LNG: Heading west

26 July 2002

Back in 1992 when the Gulf liquefied natural gas (LNG) industry was confined to Abu Dhabi's Das island, a new venture was formed in Qatar. Known as the Qatar Europe LNG Company (Eurogas), the company had an ambitious goal: to establish a 6.1 million-tonne-a-year (t/y) liquefaction plant at Ras Laffan to supply the growing European gas market. The Eurogas project was never implemented, collapsing two years later on what its shareholders described at the time as insurmountable gas pricing obstacles.

In hindsight, Eurogas can be seen as well ahead of its time. Ever since 1997, when Qatar Liquefied Gas Company (Qatargas) delivered its first spot cargo to Europe under an agreement with Spain's Enagas, the Gulf/European gas relationship has been gradually evolving. In May 2001, a further step was taken when Qatargas became the first Gulf LNG producer to secure a medium-term sales commitment with a European customer, in a deal involving the supply of 9.1 million tonnes to Spain over a nine-year period.

Two months later, it was the turn of Qatargas' neighbour, Ras Laffan Liquefied Natural Gas Company (RasGas), to enter new territory. It signed a 25-year sales and purchase agreement to supply Italy's Edison with 3.5 million t/y starting in 2005, and, unlike Qatargas and its Spanish cargos, committed to meet the volumes through the construction of new capacity. Finally in May, Spain's Union Fenosa signed up with the Omani government to take a 20 per cent equity stake in a third LNG train at Sur and purchase 50 per cent of its output.

The recent flurry of activity suggests that Gulf gas to Europe is an idea whose time has finally arrived. Determined to reduce carbon emissions, Europe is shifting decisively away from using coal and oil in power generation towards gas. Despite economic slowdown, Western European gas consumption climbed 2.6 per cent to 422 billion cubic metres (bcm) in 2001 and is set to rise further over the coming 15 years. In Spain, gas demand is projected to more than double to 48 bcm by 2015 from 19 bcm in 2001, while in Italy demand is forecast to grow to 95.5 bcm from 70 bcm over the period.

With an estimated 15 per cent of world gas reserves, Qatar is seeking to significantly raise its share of the European market. Its drive is being assisted by the low cost of adding new LNG capacity at existing production facilities, driven by higher train sizes and contractor competition. 'Investment costs are coming down dramatically,' Nasser Jaidah, director of the oil & gas ventures directorate at Qatar Petroleum (QP), said in mid May. 'If the cost of building Qatargas was 100, RasGas has managed to do it at 65. As for further expansions, we will be close to 50.'

In Oman, it is a similar story. Union Fenosa estimates that the cost of the 3.2-million-t/y third train will be $650 million-700 million, which compares favourably with the $2,200 million of investment that was required to build the existing two-train facility at Qalhat.

Shipment costs are also falling. Vessels that cost $250 million to build in the late 1990s are now being sold at $165 million, as a result of intense competition between Japanese and Korean shipyards. At the same time, capacities are rising, with the new generation of ships capable of carrying 140,000 cubic metres.

For European utilities, the emergence of an alternative gas source from the Gulf has been welcomed. Utilities are increasingly reluctant to pin their entire supply strategies on long-term offtake agreements with one supplier.

'The Spanish case explains what is happening across Europe at present,' says Julien Mintz, gas market analyst at France's Cedigaz. 'Spain has opted for gas supply contracts with Oman and Qatar when it could easily meet all its energy requirements through Algerian gas. Risk is the key issue for them when dealing with suppliers like Sonatrach. Security of supply is encouraging diversification across Europe.'

Spreading the supply risk was certainly a key factor influencing Union Fenosa's decision to invest in building a third LNG train in Oman so soon after taking an equity position in the Damietta LNG project in Egypt. 'Union Fenosa is trying to develop a gas portfolio that limits risk,' says Antonio Hernando, director of Middle East & North Africa at Union Fenosa Solutzione. 'Our aim is to diversify supply, so we are not going to concentrate on any one market. In the future, we may look at opportunities further afield in the Gulf as well as the Atlantic basin and Northern Europe.'

'Energy liberalisation in Europe has opened up the free flow of gas across borders. If there is an opportunity in Italy or France for example, we can now take it,' says Hernando.

The shipping requirements for the Spanish cargoes will be met by a new government-owned shipping company. In early 2002, the Omani government acquired a 40 per cent stake in the Greenfield Shipping Company and purchased the Lakshmi LNG tanker. It plans to add four more tankers to its LNG fleet, three of which will be dedicated to lifting gas for Union Fenosa on a carriage insurance and freight (cif) basis. Union Fenosa says this is the minimum it will need to service demand for the gas, which is due to be delivered from 2006 onwards.

As the Union Fenosa deal highlights, the reduction in shipping and plant costs has enabled Gulf producers to compete in Europe on price. 'There is a relationship between shipping costs and price, but LNG from the Gulf still has a significant cost advantage when compared with the alternatives,' says Agnus Cassens, general manager and chief executive of Oman LNG. 'Oman has a logistical advantage when compared to the rest of the region. We can access both east and west. We also have one of the most efficient plants in the world and a very low cost/capacity ratio, which make us very competitive.'

For Gulf LNG producers, market diversification is a major issue. Japan and more recently South Korea have underpinned the development of the regional industry, providing the long-term offtake commitments and, in some cases, the finance to build the initial capacity. At present, all the Gulf's long-term LNG business is tied to customers in the two markets, which last year lifted about 22 million t/y. However, with the Japanese economy stagnant and restructuring taking place in the Korean gas sector, the scope for additional long-term contracts is limited.

Attempts to diversify into the potentially huge Indian market have produced mixed results. RasGas is on track to begin deliveries of 5 million t/y to India's Petronet LNG in early 2004. However, Oman LNG has not fared as well. Following the collapse in February of a long-term deal to supply India's Dabhol Power Company with 1.6 million t/y of gas, the company has had significant amounts of surplus capacity available at its Qalhat terminal, which it has looked to sell into Europe on a short-term basis.

Gulf LNG producers are not focusing their marketing efforts exclusively on Europe, however. Considerable efforts are being exerted in China, which is expected to become a major LNG importer over the next five years. Japan, South Korea and India are still on the radar too. The message is clear: Gulf gas is going global.

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