A sellers' market
LNG is a classic sellers' market, with supply constrained and demand expanding fast. It looks set to stay that way, writes Martin Quinlan
WORLD production and consumption of liquefied natural gas (LNG) have increased by more than a third over the past five years and have doubled over the past 10 (see Figure 1). Behind the expanding market have been falling prices throughout the LNG chain, which have allowed LNG to make the transition from niche product to mainstream energy source.
But that trend has come to an abrupt halt. The capital cost of liquefaction facilities and regasification terminals started to rise last year, leading to reports this summer of cost increases of 25% or more for projects coming up for approval. In part, the increases are blamed on the rising prices of the specialised steels and aluminium used in cryogenic plants – but the bursting orderbooks of the manufacturers of pumps, compressors and turbines, and their resulting price increases, are said to be a larger contributor.
Equally significant is the shortage of main-contractor capacity in the LNG business. Almost all liquefaction projects worldwide involve Bechtel, Chiyoda or the KBR-JGC venture and these firms are fully committed. Meanwhile, there is competing demand for main-contractor services from the surge in refinery-construction projects, from forthcoming gas-to-liquids projects and from the general high level of oil and gas construction work.
Some of the LNG industry's analysts are apparently not too concerned about the rising cost of the product. They point out that gas prices generally have increased and argue that demand for LNG will continue to expand as gas from more-remote sources is brought to market. But others say there is a risk of demand destruction if gas prices stay high: developing countries will slow their uptake of natural gas while, in industrialised countries, coal and nuclear could regain lost ground in the electricity market.
However, most industry experts are still optimistic about LNG's growth prospects. At the Oil & Money conference in London in September, Michael Tusiani, chairman and chief executive of Poten & Partners, went further than most, with a forecast that world sales will increase from about 140m tonnes a year (t/y) at present to 270m t/y by 2010 and to 375m t/y by 2015 (see Figure 2).
The figures indicate a forecast growth rate of over 10% annually – significantly higher than the 7-8% rate forecast by other specialists and higher than any growth seen in the past. Over the five years to 2005 – the industry's most expansionary period so far – world LNG sales grew at just over 6% annually, according to data in the BP Statistical Review of World Energy.
Tusiani says there will be "new trade flows [to] connect regional markets", allowing "a truly global" LNG business to emerge. While the Asia-Pacific market accounts for about two-thirds of world LNG sales at present, he forecasts that, by 2015, the trade will be split evenly between the Asia-Pacific and Atlantic markets.
It is the Atlantic market, led by the escalating needs of the US and the UK, which is set to propel the business to the growth rates Tusiani envisages. He forecasts an average annual growth rate of 14% for the Atlantic market until 2015, while consumption in the Pacific market – boosted by the demands of China, India and the US west coast – is seen as growing by 7% annually.
The US and the UK are turning to LNG in a big way to solve the same problem: they are both established gas-consuming countries, but both face an increasing gap between indigenous production – declining slightly in the US and more steeply in the UK – and demand. In contrast, other countries in the Atlantic area – notably Spain, France and Italy – have turned to LNG mainly to achieve supply diversity. More recently, Portugal and Greece have gained a foothold as small-scale users for the same reason and other countries, including Ireland, are planning to join them.
The US has become a big importer of LNG over the past five years, with consumption nearly tripling since 2000 to reach 17.87bn cubic metres (cm) last year. (Japan, the world's largest consumer by far, used 76.32bn cm in 2005, South Korea used 30.45bn cm and Spain – with imports rising by 25% following the start-up of the Unión Fenosa-led Segas export facility in Egypt, at Damietta – used 21.85bn cm.)
US and UK growth
According to a recent Energy Information Administration forecast, US imports could rise to 88bn cm in 2015, while other forecasts extend to 100bn cm by that year. The limiting factor is likely to be the country's regasification capacity – the US still has only five import terminals and is likely to be short of capacity for some years (see p10).
Eight facilities to serve the North American market are under construction – of which one, Shell's Altamira terminal, near Tampico in Mexico, was due to start-up last month, but six of the others will not be operational until 2008. The latest project to move into construction – work started in September – is the Golden Pass terminal, near Sabine Pass, Texas, a venture between Qatar Petroleum (QP), ExxonMobil and ConocoPhillips, which is due for completion in 2009. Another 11 terminals have either won regulatory approval, or nearly so, with start-up dates between 2007 and 2011.
