News and Outreach: Sergey Paltsev

Until recently, most natural gas trade has been limited to the regional scale due to the challenges of transporting gas over long distances. Over the last decade, Liquefied Natural Gas (LNG)—an option that reduces the volume of gas about 600 times allowing for transportation by ship—has created an opportunity for expansion of the international market for natural gas.

In this report, Joint Program researchers examine the prospects for LNG trade over the coming decades. Part of a collaborative project between MIT and Cyprus, the report estimates that LNG trade volumes will increase from about 240 Mt LNG in 2014 to about 340–360 Mt LNG in 2021.

Sergey Paltsev, coauthor of the report and a principle research scientist and assistant director for economic research at the Joint Program, discusses some of the report’s findings.  

Q. The increase in trade volumes is largely the result of new LNG infrastructure projects. What’s causing the upswing in construction?

A. The main force driving many of these new LNG projects is the high price of LNG in Asian markets. The cost of natural gas in the US right now is about $4/mmbtu. If you add in liquefaction and transportation costs it’s about $10-11, whereas Asian prices up until recently were $14-$16. So, with this price differential an LNG exporting operation can be quite profitable. Actually, the trend that we’re seeing with new LNG projects is the opposite of what we saw less than ten years ago. In 2005 and 2006, US companies were building regasification capacity, or in other words, terminals to get gas into the country. Now, a lot of infrastructure is sitting idle because US prices are so low. Many of the current U.S. projects are actually taking the existing import terminals and converting them into liquefaction facilities, or export terminals.

This underscores why long-term market analysis is so important. Since the development and construction periods of these projects are so long, 4-5 years on average, any projects started now are not going to ship gas until 2020; and those facilities are going to be operational for at least 20–30 years. So that means you need to understand the market dynamics not just today, and probably not just in 2020 when you start operation, but also in 2030, 2040, and 2050.  

Q. Is the US going to become a major player in the LNG market?

A. There are a lot of projects that are in the permitting process right now. To export LNG from the US, you need approval from the DOE and the Federal Energy Regulatory Commission (FERC).  If you add up all of the applications which are currently in the pipeline and those projects labeled by FERC as potential, the total is more than half of the US current natural gas production. Obviously many of these are not going to happen, but everyone is trying to capitalize now. There are currently only two US projects that are likely to be completed before 2020—the Sabine Pass and Corpus Christi projects run by Cheniere Energy, Inc. In comparison to the current very limited exports from the US, these two projects will substantially increase exports from the US. So the US will have some share of the LNG market, but I don’t see it becoming the dominant player.

Most of the exports from the US will likely go to Asia, and one thing to note is that the price of LNG in Asia will start to come down as shipments of LNG increase. Over the next ten years, the global price of LNG will equalize—in other words, the price will be the same in all regions, with the main difference being the cost of transportation. So, the price differential between the US and Asia is going to narrow.

Q. What’s the long-term prognosis? Have we entered a golden age of LNG trading?

A. LNG is poised for substantial increases. Looking at the supply side, the LNG market is going to expand. Suppliers who have traditionally been in the pipeline business, like Russia, are now actively pursuing LNG projects. Again, this growth is being driven by the high price of LNG in Asia, which isn’t going to last forever. So some of the hype is going to diminish, but even with a lower Asian price this mode of natural gas trade is still going to expand.

Future demand is harder to estimate because there’s more uncertainty there, especially when much of the future demand will be determined by carbon policies, especially in China and India. Developing countries are expected to dominate new demand, and this trend is likely to continue. In addition, the LNG technology keeps evolving. In our report we discuss the potential effects of floating LNG (FLNG)—ships that liquefy gas onboard. FLNG could have a substantial impact on the industry if proven viable, since it removes the need to build permanent infrastructure.

Read the full report here.

Sergey Paltsev, assistant director for economic research at the MIT Joint Program on the Science and Policy of Global Change, presented at the 2014 Gaidar Forum entitled "Russia and the World: Sustainable Development."

The expert discussion “Green growth” and sustainable development” was dedicated to such topics as energy efficiency and renewable energy as the drivers of economic growthas economic growth drivers. Besides it focused on the perspectives of “the third industrial revolution”, which is not a new idea, however it opens the prospects for efficient energy use.

Oleg Lugovoy, Research Advisor, Center for Economic Modeling of Energy and Environment, RANEPA, Jeffrey Sachs, Director of the Earth Institute and Professor of Columbia University, Hillard Huntington, Executive Director of Energy Modeling Forum, Stanford University, Emmanuel Guérin, Associate Director of Sustainable Development Solutions Network (SDSN), Frederic Vidal, President of Université de Nice Sophia-Antipolis, Sergey Paltsev, Assistant Director for Economic Research of MIT Joint Program on the Science and Policy of Global Change of the Massachusetts Institute of Technology, John Laitner, Resource Economist and Independent Consultant of Economic and Human Dimensions Research Associates and Glen Peters, Senior Research Fellow of the Center for International Climate and Environmental Research of Norway, took part in the discussion.

