It's not about the regasification, at least not anymore. The U.S. market for liquefied natural gas (LNG) has enough receipt terminal capacity for now (see related story) and plenty planned for the future. Those whose business it is to worry about gas supply have turned their attention to U.S. market competitors and the potential for upstream problems that could disrupt supply.
Because the U.S. LNG market is in its infancy it is disadvantaged relative to more mature markets, such as Japan, where supply is procured under long-term contracts. And because LNG is crucial to Japanese and South Korean markets, they willingly outbid the U.S. in times of tight supply.
"There's considerably less certainty [of supply in the United States] than there is in somewhere like Japan. So when there's a shortfall Japan gets its quota, and the U.S. gets some of [its supply] redirected to other markets," Gavin Law, head of consulting firm Wood Mackenzie's global LNG practice, told Houston energy reporters last week.
But as the U.S. LNG market grows, security of supply will grow along with it. Last year the Japanese LNG market, currently the world's largest, dwarfed the U.S. market -- about 58 million tonnes per annum (MMtpa) to about 12 MMtpa. According to Wood Mackenzie, by 2010 the United States edges ahead of Japan -- nearly 70 MMtpa to about 68 MMtpa. And by 2015, the U.S. market could stand at about 108 MMtpa, while Japan will only consume about 75 MMtpa.
"So in essence what you get, even if they were able to 'steal' all of the LNG that was destined to the U.S., it would have a limited impact," Law said. "You certainly wouldn't see all of the North American gas disappearing into other markets." And in the years to come, even if the Japanese or Koreans are forced to go on an LNG hunt, it's not likely they will draw much from LNG sources supplying the States. "The Korean market is unlikely to go out and buy significant volumes of Nigerian gas; the Japanese are unlikely to buy a lot of gas from Algeria. A lot of that demand will be met by more proximal uncontracted supply."
However, 2010 is still four years away, and the promise of more secure supply in the future is not a comfort to those in the States who wanted LNG last year and couldn't get it. U.S. LNG imports saw a year-on-year decline in 2005. Third quarter volumes were off sharply from the year before, and while the fourth quarter saw an increase, U.S. regasification capacity was only 54% utilized in 2005, according to Wood Mackenzie. Although U.S. gas prices were higher than those in Europe and Asia, events in the energy world at large thwarted importation efforts.
Spain had a gas shortfall during the first quarter and sought more LNG. Japan and Korea required spot volumes to replace undelivered Indonesian cargoes. Asian buyers were seeking to replenish stocks for the winter during the third and fourth quarters. Spain needed more LNG for power generation due to drought in the third and fourth quarters, and cargoes that had been redirected to the United States were redirected again to Spain. Supply disruptions in Nigeria, Qatar and Trinidad sent buyers looking for replacement supply, and a winter price spike in the United Kingdom drove up demand there.
European and Asian buyers paid above-market prices. "Supply scarcity became so severe in quarter four that there were rumors that some Japanese buyers paid in excess of $20/MMBtu," Law said. "The point is if you need the gas, you need the gas. And if you're importing significant volumes you can spread that cost across your total inventory of supply. So, yes, it seems like a heck of a lot, but actually, in terms of Tokyo Gas it probably wasn't that significant in the overall weighted cost of gas."
The lesson: "If you have a cargo that has no contracted home, you will follow the money."
As the U.S. market matures it will rely less on spot cargoes. Between 2006 and 2012, the U.S. LNG market is expected by Wood Mackenzie to grow from about 2.2 Bcf/d to almost 11 Bcf/d. The vast majority of this supply will come to U.S. shores under "semi-firm" portfolio arrangements managed by the major integrated and national oil companies, said Law. During this same period, the amount of LNG delivered under firm long-term contracts will grow from less than 0.5 Bcf/d to about 1.5 Bcf/d. In 2012 the spot market will still have to make up for about 1.5 Bcf/d of U.S. supply or roughly 13% of the market. By contrast, spot cargoes accounted for roughly 37% of LNG deliveries in 2005, according to Wood Mackenzie.
Also over the coming years, Wood Mackenzie projects that the share of globally contracted LNG held by integrated suppliers, such as Shell, BP, BG, etc., will grow substantially to more than a third of the market in 2010. Between now and 2012, Wood Mackenzie sees global LNG demand growing to about 42 Bcf/d, with U.S. growth accounting for the lion's share of the increase. Even if other world markets were to attract discretionary supply targeting the United States to satisfy their uncontracted demand, the impact on the United States over the next four to five years would be limited. "It is thus likely that a significant portion of the target supply for the U.S. will be delivered," said Law.
Still, there's more to worry about. Those fretting over whether the U.S. will see another East Coast receipt terminal would do well to look upstream at the amount of liquefaction development taking place. Between 2005 and 2007, global average annual liquefaction capacity additions are projected by Wood Mackenzie to be a little more than 15 MMtpa, rocketing to 35 MMtpa 2008-2010.
Firms like Bechtel Corp. are reaping the benefits of and being kept busy by LNG development. For instance, according to Reuters, last year Bechtel worked on plants in Australia and Equatorial Guinea, Trinidad and Egypt as well as terminal development in Louisiana. As the number, scale and complexity of projects increases, contractor resources are stretched, says Wood Mackenzie. Project delays for any reason would result in supply shortfalls that could be felt in the U.S. "You can bet your bottom dollar that this is going to happen to some projects," Law said. They are going to lose momentum, and some of them are going to be delayed, not just by six months but by a year or even longer."
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