The UK rejoined the world's LNG consumers in July 2005, after initiating the world trade in 1964 when it began importing from Algeria. Imports in 2005, all received at National Grid's Grain LNG terminal, near London on the River Medway, amounted to only 0.52bn cm – much less than the facility's 4.4bn cm/y capacity, which is being expanded to 13.0bn cm/y by late-2008. Another expansion, to 19.5bn cm/y, is being planned for 2010-11.
Three other terminals are under construction in the UK. Excelerate Energy hopes to have its gas-port at Teesside ready for use this winter, allowing special vessels to pump regasified LNG directly into the transmission system. At Milford Haven, Wales, two large terminals are due for completion in late-2007 – Dragon LNG (made up of BG, Petronas and 4Gas) will have a capacity of 6.0bn cm/y while South Hook LNG (ExxonMobil and QP), being built in two concurrent phases, will have a combined capacity of 21.0bn cm/y.
Planned terminals include a facility on the site of the world's first LNG receiving terminal, at Canvey island on the Thames. SHV's Calor Gas, which operates the site as a liquefied petroleum gas terminal, has been joined by Centrica and LNG Japan (a partnership of Sumitomo and Sojitz) in a plan to build a terminal of 5.4bn cm/y capacity, with start-up after 2010. At Teesside, ConocoPhillips and its partners in the Norsea oil terminal are seeking consents for an LNG terminal of unspecified capacity, also for start-up after 2010.
Counting only the terminals under construction, the UK's import capacity for LNG will rise to over 40bn cm/y by the end of 2008. If this capacity is fully utilised, the country is likely to have become the world's third-largest LNG consumer, after Japan and (if its plans are fulfilled) the US, within just a few years of re-entering the market. The UK will also be relying on LNG for approaching 40% of its gas consumption, a degree of dependence that will give the country a strong interest in the world LNG market.
Supply side changes
The world LNG supply hierarchy is also changing fast. At present, the four major-league producing countries hold similar shares of the market and together account for 60% of the world's output (see Figure 4) – Algeria produced 25.68bn cm in 2005, Indonesia 31.46bn cm, Malaysia 28.52bn cm and Qatar 27.10bn cm. There are three second-league producers – Australia with 14.85bn cm (see p29), Trinidad and Tobago with 14.01bn cm and Nigeria with 12.04bn cm. The smaller producers are Oman (9.22bn cm), Brunei (9.15bn cm), UAE (7.14bn cm), Egypt (6.93bn cm) and – with minor production only – the US and Libya.
The main upheavals will be in the major league. Qatar – the most recent member, which became a producer only in 1997 – is on course to overtake Indonesia as the world's largest LNG producer, while Nigeria is set to become the world's number-two producer.
Qatar's capacity of 25.5m t/y is due to rise to nearly 46m t/y in 2009, with RasGas 2's third train due on stream next year and the addition of two new trains under the Qatargas 2 expansion scheduled for completion. After that, planned additional trains at the RasGas and Qatargas complexes could raise the country's output to 77m t/y. Nigeria already has 17.05m t/y in five trains at its Nigeria LNG (NLNG) complex and will see capacity rise to 21.15m t/y late next year when the sixth train starts up. A planned seventh train at NLNG and two planned multi-train complexes, Brass LNG and OK LNG, will lift capacity to over 60m t/y.
Other changes will come from the emergence of new suppliers. Egypt joined the exporters in January 2005 and before the end of that year had three trains operational in two complexes, with a total capacity of 12.2m t/y. New trains are planned. Equatorial Guinea should become an exporter in the middle of next year when the Marathon-led EG LNG facility – a single-train of 3.4m t/y capacity – is due to start-up, ahead of schedule. Marathon says a decision will be taken next year on a second train, with a capacity of 4.4m t/y, which will draw on gas in the country and elsewhere in the Gulf of Guinea.
Africa has no shortage of prospective LNG exporters. Angola could join the club in 2009-10, if Chevron takes a decision soon on the 5.0m t/y train it plans for Soyo. Mauritania has hopes of proving-up enough gas, to take advantage of its attractive logistics to the US east coast. Libya has plans to regain its former position as a substantial LNG producer, while Algeria is also planning new capacity.
