are huge: By 2007 Qatar had leapfrogged over Indonesia and Malaysia to become the world’s number one supplier of LNG, and this small emirate of 1.5 million people was on its way to being able to provide almost a third of the world’s LNG supply.

  It was not just the physical resources and technical capabilities that projected Qatar into this premier position. It was also the result of what those on the other side of the negotiating table recognized to be efficient and determined decision making. Qatar could be very tough, but it was also intent on closing deals and getting things decided quickly, not in multiple years. As Minister Al-Attiyah put it, “If we do a deal one day, we don’t wait, we sign it the next day.” Reliability was one of the critical pillars on which the Qatari industry was built. Once a deal was done, stability of contracts underpinned confidence and facilitated investment. The importance of this approach was made clear by comparison to the other side of the median line, off the coast of Qatar, where Iran after forty years has yet to be able to turn South Pars gas into exports.13

  By the 2000s, it seemed that natural gas, carried around the world on tankers, was on its way to becoming a truly global industry. Historically, due to the high cost of transporting gas over long distances, natural gas has been traded regionally. By bringing down costs so significantly, this no longer applied.

  What this meant was vividly demonstrated in July 2007. On July 16, 2007, a large earthquake hit central Japan, damaging the Kashiwazaki-Kariwa Nuclear Power Station—the world’s largest, home to seven reactors. The entire facility was shut down, creating an immediate shortage of electric generation. The owner of the power station, Tokyo Electric Power Company (TEPCO), began buying heavily from the short-term LNG market to fuel stand-by natural gas–fired power plants that could make up for the nuclear power shortfall. LNG tankers intended for elsewhere immediately changed course on the high seas and headed for Japan. Also in that same month, July 2007, half a world away, outages of natural gas pipelines flowing from the natural gas fields in the North Sea interrupted supplies to Europe. This too triggered a quick diversion of LNG supplies from their intended routes.

  Almost four years later in March 2011, a giant earthquake and tsunami shook Japan, knocking out power and setting off a major nuclear accident at the Fukushima Daiichi plant. Natural gas supplies were redirected to Japan on an even more massive scale.

  What had been an inflexible regionally based LNG industry had turned into a flexible international business. Natural gas had become a global commodity. 14

  16

  THE NATURAL GAS REVOLUTION

  George P. Mitchell, a Houston-based oil and gas producer, could see the problem coming. His company was going to run short of natural gas, which would put it in a very difficult position. For it was contracted to deliver a substantial amount of natural gas from Texas to feed a pipeline serving Chicago. The reserves on which the contract depended were going down, and it was not at all clear where he could find more gas to replace those depleting reserves. But he did have a strong hunch, piqued by a geology report that he had read.

  That was in the early 1980s. Three decades later, Mitchell’s relentless commitment to do something about the problem would transform the North American natural gas market and shake expectations for the global gas market. Indeed, the stubborn conviction of this one man would change America’s energy prospects and force recalculations around the world.

  The son of a Greek goat herder who had somehow ended up in Galveston, Texas, Mitchell had grown up dirt-poor. He had worked his way through Texas A&M University waiting tables, selling candy and stationery, and doing tailoring for his fellow students. After World War II, Mitchell had started in the oil-and-gas business in Houston, working out of a one-room office atop a drugstore. Over the years he had built it into a
very substantial company, Mitchell Energy and Development, that focused much more on natural gas than oil.

  For Mitchell, natural gas was virtually a cause. He was such a believer that when he suspected someone of speaking too kindly of coal, he would reach for the phone and set him straight in a few short sentences. What he wanted to see was more natural gas use. And he simply would not accept the notion that supplies were constrained by scarcity.

  But where was he going to get more gas? The geological report that he had read in 1982 pointed to a possible solution. For a very long time it had been recognized that natural gas was to be found not only in productive reservoirs but also trapped in hard, concretelike shale rock. This shale rock served as the source rock, the “kitchen,” where the gas was created, and also as the cap that sat on top of reservoirs that prevented the gas (and oil) from leaking away.1

  Gas could certainly be extracted from shale rock. In fact, it is thought that the very first natural gas well in the United States, in Fredonia, New York, in 1821, drew from a shale formation. The problem was the economics. It was inordinately difficult and thus very expensive to extract gas from shale. It just was not anywhere near commercially viable. Yet maybe it was possible with the right mixture of technological innovation and persistence.

  Mitchell’s “laboratory” was a large region called the Barnett Shale, around Dallas and Fort Worth, Texas, which sprawled under ranches, suburbs, and even Dallas–Fort Worth International Airport. Despite Mitchell’s efforts, the Barnett Shale proved continuously unforgiving. Mitchell insisted that his engineers and geologists keep plugging away in the face of ongoing disappointment and their own skepticism. “George, you’re wasting your money,” they would say to him over the years. But when they raised objections, he would reply, “This is what we’re going to do.”2