U.S. liquefied natural gas (LNG) buyers who are disappointed at the dearth of spot cargoes available on the world market have but one consolation: If they could get a spot cargo, they probably couldn't afford it.
The Korean market has paid up to $25/MMBtu for LNG on the spot market; Japan has paid more than $20; India has paid around $17, and China has bought spot cargoes for around $15, Kathleen Eisbrenner, Shell Gas & Power executive vice president for global LNG, told attendees last week at GasMart 2008 in Chicago. Long-term contracts are generally indexed to oil, and at now-hypothetical $100/bbl that means $16/MMBtu for LNG.
In a keynote address Eisbrenner described a rapidly evolving LNG market in which the number of importers is growing faster than the number of suppliers; exporting countries are holding gas back for their own consumption; demand in China and India is skyrocketing, making for premium pricing in the Pacific Basin; liquefaction project costs are climbing; workers and engineers to build new liquefaction facilities are in short supply; and a strong price disconnect exists between the Atlantic and Pacific basins.
"North American natural gas production will continue to grow at a rate that is not expected to keep up with demand. LNG potentially is a key component of filling the gap, but increasingly the U.S. will be competing for natural gas supplies with other big markets," she said. "And here in the U.S. we must realize that sellers will not be marketing their gas to the U.S. as a matter of course. We need to compete for it."
There has been a steady decrease and delay in LNG supplies destined for the United States in the coming years, and this is expected to continue, Eisbrenner said.
Today the world knows 17 LNG importing countries and 15 exporters. By 2012 it is expected to have 29 importers and 18 exporters. "These countries are planning to import LNG because they recognize that their alternative is liquid fuels at world prices, and naphtha and diesel at world prices have recently been twice the level of Henry Hub [gas]. I think that's the most important message for the U.S," Eisbrenner said.
"Many countries are now planning to import LNG for the very first time. Countries as diverse as Brazil, Chile, Germany and Singapore, just to name a few. China has entered the global LNG market in a big way, moving quickly from acquiring its first spot cargo in 2006 to signing up for several large long-term contracts in 2007 and into 2008. In fact, just last month we signed a long-term supply deal to take Qatari LNG to satisfy growing energy demand in China" (see NGI, April 14).
To illustrate the growing demand for LNG in India, Eisbrenner offered Shell and Total's Hazira LNG Terminal and Port in the state of Gujarat in western India. At its start-up the terminal had no firm LNG supplies. Last year the terminal was at a 75% utilization rate, and to date this year it is operating above its nameplate capacity, Eisbrenner said. "Cargoes are being imported from as far away as Trinidad and Nigeria, and they're being sold to India's steel mills, power companies and fertilizer manufacturers, who are all now willing to pay international prices for LNG and yet realize a savings [over their alternative fuel]."
The Hazira terminal isn't the only one capable of sucking up a lot of the global LNG supply. Eisbrenner said a terminal being built in Brazil could accommodate on a daily basis more than all of the LNG produced by Equatorial Guinea, a new LNG producer. "And Brazil will be competing during our summer to satisfy their winter demands," noted Eisbrenner.
Also trolling the LNG market during the U.S. summertime -- when the domestic market is expected to be most attractive to LNG suppliers -- will be Argentina, Uruguay and Chile, she noted.
"South America, for example, of course, is not going to want to pay oil parity [for LNG], but...we've done contracts that indicate they will pay above Henry Hub," Eisbrenner said.
"In South America people perceive Henry Hub to be their competition, and so they're looking to pay premiums to Henry Hub. But we've got all this competition and all of these new countries coming into the market over the next four years before the next wave of new supplies can happen. So you just have to wonder how high a premium above Henry Hub -- and does that end up looking like an Asia proxy."
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