New regions, as well as new countries, are soon to join the exporters. In December next year, the first LNG complex in Europe is due to start-up: Statoil's Hammerfest LNG complex, in northern Norway, will produce 4.2m t/y from a single train. In 2008, Russia should make its entry into the LNG business when the two-train Sakhalin-2 complex, with a capacity of 9.6m t/y, starts producing (although Sakhalin Energy has said there will be a "significant delay" in the project because of the authorities' withdrawal, in September, of an essential environmental permit – PE 10/06 p4). Norway's LNG will go to Europe, while Russia's will take the country into the Japanese market.
When markets are expanding, the ambitious players want market share. ExxonMobil is the leading private-sector participant in the LNG market: the firm participated – including its joint-ventures – in sales of about 27m tonnes of LNG in 2005 and forecasts that the figure will rise to nearly 80m t/y by 2015. The supermajor claims to participate in about 20% of the industry's capacity, worldwide, and says it will have an interest in 35% of the new capacity to be added in 2007-11 – interests in eight trains with a total capacity of 51m t/y.
Shell claims LNG sales of 10.7m tonnes in 2005, up by 5% from the previous year – the firm forecasts that world LNG demand will increase at 10% a year, at least for the coming few years. BP does not give a sales figure, but says its equity interests add up to 8.5m t/y of production capacity, while Total is estimated to have had LNG sales of 7.5m tonnes last year. BG says it produced 4.1m tonnes of LNG in 2005 and projects that the figure will rise to 7.1m tonnes this year.
Challenges come from the regional majors, such as Repsol YPF and Eni, and also from the large gas producers – Russia's Gazprom, Norway's Statoil and Algeria's Sonatrach all want a higher profile in LNG. Gazprom, with the world's largest gas reserves, has no LNG production, but is eyeing shares of both main markets. The firm is seeking a share in Shell's Japan-oriented Sakhalin-2 facility and had been planning to gain a foothold in the US with an export facility based on vast reserves at its Shtokman field. However, last month, the company said it had abandoned plans for an LNG facility at Shtokman and that the gas would be piped to Europe instead (see p33).
Gazprom has also been signing agreements – although they are mostly vague – with other participants in the market, apparently with the aim of raising its international profile in LNG. A memorandum signed in August with Sonatrach calls for oil and gas co-operation and makes specific mention of LNG, with joint marketing a possibility. Last month, a co-operation agreement, also mentioning LNG, was due to be signed with Eni.
In September, Gazprom signed a more-specific agreement with BP under which it will become a marketer of BP-sourced LNG is the Atlantic area. The deal gives Gazprom's UK-based marketing and trading subsidiary access to "a number" of cargoes in 2006 and 2007, which Gazprom will deliver to its customers in vessels chartered from BP. The first trade involved a cargo of 135,000 cm, lifted from Point Fortin, Trinidad and Tobago, by the British Merchant LNG carrier and delivered to the Cove Point terminal in the US.
Mature markets have balancing and trading centres – at present lacking in the LNG market. Dubai – although not an LNG producer – has plans to change that: the Dubai Multi Commodities Centre, the country's Techno Park and LNG Impel (a subsidiary of Canada's Galveston LNG) launched plans this summer to establish an LNG storage and trading hub by about 2010 (PE 9/06 p31).
The facility will allow suppliers and buyers to store LNG, from sources in the Mid-east Gulf and beyond. Trading will develop, based on short-term and seasonal price differences and geographical arbitrages. The Dubai LNG Storage Hub, likely to cost $1bn to develop, will have a capacity equivalent to 1.1bn-1.8bn cm of gas – the larger figure being equivalent to the capacity of 20 of the world's largest LNG vessels. A small liquefaction unit will return boil-off gas to the tanks.
The backers foresee the facility developing as a hub comparable with Henry Hub in the US, with a price-setting role for the region, and they point out that its planned start-up date will coincide with the start-up of a large volume of liquefaction capacity in countries nearby. Some in the business are less optimistic, however, arguing that the LNG market will be supply constrained for years to come and that not enough surplus cargoes will be available for storage. If so, a lack of liquidity could check the development of physical and futures markets.