Operating problems and "teething start-ups" will not hinder the growth of either the short- or long-term global liquefied natural gas (LNG) supply, which could meet 15% of the world's natural gas demand by 2012, Cambridge Energy Research Associates (CERA) said in a new analysis.
"CERA's 2004 projection that the LNG industry would grow in the eight years to 2012 by the same amount as in the first 40 years of its history now looks, if anything, overly cautious," said Michael Stoppard, CERA's senior director for global LNG. "The industry will probably double in six or seven years relative to 2004."
More than 25 million tons of new liquefaction capacity have been commissioned since October, adding 18% to global capacity, according to Stoppard. This year, "even under the most conservative scenario," LNG trade is projected to reach 159 million tons, up 12% over 2005, with U.S. imports up almost 25%. LNG, said CERA, is "on its way" to becoming a $65 billion market.
Contrary to some reports, global LNG growth is not stalling, according to CERA. Based on projects currently under construction, global LNG supply capacity will rise 60% by 2012 or earlier, with almost half the global construction occurring in one country and on a single site: Ras Laffan in Qatar. The combined capacity of Qatari LNG investments focused just on the United States is "broadly equivalent" to the proposed capacity of the Alaskan pipeline.
The LNG industry now is focusing on the next generation of supply beyond Qatar, where the technological, cost and political challenges will be high but still doable.
"The strain of growth globally is starting to show," the report noted. "Evidence is mounting of cost inflation and budget overruns, of project delays and operational hiccups, of shortages of specialized labor and expanding lead times for specialty parts -- and all this within a broader context of more strained global geopolitics."
Nevertheless, "the supply difficulties that projects face -- and that will intensify -- are not evidence of the inability of LNG to respond. Rather they should be interpreted as the natural friction that comes from growing momentum and the pressures that are affecting the entire energy industry."
LNG projects are facing "rapidly" rising costs, "linked to a more general inflationary trend across the oil and gas industry. Part of it is exacerbated by characteristics more specific to LNG, notably shortages of key specialty materials, and a select set of engineering, procurement, and construction companies with proven track records on large-scale LNG projects."
The result has been a reversal of the late 1990s reduction in liquefaction costs with a key capital cost benchmark moving back above $275/ton of annual capacity for the lower cost developments; and a rise in general exploration and production costs, with offshore project costs increasing 42% since 2000. However, economies of scale have generally moderated unit cost increases in shipping and regasification.
The overall result has not increased the marginal cost of LNG into the United States or northwestern Europe as much as might be expected, according to CERA. Supply from Trinidad and West Africa may still access markets for around $4/MMBtu. Also, for Middle Eastern suppliers, cost inflation has been partially cushioned by the move to large ships.
"It should be borne in mind that once these capital-intensive projects are built -- regardless of their full cost -- their variable costs are minimal, at less than $2/MMBtu," said Stoppard. "Finally, although LNG costs have risen, LNG has remained competitive with pipelines, which are more sensitive to the rising price of steel."
For more information on the report, "Progress in the Face of Adversity," visit www.cera.com.
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