Global liquefied natural gas (LNG) supplies are tight and expected to remain so for a while as liquefaction projects in progress wrestle with delays and those being planned face an environment of escalating costs. However, there is plenty of gas to liquefy in Australia, the United States (thank you, shales) and elsewhere. And there's growing demand as gas is becoming the "fuel of choice" around the world.

"The future looks bright for our industry," ExxonMobil Corp.'s Richard Guerrant, vice president for LNG, said last week at the LNG 17 conference in Houston. "As we move forward, it is important that our industry work together to ensure LNG markets and supplies remain viable, and our industry maintains its reputation for reliability and excellence."

RasGas Co. Ltd. CEO Hamad Rashid Al Mohannadi was one of Guerrant's co-panelists at the event and reflected on how far leading global LNG supplier Qatar has come in the last decade. In 2003, RasGas was in "full construction mode" and Qatar was producing about 16 million tonnes per year of LNG for export, he said. There were very few importing countries, and very little spot trading was taking place.

Now, he said, Qatar is part of a "far more dynamic" industry. The country has reached its goal of putting 77 million tonnes per year of LNG into the global market and is moving forward with other projects overseas (see related story). Twenty-eight countries are importing LNG "with many more on the horizon," the RasGas chief said.

Of course, the fortunes of LNG are dictated by those of natural gas, and it is becoming the "fuel of choice" around the world, the one that most economies go to first to meet their needs, Chevron Gas and Midstream President Joseph Geagea said. The greatest challenge for the LNG sector is bringing buyers and sellers together in a free market and regulatory environment that is conducive to growing the supply needed to meet demand, he said.

It would be a mistake to believe that "all the LNG will come from the United States" or for that matter from Australia or Qatar, Geagea said. Diverse supply points are needed, and where LNG exports are viable, they should not be scared out of coming into the market. Geagea encouraged LNG consumers to diversify their portfolios and take equity positions in the upstream gas exploration and production industry, as some have done. If they do, they'll learn first hand about the challenges facing gas producers in different parts of the world, he said. "It's only from a partnership between buyers and sellers that we can serve this market."

The perspectives of LNG consumers were also represented. Petrobras' Jose Alcides Santoro Martins, chief gas and energy officer of the Brazilian producer, was not shy about articulating what LNG consumers most want: supply security, flexibility and competitive pricing.

And when it comes to pricing, Tokyo Gas is looking forward to the entry into the global market of shale gas-backed U.S. LNG. Shigeru Muraki, Tokyo Gas representative director, said U.S. LNG will make a "significant impact" on pricing and liquidity in the Asian LNG market. He said he expects U.S. gas to enter the East Asia market at around $10-12/MMBtu. U.S. gas will be a driving force to enhance competitiveness and develop trading opportunities and an Asian LNG hub, he said.

Just weeks ago, Tokyo Gas joined Tokyo Electric Power Co. (TEPCO) in linking the price of some of its LNG to prices at the Henry Hub (see NGI, April 8). Last February, TEPCO struck its first-ever Henry-linked LNG contract (see NGI, Feb. 11). Alaska has been exporting LNG to Japan on a small scale for decades, and the Tokyo Gas executive said the northernmost U.S. state has a lot more gas to offer from its North Slope.

Japan recently announced plans to develop an LNG futures market on the Tokyo Stock Exchange within two years. Shigeru said that is putting the cart before the liquidity horse and the futures market, if established, will not function well in an environment of limited trading opportunities. "I think it will take some more time," he said during a separate panel discussion at the conference.

But Japan expects LNG prices to be competitive, Shigeru said. If LNG prices remain high, coal will scoop up market share in the power sector, particularly for baseload generation. But if natural gas is competitive, demand for LNG will grow and pipeline gas from Russia will offer a complementary supply, he said.

Keeping global LNG prices competitive is not an easy task, though, Guerrant said. ExxonMobil and other companies all have their ways of bending the cost curve, he said. "We're striving to stem the increase [in LNG development costs] so that we can remain competitive and come up with a project that can deliver a price to a customer that keeps him competitive and meets our needs for a reasonable return. And that is a challenge in this environment."

The expectation that connecting the Henry Hub to the global gas market will cause a significant reduction in LNG prices is not correct, according to a number of speakers at the conference.

Gas markets will feel the Henry Hub's presence, IHS Inc. Vice Chairman Dan Yergin said, but it won't mean sale prices on gas supplies for Asian and other consumers. "Henry Hub will establish a different pricing system, but not necessarily a much lower pricing system. But it will establish a price benchmark against which others will have to compete," he said.<

"The U.S. will set a new competitive price benchmark for gas around the world. Obviously that doesn't mean that everyone by any means will adopt that pricing system; they will not," Yergin said. "But it will be possible in some cases to deliver gas from the U.S. to almost any global coastal port for perhaps around $12/MMBtu. Not all the gas in the United States will make that price, but that will be a price threshold that will be very significant for the industry."

IHS projects that global gas demand will double by 2040 from where it is today, Yergin said. "And that 620 Bcf/d that we're talking about in 2040, for those thinking in oil terms, would be equivalent to 100 million b/d of oil equivalent, which is larger than today's world oil market," he said. The main driver is the power generation sector.

"If we go back five years ago, just five years ago, natural gas was about 20-21% of electric generation. Today it's over 30%; it shows you how fast those changes continue," Yergin said.

Natural gas is in a horse race right now with coal and oil. For instance, while gas has been pushing coal out of the power generation market in the United States, the exact opposite is happening in Europe, where cheap coal is the order of the day.

Gas coal and oil combined meet about 75% of the world's energy mix, Yergin said."But at least in our view at this point, we would expect that round 2040, maybe a little bit before that, natural gas will edge out ahead of oil, ahead of coal and in fact become the world's dominant fuel. What a change for a fuel that when people used to discover it they'd curse the discovery of gas and say why didn't we find oil."

Global demand for gas is growing, and so is demand for LNG. Wood Mackenzie projects that demand for LNG will nearly double by 2025. Too meet this demand, "significant" liquefaction capacity and 180 Tcf of natural gas will be required, said Frank Harris, Wood Mackenzie head of global LNG consulting.

Supply must not only increase to satisfy incremental LNG demand growth of 4.5%/year out to 2025, but it also needs to replace lost supply from a number of existing LNG supply projects, Harris said. These are projects where production is going into decline, either due to depleting reserves or diversion of reserves to meet demand from local gas markets.

"Several major gas resource-holding countries, such as Egypt and Indonesia, now have such strong domestic demand for gas that reserves can no longer be made available to fully support export -- from new, and in some cases existing facilities," Harris said. "This creates the requirement to look for new sources of supply. The good news, however, is that the industry is now awash with gas, partly due to successful exploration for conventional gas, but largely due to the huge growth in unconventionals."

In North America, the shale gas revolution has created the potential for significant LNG exports, but developing export projects is proving far from straightforward. And a wave of gas-focused exploration from Australasia to East Africa to the Levant has added significant new reserves, but as always, turning this gas into LNG remains a challenge.

There are three core options for securing gas, according to Wood Mackenzie: exploiting already discovered conventional resources; exploring for additional conventional resources; and/or developing unconventional resources. However, each of these options has its challenges, typically a mixture of technical, political and/or economic factors.

"From the LNG industry's perspective, this means that the main challenge is how to combine exploitation of discovered conventional resources, with exploration for more conventional gas and the development of unconventional resources," Harris said.

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