In his opening remarks, the moderator Oleg Lugovoy defined the vector of the discussion: “It’s a discussion on how to achieve high growth rates and improve life quality without causing harm to the environment.” He also noted that the problem could not be solved by the efforts of business and public organizations alone, but depends on economic regulation.

John Laitner turned the participants’ attention to the task of increasing the quality of energy efficiency giving USA as an example, where 86% of all energy is spent to no purpose. Inefficient use of energy leads to huge costs and is a factor limiting, in Russia as well, the potential for economic development. The expert underlined that the idea of the third industrial revolution which consists of combination of interactive communications and new green technologies is getting more important.

Jeffrey Sachs reminded the participants of the discussion about the idea of a prominent Russian economist Nikolai Kondratyev on periodic economic cycles (waves) linking it to the concept of a shift in technological modes. Each of them had limited resources, but never before has the scale of economic activity been so impressive and the number of population so huge (7.2 billion people). “90 trillion dollars – this is the volume of the annual economic output,” Jeffrey Sachs noted, “and this figure tends to grow progressively. So do the CO2 emissions as well. Already today 38 billion tons of СО2 are annually emitted into the Earth’s atmosphere,” the expert noted.

However, changing the energy system profoundly and substantially over 40-50 years is quite a challenge. One of the possible solutions is to switch to alternative types of fuel or renewable energy sources. Nuclear energy, if it is safe, also has a high potential. But the most important thing, according to the expert, is to reduce coal consumption, in particular, “convince China, the country which consumes this fuel in huge volumes, to do so.”

The report by Hillard Huntington marked a turn in the discussion to the subject of shale gas. The expert noted numerous uncertainties pertaining to shale gas extraction. It is still difficult to evaluate the outlook for price policy in this field unambiguously, which is caused not only by the way it is extracted, but also the volumes of gas supply.

Sergey Paltsev agreed with his colleague. He immediately dotted the i’s noting the “platitude” of shale gas: “It does not differ from the common methane, the difference lies in the method of extraction which consists in subsurface fracture.” Answering the question “whether Gazprom has overslept shale gas revolution or not”, the expert agreed with the estimation given by the Prime Minister of the Russian Federation Dmitry Medvedev who said that “this question is quite complicated.” “Gazprom has enough gas and it can go without shale gas, given proper investment and price policy,” Mr. Paltsev summarized. He also noted that the consequences of fraction are difficult to predict. Besides, the use of huge amount of water during extraction makes its benefits ambiguous, at the same time CO2 emissions from the use of natural gas are far from zero, therefore it is impossible to say that its production can address the problem of emissions globally.

Alli Gold Roberts
MIT Joint Program on the Science and Policy of Global Change

Policies to curb greenhouse gas emissions will come at a cost to energy producers, industry and consumers. Policymakers around the globe are working to determine the most effective and cost efficient way to reduce these emissions—from renewable energy subsidies and fuel efficiency standards to carbon taxes and cap-and-trade policies.

To tackle this challenge, Sergey Paltsev from MIT and Pantelis Capros from the National Technical University of Athens have come together to assess which methods and metrics are best for calculating the cost of climate policies. In their study, published this week in Climate Change Economics, they find that there is no one ideal metric for climate mitigation policies, but measuring changes in consumer welfare is one of the most appropriate techniques.  

“With many of these regulations, the total costs are often less visible to consumers because the true costs are not reflected in the price of energy, but distributed to other sectors of the economy,” says Paltsev, the assistant director for economic research at the MIT Joint Program on the Science and Policy of Global Change. “The true measure of the cost of a policy is reflected in the change in consumers’ behavior, something that economists call as ‘change in welfare,’ but it is hard to convey this measure to policy makers and general public.”

In the study, the researchers compare different concepts that are used to inform the public about the cost implications of climate change. They consider two major modeling types where costs are calculated, energy system models and macroeconomic models. Energy system models focus solely on the energy sector and treat the rest of the economy as a given.  Macroeconomic models represent the energy system as part of the entire economy and provide more detailed information on the various sectors. Within these approaches there are a variety of metrics used to calculate the cost of a climate mitigation policy.

After studying the cost metrics associated with each modeling approach, the researchers compared the metrics used by a team of international researchers to better understand the impacts of the current EU emissions targets (the EU Energy Modeling Forum 28 study). They find that there are large variations in cost estimates and most metrics are not directly comparable, which makes it difficult for policymakers to interpret the results of these studies.

Paltsev says there is no ideal metric for costs, but it’s clear that some approaches are more effective than others. For example, carbon prices and marginal abatement cost curves are unable to reflect the full impact of the policy on the economy. In addition, energy system models do not always take into account the full cost of a climate policy—particularly the economic impacts of policies interacting with one another. The authors recognize that depending on the objectives, other metrics and modeling techniques may be appropriate. They conclude that measuring changes in consumer welfare or consumption is an effective approach that should be used by policymakers to evaluate climate policies.