According to the International Energy Agency (IEA), global liquefied natural gas (LNG) imports reached 236 billion cubic metres in 2007, 69 per cent more than in 2000 and up 39 per cent since 2003. Over the past two years, LNG trade has increased by 20 per cent, according to the US’ Energy Information Administration (EIA).
LNG’s flexibility makes it attractive to consumers who want to diversify their energy supply. It can redress seasonal differences in gas demand across the world and help to bridge a growing disconnect between the world’s gas producers and consumers. In some cases, notably Japan and Korea – the world’s largest importers of LNG – it has helped to meet rapidly rising industrial gas demand in a part of the world where piped gas is not an option.
Historically, LNG has been a more expensive alternative to oil, but it has also enjoyed a cost advantage in recent times. While the price of oil has increased by more than 200 per cent since 2002, the imperfect linkages between oil and gas prices mean gas is now an estimated 18 per cent cheaper than fuel oil for power generation, on average, even before environmental costs are taken into consideration.
The Middle East is perfectly placed to benefit from LNG’s rising popularity. Situated equidistant between the Americas and the Asian LNG markets, it can serve both the Atlantic and Pacific basins.
Between 2004 and 2006, LNG exports from the Middle East and North Africa increased by more than one-third to 90 billion cubic metres a year (cm/y), and the region’s share of global LNG trade increased to 42 per cent from 36 per cent. In 2006, Qatar overtook Indonesia as the world’s largest LNG exporter, and by 2010 it could supply more than 20 per cent of the global market, according to the IEA.
By 2011, the addition of a series of mega production trains is set to triple the country’s exporting capacity to 105 billion cm/y.
It is also introducing a new breed of larger LNG carrier ships: the Q-flex, with capacity of 210,000 cubic metres, and the 260,000-cubic-metre Q-max.
Other countries in the region are also playing a significant role. Despite losing three of its LNG trains in an explosion in 2004, Algeria, the first country to export the product, is still the world’s third-largest exporter. A further 9.5 million tonnes a year (t/y) of new capacity is set to raise total output by almost 50 per cent by 2012.
Egypt, which produced its first LNG in late 2004, is growing rapidly, with two new trains due to come on stream in 2011, taking capacity to about 20 million t/y. In Libya, the UK/Dutch Shell Group is working to restore the original capacity of the 2.3 million-t/y Marsa el-Brega plant and planning a completely new terminal at Ras Lanuf. The UK’s BP and Italy’s Eni are both working on longer-term plans to market LNG from Libya. Although additional capacity in Egypt and Libya is dependent on the allocation of gas to the projects by their respective governments, both are expected to bring on new capacity over the next five years.
If political difficulties can be overcome, Iran could also become a major player. Three projects are under consideration that could together add up to 20 million t/y of LNG from the South Pars gas field in the early years of the next decade. Elsewhere in the Gulf, the Adgas project in Abu Dhabi produces 5.8 million t/y of LNG, Oman expanded its capacity by a third in 2006 to 9.9 million t/y, and Yemen is set to produce its first LNG from a new 6.7 million-t/y facility by the end of 2008.
The Middle East will also benefit from the increasing flexibility of LNG contracts, which is facilitating the diversion of LNG between these markets. Historically, the sale of LNG has been governed almost exclusively by long-term contracts determining the specific points at which the product would be bought and sold. But in recent years, international companies have taken equity or capacity stakes in both upstream and downstream elements of LNG projects, allowing them to sell the product to the market offering the best price.
National oil companies are also beginning to exploit this trend, signing long-term agreements that allow for their LNG to be diverted to different locations depending on market conditions.
For the first time in the history of the trade, 6 per cent of Atlantic basin LNG production was diverted to the Asian market in 2006. According to US energy consultant Cambridge Energy Research Associates (Cera), while 86 per cent of existing LNG supply is dedicated to a specific market, 40 per cent of supply committed for the future is undedicated.
“Suppliers are in a position of strength, and now they want the flexibility to decide where to sell their gas,” says Phil Nutman, director of consulting at the UK’s Gas Strategies Consulting. “Qatar has invested in regasification facilities to give it the option of selling to different markets, and Algeria also has capacity options on both sides of the Atlantic.”
This diversion market, coupled with high oil prices, has enabled sellers of LNG to enjoy better returns on their gas. In the past 12 months, there have been instances of spot LNG volumes being traded at $18, $20 and $25 a million BTUs, exceeding the international gas market price of about $10 a million BTUs. As existing long-term contracts expire, the scope for more spot-traded gas will only increase.
Global liquefaction capacity is expected to grow by 30 per cent to 341 billion cubic metres by 2010, while dozens of regasification terminals seek the go-ahead in Asia and the West.
In terms of shipping, 30 new LNG carriers were delivered to the market in 2006, expanding global capacity by 19 per cent, and a further 82 are set to be added by the end of 2008. The global fleet is expected to grow from 220 vessels in 2006 to 350 by 2010, while the average capacity of the vessels is set to increase to 180,000 cubic metres in 2008 from 140,000 cubic metres in 2005.
But opinion is divided on the strength of the sector over the longer term. Speaking at the GasTech conference in March, Andrew Swiger, power and gas marketing president of the US’ ExxonMobil Corporation, announced that the oil major expects LNG demand to grow from about 100 million t/y in 2000 to more than 500 million t/y in 2030. But others argue that growth will slow from 2012 as the lack of planned liquefaction capacity, and the demands of domestic markets in producing countries, begin to have an impact on exports.
Between now and 2012, the vast swathes of LNG infrastructure being brought on stream, and the prospect of a worldwide recession, could cool LNG prices, but beyond that, the problem could be a lack of new liquefaction capacity rather than a surfeit.
Project costs have doubled over the past two years and are already inhibiting project development. Algeria’s plans to upgrade its two LNG hubs have been delayed by cost escalation, and Qatargas has had to give contractors an extended deadline to complete work on two new LNG trains because of spiralling costs.
Beyond 2012, there is a dearth of planned infrastructure. In 2006, no final investment decisions for LNG export projects were made anywhere in the world for the first time since 1998. Several producing markets are also showing signs that increasing gas exports may not be a priority in the years ahead.
Rapidly growing domestic power demand in most of the Middle East is likely to reinforce the existing trend towards prioritising the home energy market.
Egypt requires foreign investors to provide a third of gas finds to the local market and keep another third for future generations. Algiers, already suffering from lower-than-expected output from two of its main gas fields, In Salah and In Amenas, has been vocal about preserving resources for future generations, notwithstanding the imminent launch of its first gas round. Qatar has a moratorium on gas development and no commitments have been made for new LNG export capacity beyond 2011.
“Exporters don’t want to expand their volumes, they just want to expand their earnings,” says Jonathan Stern, director of gas at the Oxford Institute for Energy Studies in the UK.