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LNG Imports Seen Higher -- Unless Russian Dispute Deters Cargoes

The economic slowdown, falling prices and overwhelming onshore production aren't enough to deter more liquefied natural gas (LNG) from heading to North American shores, but the Russia-Ukraine gas dispute could prove consequential for the Atlantic Basin's business later this year, energy consultants said last week.

In its review of the global LNG market, UK-based Wood Mackenzie predicted imports to the United States and Canada are on track to rise through at least 2014 because of infrastructure improvements. The bulk of U.S. gas traditionally has come from the Lower 48 states, Canada and Mexico, but Wood Mackenzie predicts U.S. LNG imports from the Middle East and elsewhere are expected to continue to move higher.

"In light of recent history, and the longer term outlook for growth in domestic U.S. shale gas, many industry analysts and commentators have been suggesting that the outlook for LNG imports into North America is bleak," said Wood Mackenzie analyst Murray Douglas. "While it is fair to say that regas capacity has undoubtedly been overbuilt, the medium-term outlook for LNG in North America is not as dire as other commentators are suggesting, despite the success in developing shale gas."

The medium-term outlook for LNG imports into North America will see a year-on-year increase to 4 Bcf/d in 2014 from 1.7 Bcf/d in 2009, according to Wood Mackenzie research. And the growth will come even though domestic shale gas resources may reduce the long-term outlook for LNG imports into North America.

The Energy Information Administration in its latest Short Term Energy Outlook noted that U.S. LNG imports are expected to rise to about 420 Bcf this year (see related story). Limits to gas storage outside the United States "could unexpectedly boost U.S. imports of LNG during the summer months if global demand for natural gas does not increase as expected," EIA stated. U.S. LNG imports in 2010 are projected to rise to around 500 Bcf.

Other researchers also have agreed with Wood Mackenzie's data. Analysts at Waterborne Energy forecast a 30% rise in total LNG production worldwide by the end of 2009, some of which would make its way to domestic markets. Energy analysts at FBR Capital Markets also foresee growth in U.S. imports.

In addition, softening global gas demand could cause the U.S. LNG market to be oversupplied in the near term, analysts have noted. "This is therefore expected to lead to increased flows of LNG to the U.S. as it plays its role as the global sink for LNG," said Wood Mackenzie's Douglas.

Besides baseload supply, equivalent to total LNG imports in 2008, additional volumes to the United States are expected to arrive as a consequence of the new liquefaction capacity coming onstream over the next three years, Wood Mackenzie noted. "The original target and most likely home for a significant proportion of this LNG are the liquid Atlantic basin markets, the largest and most liquid of which is the U.S."

However, the growth in LNG will negatively impact the U.S. gas market, Douglas said.

"The U.S. can easily accept large volumes of unallocated LNG as required due to its size, liquidity and significant regas and storage capacity," the Wood Mackenzie analyst noted. "Some of this relatively low cost new liquefaction capacity will compete with domestic shale gas resources in the U.S. market. This will suppress price and in turn delay some higher cost domestic developments."

Wood Mackenzie is predicting a "further upside to the North American forecast if there is a sustained period of low oil price," said Douglas. Under this scenario, the "attractiveness of the North American gas market to LNG suppliers" would become evident "as the oil-linked gas prices in European markets soften and Asian buyers switch from gas to oil resulting in more LNG on the market."

However, one issue that could negatively impact more LNG moving to U.S. markets is the dispute between Russia's gas monopoly Gazprom and Ukraine over gas supplies, which in turn led to a natural gas crisis in Europe.

Lloyd's List, which covers the maritime and transport industry, said in a note that the "upside to the crisis could be the LNG industry...In the short term, demand for LNG will be increased as utilities scramble to buy cargoes to cover shortfalls in deliveries from Russian gas giant Gazprom. A more fundamental issue is the extent to which the gas crisis will increase the strategic importance of the LNG industry in the longer term. Europe is well placed to secure both pipeline and LNG supplies, but security of supply and concern over a lack of diversification are playing to the strengths of the latter."

Europe would need up to 14 additional LNG cargoes to make up for the storage lost from the first 10 days of the Russian gas dispute, according to Bentek Energy LLC's European Observer. Gazprom, Bentek noted, cut off around 11 Bcf/d of gas to Europe beginning Jan. 6, which also occurred during a regional cold snap.

Because of the supply losses, Europe may be forced to import more LNG in the coming months, which could "shift the balance in the Atlantic Basin LNG market, potentially resulting in fewer spot cargoes to the U.S. market this coming spring and summer," said Bentek.

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