For the time being the global market for liquefied natural gas (LNG) will remain tight, with regasification/import projects outpacing liquefaction/export projects, according to analysts at Standard & Poor’s (S&P).
“We believe current market conditions are favorable for exporters,” S&P analysts said in one of two LNG sector notes published Friday. “Demand has grown faster than the new liquefaction capacity. Most LNG is spoken for under long-term contracts that crude [oil] indexing and high oil prices support. And although spot volumes have increased, tight remaining supplies have pushed spot market prices steadily upward.”
Spot cargoes accounted for about 12% of the LNG market in 2005 and about 21% of total LNG deliveries in 2010, according to S&P. “This has partly been due to the weak U.S. import market and resulting redirection of deliveries. For example, importing entities with flexible volume commitments have cut down on their deliveries in the face of cheaper domestic gas.”
Meanwhile, the roughly 20 Bcf/d of LNG import capacity in the United States sits mostly idle while developers now work to advance projects to export LNG from the Lower 48 and from Western Canada (see Daily GPI, April 23; April 18a; April 18b).
“While it’s still too early to say how many [U.S. and Canadian export projects] will move forward, the swing from import capacity of more than 20 Bcf/d, even if only partly utilized, to potentially exporting several Bcf/d represents a significant introduction of incremental LNG volumes to the global market,” S&P said. “This could cushion supply in a market that is becoming increasingly tight. However, meaningful incremental LNG supply from North America will not be available until 2016 at the earliest…”
Developers targeting LNG exports from the U.S. Gulf Coast are further along with their projects than their counterparts seeking to export LNG from Western Canada. That’s because export capability can be more quickly added to the existing regasification terminals already on the ground in the Gulf Coast than it can be developed from scratch at greenfield sites in British Columbia, S&P said. There is also the matter of pipeline capacity that needs to be developed to serve projects in Western Canada.
There are significant differences in the contracting practices underlying projects in Western Canada and the United States, too, S&P said. In Canada, LNG export is an integrated, producer-backed effort, with project economics relying mainly on the cost of producing gas/LNG.
In the United States, however, projects are based on a standalone midstream model that would seek to exploit arbitrage opportunities. “For example, if a liquefaction facility buys market-price natural gas rather than sources it from an integrated upstream production company, its costs may become more volatile,” S&P said. “But by executing [long-term supply purchase agreements] with a fixed reservation fee for capacity plus a volumetric charge based on the spot price of natural gas, the variable natural gas costs will pass through directly to customers.”
The ratings agency believes arbitrage between the United States and other markets “will be unpredictable, and the potential is there for that arbitrage to compress over time because the U.S. at the end of the day is not a typical export market,” S&P credit analyst Mark Habib said during a conference call Monday. “It’s not a stranded market like Qatar or Australia or some of the other exporting countries. Rather, it’s very large, robust and a much more evenly balanced supply-demand market.
“U.S. exporters are going to be largely dependent upon the spread between Henry Hub prices and crude prices, which determine the LNG prices in much of the receiving countries. And that long-term spread, we believe can compress, due to the potential for demand creation within the U.S.”
Over the next five years “large increases” in global LNG supply around the world will make predicting the LNG supply-demand balance more difficult, S&P said. Factors to weigh carefully, according to the ratings agency, include the quantity and timing of new supply, gas demand growth in economies that don’t have adequate access to pipeline gas, and the exploitation of unconventional gas reserves in markets that are short of gas.
“There are many LNG markets around the world, and the pace of new development and credit implications vary from market to market. Three key LNG markets to watch are North America, Australia, and Qatar,” Habib said.
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