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North America, Atlantic Basin Driving Much LNG Growth

May 22, 2006
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The global liquefied natural gas (LNG) business is continuing to grow and is on the cusp of significant changes. Driven by North American demand, the Atlantic basin is poised to balloon to equal the Pacific in volumes traded. While there seems to be no shortage of regasification capacity, at least in North America, liquefaction capacity runs much tighter, and regas project backers that don't have supply lined up are being forced to wait. It's a seller's market. Contracting terms are becoming more flexible, often including provisions for cargo diversion, and the spot market is growing but is not expected to ever rival the amount of LNG that moves under firm contract.

Those are some of the thoughts expressed by speakers at Platts fifth annual Liquefied Natural Gas conference, held last week in Houston.

Between now and 2015 the Atlantic basin LNG market will grow to about half of the world market, and North America will account for half of the basin's LNG demand. Along the way there will be "drastic structural changes" in LNG liquefaction as well as in shipping as train capacities double.

From 1980 to 2005 the global LNG business has grown from 24 million tonnes/year (3.2 Bcf/d) to 142 million tonnes/year (19 Bcf/d). It's time that the industry stopped focusing on one sector of the LNG business and embraced the whole value chain, Gabriel Avgerinos, Poten & Partners Inc. general manager of LNG/gas consulting, told conference attendees.

As the industry has evolved from a buyer's to a seller's market, the emerging model for the LNG business will be marked by "supply portfolio" strategies, less certain off-take guarantees, more destination flexibility in contracts, and long-term prices will be more frequently indexed to gas market prices (e.g. Henry Hub). The market also is becoming more globalized. Greg Hopper, vice president with Lukens Energy Group, said that LNG flows to North America will be increasingly influenced by gas prices on other continents.

Hopper predicted a move toward global gas prices, but he said the process would take much longer than the similar evolution that took place in the world oil market. He said what producers are looking for is a portfolio of prices with little correlation between gas and oil prices. They want to sell gas at high prices when oil is down and vice versa.

Hopper and others at the conference cautioned that if natural gas prices stay too high for too long, they will kill the "golden goose" that is power generation. Several speakers acknowledged a threat to gas-fired power generation demand from coal and nuclear.

Christopher Ross, CRA International vice president, said the LNG business is soundly in its second growth phase. Where once the business was dominated by national oil companies there now is a strong presence of the international oil majors as well as companies like BG Group, YPF Repsol, and Marathon.

Ross said that external drivers still favor natural gas/LNG for power generation: low emissions, high efficiency, multiple international sources and the ability to hedge supply easily. However, if the world LNG market is too slow to develop, natural gas risks losing power generation market share to coal and nuclear. He suggested that it would be good for gas markets and LNG if the United States were to embrace the Kyoto treaty. This would make the U.S. more competitive with Europe in the race to snare LNG cargoes since Kyoto requirements favor gas-fired generation and serve to support gas prices.

And cargoes will be getting bigger. The era of the "mega train" is coming, with trains in development as large as 7.8 million tonnes/year, a significant increase from the 3 to 5 million tonne trains currently seen. With this, development prices will double but volume-based costs will decline. A traditional train now costs around $6 billion. A mega train will cost about $12 billion but on a per-tonne basis will really be only half the cost of a traditional train.

Among LNG players, two strategies have emerged, which Avgerinos described. "Floating pipelines" are integrated operators that seek to drive down costs in their point-to-point operations. Examples of such companies are ExxonMobil, ConocoPhillips, and Chevron. The other is "branded LNG," embraced by companies such as BP, Shell, BG, and Total. These players are opportunistic supply aggregators focused on maximizing revenue.

Avgerinos said that regasification capacity is not a constraint point in North America and clearly won't be in the future. He predicted that there will be six to 10 new regasification terminals in North America by 2012. The East Coast and West Coast each will get one or two, and four to six will end up in the Gulf Coast. Additionally, the new terminals will be fully expanded.

The spot market is growing, but growing modestly, accounting for about 20 million tonnes in 2005. Avgerinos cautioned that what are described as spot deals often are only available to parties with right of first refusal for capacity, so they aren't truly spot in the conventional sense. He said the spot market in LNG will continue to be a "profitable supplement" to the market but not a mainstay.

Avgerinos said that there is very little LNG supply available for purchase today for projects slated to start up between 2008 and 2010, but between 2010 and 2015 more supply becomes available. Of that supply, that coming from Qatar is by far the greatest at 50 million tonnes/year, which has already been committed to projects, Avgerinos said. And Qatar will be a substantial player in the Atlantic basin market.

In the late 1990s Qatar decided to move away from selling into its traditional eastern markets and commit more supply to the Atlantic basin, Avgerinos said. He projected that 68% of Qatar's supply will be destined for the Atlantic basin by 2015.

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