It's probably going to be a liquefied natural gas (LNG) suppliers' market for years to come and that is not good news for the more than 50 regasification projects planned in North America, according to a new report by Canadian investment bank Tristone Capital. Global liquefaction capacity will fall well short of regasification capacity over the next decade and likely beyond that, said Tristone's Chris Theal.
Global liquefaction capacity in 2005 totaled 20.3 Bcf/d, while regasification sat at 27.3 Bcf/d. "Our analysis is consistent with the views from the major LNG players...," Theal said in the Tristone report to clients. "The global liquefaction shortfall will more than double from 7 Bcf/d in 2005 to 18.2 Bcf/d by 2010 (or to 14.6 Bcf/d if we eliminate second terminals at Sabine [Pass, LA] and Corpus Christi, TX)."
Tristone estimates that global liquefaction capacity will grow from 20.3 Bcf/d in 2005 to 36 Bcf/d in 2010, while regasification capacity will balloon to 53.9 Bcf/d, and that's excluding a large majority of the current terminal proposals.
"With the global market increasingly net short LNG supply, we expect the current sellers' market to persist well through the end of the decade," said Theal.
As a result, Tristone has a pessimistic outlook for many U.S. regasification projects. According to Theal, the projects most likely to succeed meet the following criteria: 1) they have received regulatory approval; 2) they have long-term supply agreements and off-take agreements; and 3) they have a relationship with or bias toward the major producers (i.e. BP, ExxonMobil, ConocoPhillips, Chevron).
Tristone's list of the North American projects most likely to be built includes the following:
Noticeably absent from the list is Anadarko's Bear Head terminal in Cape Breton Island, NS, in eastern Canada. Theal said Bear Head faces two major hurdles: a long-term supply agreement and a difficult inlet crossing that will draw the attention of lobstermen, fishermen and environmentalists.
He said the Long Beach, CA, LNG terminal proposed by ConocoPhillips and Mitsubishi may meet all the criteria but it faces too steep a NIMBY (not in my backyard) challenge. The NIMBY/environmental/safety issues will bring about the downfall of nearly all the other projects planned on the East and West coasts, and the projects that don't die in the regulatory process are likely to collapse because of a lack of available global LNG supply.
Terminals that rely on the spot LNG market, rather than long-term supply agreements face a real challenge, said Theal. "This sellers' market is likely to persist and it will make it increasingly difficult for merchant terminals to source any large component of uncontracted supply because that large component of uncontracted supply just doesn't exist," he said in an interview with NGI. "LNG imports [in the U.S.] will grow, but for the most part the liquefaction that is being built is being integrated through an LNG chain to an end consumer.
"I just don't think that in the tightness of this market over the next five years that the merchant model works," he said. Excelerate's Gulf Gateway Energy Bridge offshore Louisiana was built under a merchant model and the company is planning another terminal offshore Massachusetts with a similar model in mind. Theal said attracting seven to 10 cargoes a year, as Gulf Gateway was able to do this year, simply won't provide enough of a return to support that business model going forward.
He believes the Gulf Coast region will reach LNG capacity saturation when 10 Bcf/d of regasification is added, which won't take long given the large number of projects planned. As a result, he expects some consolidation at the Sabine and Corpus Christi sites, for example.
In Canada, TransCanada and PetroCanada's proposed Gros Cacouna terminal in Quebec could be left out in the cold by Russia's Gazprom, which is likely to be the No. 2 LNG supplier worldwide by the end of the current decade, according to the Tristone study. Petro-Canada signed a preliminary agreement with Gazprom to examine a commercial LNG relationship under which the Russian supplier would deliver LNG from a Baltic Sea terminal in St. Petersburg to Quebec.
"It is still very much a 'jump ball' with respect to where Gazprom ultimately establishes tidewater access in North America," the study noted. "One point that was made clear is that Gazprom is targeting access to downstream markets (end consumers) in North America -- a key feature that is absent from the...Gros Cacouna location."
Gazprom already has said publicly that it is considering other LNG partners. "We continue to have doubts with respect to Petro-Canada and TransCanada's North American LNG strategies," said Theal in the study.
He said Gazprom and Qatar will emerge over the next five years as LNG "super suppliers." Qatar has plans to increase its LNG supply from 3.4 Bcf/d in 2005 to 10.3 Bcf/d in 2010. Gazprom, which holds one-sixth of the world's gas reserves, has similar but less certain plans. Gazprom produced 53 Bcf/d of gas last year, or about 1 out of every 5 Bcf produced on any given day globally. Its proved reserves total 1,020 Tcf. Although it currently has no liquefaction capacity, it is targeting 6.6 Bcf/d by 2015. It has two Atlantic Basin liquefaction projects in the early stages of execution.
Beyond 2010, the next wave of liquefaction projects have even greater geopolitical risk, said Theal, citing potential projects in Russia, Iran, Saudi Arabia, West Africa and Venezuela.
"With questions of transparent policy and markets in Russia, nuclear development in Iran and geopolitics in Venezuela, the increased geopolitical risk is likely to restrict/limit/delay investment by the majors where country, counterparty and financial risk increase. These inevitably impact borrowing capability for financing projects (cost of capital) and security of supply for new LNG chains."
As a result, LNG export growth after 2010 is even less certain, according to Tristone.
Global liquefaction was running full tilt this year and that took a toll on operations with a number of unplanned outages in Trinidad, Nigeria and Australia. With a forecast of an even larger imbalance between LNG supply and demand, Theal warned that this scenario is likely to continue, increasing volatility in markets with underlying tight supply-demand imbalances such as the U.S. and Europe.
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