By Ayesha Daya

July 2 (Bloomberg) — Natural gas, trading at a 40 percent discount to crude, may rise to reach the record price of oil as demand for cleaner-burning fuels increases, according to energy ministers from Qatar, Algeria and Iran.

U.K. natural gas sells for 71.35 pence a therm, or the equivalent of $85 a barrel based on its energy content, compared with $141 for Brent crude. British natural gas rose 38 percent this year, lagging behind the 50 percent advance in oil.

Natural-gas use worldwide rose 3.1 percent last year, almost three times faster than the 1.1 percent increase in oil, according to figures compiled by BP Plc. Gas is cleaner-burning than oil and creates half as much carbon dioxide as coal when used to generate power, helping ease the buildup of greenhouse gases blamed for climate change.

“Gas is clean and it is an alternative to oil,” Qatar Oil Minister Abdullah al-Attiyah said in an interview in Madrid this week. “The price should be at least competitive to oil.” Qatar holds 895 trillion cubic feet of gas reserves, the world’s third- largest, after Russia and Iran.

Rising global energy demand, environmental restrictions and slower progress in expanding nuclear power and wind farms are increasing demand for gas.

Liquefied natural gas may become more expensive than crude oil as demand from Asia and Europe rises faster than supply, Sanford C. Bernstein & Co. said in a report last month.

Winter Prices

“Clearly, global demand for natural gas is racing ahead,” Linda Cook, executive director of gas and power at Royal Dutch Shell Plc, the biggest non-government producer of LNG, said at the World Petroleum Congress today in Madrid. “The question is whether supply can keep pace.”

In Japan, utilities paid as much as $20 a million British thermal units for LNG imports last winter, which equates to an oil price of $120 a barrel, after an earthquake closed the country’s largest nuclear power reactor. U.K. prices for the 2008-2009 winter trade at a similar level.

“Gas prices will follow oil prices; they will converge,” said Algerian Energy Minister Chakib Khelil. The country is scaling back oil production growth to concentrate on gas.

“Our efforts are really focused on gas,” he said. Exports will rise 37 percent by 2012 to 8.5 billion cubic feet a day, said Khelil, who is also the president of the Organization of Petroleum Exporting Countries. Al-Attiyah and Khelil were also among energy officials attending the congress in Madrid.

Chilled Gas

Global trade in LNG expanded 7.3 percent last year to 226 billion cubic meters, led by increased shipments from Qatar and Nigeria, according to the annual review of world energy by London-based BP. About twice as much gas is imported across national borders by pipelines, where Russia is the biggest supplier, exporting 148 billion cubic meters last year.

LNG is gas that’s chilled and condensed to liquid form to make it easier to transport long distance by ship.

“We will need some time to see the convergence of oil and gas,” Fatih Birol, the chief economist of the International Energy Agency, said in an interview in Madrid today. “Not tomorrow,” perhaps in a “few years,” he said.

“More LNG needs to come to the market and that seems to be a bit difficult,” Birol said. The Paris-based agency is a policy adviser to the U.S., Japan, U.K. and other consuming nations.

Iran halted a gas supply deal to the United Arab Emirates in 2006 to negotiate a higher price than agreed in 2001. Iran hasn’t built new liquefaction plants, in part because Western companies including Shell and Total SA are wary of U.S. sanctions.

Gas to Rise

“There is a natural relation between the price of oil and the price of gas,” Iranian Oil Minister Gholamhossein Nozari said today in Madrid. “Because it is a clean fuel it will increase its role in the energy market and I think the price of gas will increase as well.”

Qatar, the biggest shipper of LNG, is diverting some cargoes destined for Europe to Asia, where prices are higher.

Nigerian President Umaru Yar’Adua said in May that gas export agreements will have to be renegotiated to ensure Africa’s most-populous nation has enough for its domestic needs.

Algeria took Spain to an international tribunal to raise the contracted prices for gas supplies.

“The gas was sold in 1995, when oil was at $15 a barrel,” Khelil said. “When oil rose to $50 a barrel a few years ago, we decided to renegotiate.”

Helge Lund, the chief executive of StatoilHydro ASA, Norway’s biggest oil and gas company, said coal-fired power stations should be replaced with plants using natural gas because that can reduce carbon dioxide emissions by two thirds. Climate change is one of the “biggest challenges” for today’s energy industry, he said in Madrid.

To contact the reporters on this story: Ayesha Daya in Madrid at adaya1 [Email address: adaya1 #AT# bloomberg.net - replace #AT# with @ ]

Tags: peak oil energy investments

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