The Policy Tightrope in Gas-Producing Countries
Stimulating Domestic Demand Without Discouraging Supply
This working paper by Mark Thurber and Joseph Chang (Program on Energy and Sustainable Development, Stanford University) was commissioned for the 2011 Pacific Energy Summit on “Innovation Generation: Powering a Prosperous Asia.”
This study explores and assesses the policy options that gas-rich governments can use to develop domestic gas markets, with a focus on major Asian gas-producing countries.
Governments of countries with substantial gas resources typically hope to harness their gas for domestic uses as well as for export revenues. However, the use of price subsidies to stimulate domestic demand in a variety of segments—including power generation, fertilizer manufacture, petrochemical production, transport, and residential use—has in a number of cases deterred the development of gas supply and led to shortages. Some countries have balanced political pressure for government intervention in the market with the need to reduce problematic distortions by setting up hybrid markets with both liberalized and planned components. Another challenge faced by gas-rich governments is how to mitigate risks faced by both prospective gas suppliers and prospective gas consumers in a nascent market, especially given the need for costly gas transport infrastructure.
- The excessive or inappropriate use of mandates requiring that gas producers supply domestic consumers at highly subsidized prices characteristically leads to the following negative impacts:
- More limited gas supply
- Heavy financial burden to the state
- Overconsumption and misallocation of gas in the economy
- While restricting uncommitted gas exports in the face of shortages may have limited negative impacts, major deviations from terms of existing contracts can cause severe reputational damage that affects future gas development, as in the case of Algeria.
- Creation of hybrid markets with both liberalized and planned components can be a surprisingly successful way to sidestep entrenched political resistance to reforms.
- The liberalized portion of the market tends to grow over time.
- Customers that are less politically connected are able to obtain gas.
- The establishment of hybrid markets tends to create a momentum that leads to future reforms.
- Liberalizing “non-strategic” industrial segments first can be effective because (1) gas already may be more competitive in these segments and (2) these segments are less politically fraught.
- Gas project outcomes are most favorable when the government works to mitigate supply and demand risks in tandem.
Mark C. Thurber is Associate Director of the Program on Energy and Sustainable Development at Stanford University. Joseph Chang is a Research Associate in the Program on Energy and Sustainable Development at Stanford University.