LNG Expected to Play 'Big Role' for Majors
As long as prices remain near the current level, the liquefied natural gas market will play a "big role" in both Europe and the United States in the coming years, and with a current growth rate of 8%, LNG will be a "key growth engine" for many of the world's majors, according to Deutsche Bank analysts, who offered their global assessment of the marketplace Wednesday.
David Wheeler, Deutsche Bank's major oils analyst, reminded the audience that only a few decades ago, natural gas was the "waste fuel" of oil companies. That market has changed, and so has the market for LNG on a global basis, he said. "As the world becomes increasingly gas-fired, this large business is growing at a rapid rate...far faster than the 3.5% demand growth seen in gas and 2% for oil."
Of course, to make the LNG market attractive to energy companies, natural gas has to remain relatively expensive, said Paul Sankey, who analyzes the European market for Deutsche Bank. However, he said increased competition worldwide is also lowering material costs.
Through the LNG value chain, liquefaction costs currently are in the range of $0.75-$1.50 MMBtu. With shipping costs, which depend on location, and the regasification costs, LNG adds $1.40-$2.50 of additional cost into the delivery chain, he said. At current and projected natural gas prices, that additional amount makes LNG a much more attractive investment.
The global supply has two regional basins: the Atlantic Basin and the Pacific, and new projects are on the books in both regions. In the next decade, the Pacific Basin will see its LNG market double, Sankey said. And in the Atlantic, driven by U.S. and European demand, growth is expected to be strong.
"With the right development and the right cost control," Sankey said, LNG capital spending is becoming more apparent among the majors. Most prominent in LNG growth are Shell Oil Co., which has made a "significant investment in ships and gasification," and BP, which he said, was "pouring money into gasification" facilities.
Until the past few years, LNG was growing mostly in the still prominent Asian market. However, new LNG growth most certainly will come in the Atlantic Basin, driven by demand and price. "The U.S. doesn't care where the gas comes from, they just want the cheapest gas," Sankey said. The biggest risk, of course, is if U.S. gas prices fall.
Because of demand, the Atlantic Basin has created a price arbitrage, Sankey said. "For the first time in gas' history, two regions are linked on a super-regional open market basis," he said, referring to the United States and Europe. New Atlantic projects can deliver into Europe and/or the United States. Also on the table is the U.S. LNG growth on the West Coast, which Sankey said could "complete the global missing link."
"California would be a compelling place to put a terminal," Sankey said. "The question is, where?" With most of the LNG market currently directed toward the East Coast and its vast pipeline system, a possible solution could rest in Alaska, which he said could get the LNG to California ahead of a new pipeline. "Economically, there is a compelling market in California."
Currently, capacity is "tied up," and U.S. players are defined, according to the Deutsche Bank analysts. Cabot/Tractebel has "subscribed all the available capacity to Cabot LNG (in Everett, MA). Pressure has increased to adopt the Open Access regime proposed by the Federal Energy Regulatory Commission."
At Cove Point's LNG facility, "BP, Coral (Shell) and El Paso have secured long-term capacity through an auction process. Long-term agreements for around 50% have also been agreed upon" at El Paso Merchant Energy's facility in Elba Island, GA. Both of these facilities are being reactivated after being mothballed (see Daily GPI, Feb. 9).
CMS Trunkline LNG in Lake Charles, LA, the largest U.S. LNG operator, already is "taking in record volumes." Most of its imports come from Algeria's Sonatrach under long-term contracts, but it has other deliveries from Qatar, Australia, Nigeria and Abu Dhabi. However, its growth will continue, said the analysts. "The terminal has major expansion potential.
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