RELATED ARTICLESJune 2009 May 2009 - UK: Total responsible for Buncefield explosionMay 2009 May 2009 April 2009 - Adopting the airlines' approach to the development of maintenance strategies could significantly increase operating uptime and profitability in the oil industry, writes Tony Geraghty, vice-president, Schlumberger Business Consulting
The global glut of LNG
The LNG business has changed drastically in the past two years, from fears of a production shortfall, to a supply glut
In mid-2008, as oil prices rose towards $150 a barrel, Linda Cook, then head of gas and power at Shell, told Petroleum Economist that anxious LNG buyers were snapping up volumes previously considered flexible (PE 7/08 p17). Such was the strength of demand that LNG buyers that failed to lock in supplies under long-term contracts risked being caught short, she said. Consumption, Shell predicted, would grow at 8% a year. And, with few final investment decisions being taken on liquefaction projects, there was a risk that supply would struggle to keep up with demand. Cook seemed to be loving it. But the recession trashed those assumptions. LNG consumption fell last year – in Japan, the biggest LNG market, by almost 10% in 2009, according to Cedigaz. Gas prices in Asia are roughly half what they typically were two years ago – closer to $8.00/m Btu than $16/m Btu (or higher: some trades in Asia were done at up to $24/m Btu in the winter of 2007/08, market sources say). Gas prices in the US, a less dependable buyer than the Asian stalwarts, collapsed to below $2.50/m Btu in September. They recovered to above $6/m Btu during January's freezing weather, but the long-term outlook for the US market is bearish because of the continuing success of unconventional gas exploration in North America. The US will continue to be able to absorb cargoes of LNG that no-one else wants (the government's Energy Information Administration even expects US LNG imports to rise slightly this year and next). But this will happen at a price: a low one. Meanwhile, as the recession sapped demand, the LNG supply outlook improved. New flows of LNG materialised in Qatar, Yemen, Indonesia and Russia. And last year was a good year for final investment decisions (FIDs): LNG projects that received the go-ahead include Chevron's 15m tonnes a year (t/y) Gorgon project and ExxonMobil's 6.6m t/y PNG LNG venture in Papua New Guinea. Both could be in operation by 2014 (PE 1/10 p28).  Numerous other projects are in development. Additions to LNG capacity in Australia alone – including planned and proposed projects, as well as those under construction, but excluding ventures that would produce gas from coal seams and liquefy it for export – amount to over 70m t/y, according to Petroleum Economist's LNG Data Centre. Prices in the 2015-20 period could remain depressed, especially if substantial volumes of Qatari LNG that had been intended for the Atlantic basin head east instead.
Some of the immediate LNG excess has been removed from the global supply system by prolonged shut-downs or outages at LNG plants – in Norway, Nigeria and Algeria, for example. But, says Frank Harris, head of LNG at Wood Mackenzie, a consultancy: "There's a lot more LNG in the system than there is demand." Last month, Woodside Petroleum even lost a customer for its Browse project. In 2007, PetroChina agreed to buy up to 3m t/y of LNG from that Australian project, but with no agreement reached by the end-2009 deadline, the discussions were terminated. The loss of such a high-profile customer isn't as bad as it sounds. There is so much unallocated LNG available – at numerous projects, including Browse – that abandoning a commercial framework established at a time when gas prices were higher makes obvious sense. In any case, Browse is still a couple of years away from FID. Yet the urgency to sign deals that characterised negotiations two years ago has evidently gone. PetroChina can afford to take its time as it assesses where it can achieve the best value – an indication that the fundamentals favour the buyer. That, however, doesn't mean the market is in danger of collapse. Woodside may have more marketing to do at Browse, but PetroChina and other Chinese energy companies remain active off-takers for Pacific basin LNG. Last year, PetroChina signed up for 2.25m t/y of Gorgon gas; Sinopec agreed to buy 2m t/y from PNG LNG; and China National Offshore Oil Corporation (CNOOC) said it would take more LNG from Qatar, as well as 3.6m t/y from BG Group's 7.4m t/y Queensland Curtis LNG project, a coal-seam-gas-to-LNG venture (PE 5/09 p16). CNOOC alone says it will have built 50m t/y of import capacity by 2020. Unpredictable markets However, while LNG will feature prominently in China's energy strategy, the country has plenty of other options for importing gas, creating a degree of uncertainty over incremental Chinese LNG demand. China is building a second west-east gas pipeline – a 30bn cm/y monster that should be complete by 2011. A new pipeline carrying gas from central Asia to China will begin operating this year, delivering supplies from Turkmenistan, Uzbekistan and Kazakhstan to the northwest Chinese border. Pipeline imports from Russia – of up to 70bn cm/y – are also under discussion. Other Asian markets are more predictable. Japan and South Korea have little choice but to remain big buyers, with the extent and speed of demand recovery dependent on wider economic performance. Europe, however, is another unpredictable LNG market. At present, LNG buying and infrastructure investment is determined by price far more than by strategic considerations such as energy diversification. If piped gas can be acquired more cheaply – and it usually can – buyers avoid LNG. It is hard to see that changing, although more LNG imports would enhance Europe's energy security, making it less dependent on Russia's Gazprom, which, battered by the recession, may not invest quickly enough upstream to keep Europe supplied. A politically and strategically motivated Europe could add incremental LNG demand. So could low LNG prices (and LNG priced against Henry Hub or the UK's National Balancing Point, as opposed to oil-linked LNG, is certainly cheap on an energy-equivalent basis compared with oil), which should eventually bolster demand. And the supply outlook isn't unremittingly positive. While the Pacific basin may be well supplied with LNG, some of the Atlantic basin projects – in Venezuela, Nigeria, Trinidad and Tobago, Algeria, Egypt, Libya and Brazil – are unlikely to add much to supply flows, for various reasons, not least because the country that was recently considered the prime Atlantic basin off-taker, the US, is no longer so attractive. And some LNG projects, perhaps one or two in Australia, may be indefinitely delayed – particularly if costs remain as stubbornly high as they have been and developers cannot find enough people to build them. Cyclical businesses have a habit of changing, as the past two years have shown. Perhaps the ground will have shifted once again by 2012. But the long-term outlook for the LNG sector, on the present evidence, is more bearish than bullish.
|
