Following a stream of industry announcements, Cambridge Energy Research Associates has now put its stamp on liquefied natural gas growth, predicting that the “fundamental” changes worldwide in natural gas availability and potential shifts in pricing, downstream markets and available capital will position LNG to become a “major global energy player over the coming 20 years,” with demand as much as tripling by 2020.
Another report, “Global LNG Trade” by market researcher Emerging Markets Online, forecasts the market to double in size by 2011. EMO found that the world trade market for LNG is an “important part of the growing international gas business.”
CERA, headquartered in Cambridge, MA, released its study on Wednesday, finding that the “underlying forces” expected to shape the LNG industry worldwide in the next 20 years include:
“The key challenge for the LNG industry to achieve its global potential is the acceptance of a move from the current traditional supply-driven model to one which is flexible and market responsive,” said Peter Hughes, CERA’s senior director. He said LNG’s “unique characteristics suit it perfectly” for markets that likely will change in the future. “Gas reserve holders will be able to capitalize on LNG’s marketing flexibility at the same time as the industry’s cost structure has been significantly improved by recent technological developments.”
CERA does cite “major uncertainties” in LNG’s growth, including gas needs in North America and Europe, global warming concerns, Russian supplies and the “speed of market liberalization.” CERA said, “How companies and the industry address these issues may determine the direction the LNG industry takes.”
“Historically, LNG projects have not been able to move forward until all the gas is securely contracted for,” Hughes explained. Citing the Asian economic crisis, Hughes said that demand growth has slowed even while new liquefaction capacity has come onstream. CERA projects that eventually, Europe and Asia LNG pricing structures will “converge toward the U.S. model,” pushing LNG toward interregional trade.
CERA predicts LNG growth will come regardless, probably following one of three paths. In the “competitive rim” scenario, which is characterized by confident growth, LNG would more than triple by 2020. “Market confidence increases overall energy demand, and environmental concerns are addressed, benefiting gas in particular.”
The competitive rim scenario also assumes that there will be an “aggressive drive to develop gas reserves,” with mega-pipeline projects launched. “LNG developers find more innovative financing methods, new players enter, there is no shortage of capital, and producers are increasingly willing to accept volume risk.”
In the “sheltered paradigm” scenario, LNG demand also would triple in 20 years, with projects undergoing a “radical change in traditional structure and management, with new innovations in contracting and pricing driven by uneven, cyclical economic growth.” The LNG surplus would lead to new market development, the “diversion of cargoes and the emergence of new players.”
CERA’s “high seas” scenario would take place in a “climate of deteriorating global relations, with a resistance to international law and arbitration and a decline in free trade.” In this low-growth natural gas scenario, LNG would still have advantages over pipe in terms of more flexibility to switch between markets, better security and smaller, more easily financed projects. “A small group of players continues to dominate the gas scene and alliances develop to minimize new project risks.”
With the “high seas” approach, which indicates unfavorable business conditions, “LNG wins a big piece of the relatively small pie, due to its advantages in terms of market flexibility, lower capital cost and the absence of transit concerns.”
In the second LNG report, EMO found that increased competition in LNG trade and an “ever-rising demand for natural gas, falling costs of LNG supply and shipping and rising demand from Europe and the U.S. for gas-fired power plants” would push LNG growth up.
“The landscape for LNG trade is changing by global region,” reported EMO. While most of the growth would be in the Asian market, EMO found that about 45% would come from growth in the European and U.S. LNG markets, “largely to meet the demand for gas-fired power generation.” It reported that the “winners in the future LNG industry will be those taking a long-term view, who cooperate with other participants in the LNG chain, those willing to innovate and take risk in adapting to the changing situation.”
Copies of the CERA report may be purchased by contacting CERA’s Sean Becker at (617) 498-9106. To order a copy of the EMO report, visit the web site at www.emerging-markets.com/LNGtrade.
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