Liquefied natural gas (LNG) is clearly becoming a more freely traded flexible worldwide commodity that will reshape the global market's traditional pricing and contracting prices -- and most of the new supplies will be flowing to North America, according to Cambridge Energy Research Associates (CERA).
Even with "substantial" delays in LNG projects, a slowdown in project approvals, more stringent upstream terms, joint venture issues and rising costs, "the LNG armada has already set sail," said CERA's Michael Stoppard, senior director for Global Gas. However, the current difficulties "raise major questions about the pace of growth of LNG beyond 2010 and its ability to deliver. They do not materially affect the growth story to 2010, which is 'baked-in,' based on momentous investment decisions made several years ago."
CERA issued its report last week at the CERAWeek 2008 conference in Houston.
"The bulk of the new supply is expected to flow into the Atlantic Basin and, in particular, to North America, the world's largest natural gas market and the most open in terms of liquid traded hubs and accessible gas storage," CERA stated. With North American production seen reaching a plateau, LNG imports hit a record level in 2007 and a "sharp step-up" in imports is expected in 2009.
"North America's increased role in LNG will challenge the pricing and contracting practices of old," Stoppard said. "Sales into North America will necessarily be shorter-term in nature and involve more spot price risk. A three-way accommodation will need to be reached between the needs of the traditional Asian and continental European clients focused on the long term and security of supply with the market-based needs of North America and northwestern Europe, as well as the proliferation of scattered smaller market entrants."
The emergence of North America also is forecast to help ensure flexibility in the global market.
"North America has over 4 Tcf of working storage capacity, which is already providing an important buffer against market swings around the world," said CERA's Robert Ineson, director of North American Natural Gas. "This role is set to grow in the years ahead."
Because of global investments already made, CERA estimated that over the next two years:
Together these factors set the stage for a more heavily traded global gas market within 24 months. According to CERA, investments in supply/liquefaction construction, shipping capacity and regasification terminals are underpinning the near-term growth of the global LNG market. Liquefaction capacity is forecast to increase 30% in the next 24 months, to 247 million metric tons (mt), or 341 billion cubic meters (Bcm), from today's 190 mt (262 Bcm). About half of the investments are slated for Ras Laffan in Qatar, with Russia, Yemen, Australia and Indonesia also adding significant capacity.
CERA research also found that the world's LNG shipping capacity is set to jump by more than half by 2010, with a record 58 ships to be added to the existing fleet of 251 during 2008. In addition to allowing expanded arbitrage opportunities, abundant shipping capacity -- growing faster than LNG supply -- would allow for novel market solutions such as using ships not only to transport LNG, but also as floating regasification and storage vessels.
In addition, CERA noted that investment in regasification terminals is rising at a faster pace than the associated liquefaction, which he said was not surprising in view of the fact that "regas" represents only 10-15% of LNG supply chain costs and should, therefore, always be in excess over liquefaction.
"For aggregators, surplus regasification is essential to being able to move shipments between regions as needed," Stoppard said. "For buyers, regas is the ante to sit in on the global gas procurement game." The expanding number of countries considering building LNG import facilities include Brazil, the Netherlands, Pakistan and New Zealand.
The new LNG supply is seen as more market-flexible than the traditional LNG trading structure, which included long-term contracts pre-sold to specific countries and end-users with fixed points of dispatch and delivery, CERA noted. These rigid terms were considered necessary to finance the large capital requirements of LNG producers and importers. However, there has been "dramatic change in these contracts that is not fully recognized since most supply continues to move under long-term contracts. Many newer contracts are not dedicated to a specific market or end-user, but to an aggregator or merchant buyer who will seek to move the LNG to the market of highest value, as with most other commodities."
CERA estimated that 40% of LNG supply under construction is "nondedicated" and flexible to trade. Most of the LNG supply is either in the Atlantic Basin or the Middle East, with the Pacific Basin continuing to favor "old-style contracting," CERA found. Now supported by the expansion of supply, shipping and regas capacity, the amount of flexible trade is forecast to double by 2010, and "will surely transform thinking in the industry, although supply will remain in the hands of a relatively small number of key players," according to the energy analyst.
"A growing and more flexible supply, available transportation shipping capacity, the development of a network of regas portals to allow arbitrage to take place, and the bringing together of the great markets of Asia, Europe and North America will be the result," Stoppard said.
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