Something interesting happened in the booming world of liquefied natural gas (LNG) this winter: cargoes bound for the US were diverted to Europe. For the first time, producers were able to discriminate between their customers, a sign that a global market for LNG may be flickering into life.
Until recently, the fundamental characteristics of LNG trading made this untenable. The lack of specialist shipping capacity, the comparatively small volumes of LNG being traded between countries, the distance between those countries and the few dedicated exporting and importing terminals available had left little scope for quick or economical transfers of LNG between markets. Moreover, there has been no unitary pricing mechanism for LNG. Not only do prices differ widely between markets, but they follow different local criteria. For example, LNG prices generally follow Henry Hub gas pricing trends in the US, with prices varying further according to the delivery terminal. However, in European and Asia markets, LNG is primarily influenced by oil prices - by fuel oils in Europe and crude in Asia. Lastly, the LNG market has traditionally been based almost entirely around long-term supply contracts. Producers minimise risk by setting quantities and destinations, tying up the available cargo for as much as 25 years in advance. Today, however, rising demand is driving important changes in the movement of LNG traffic. The Pacific basin and its three big buyers - Japan, the world's number one importer, South Korea and Taiwan - are still responsible for three-quarters of global LNG consumption, importing more than 86 million tonnes a year (t/y) primarily from Malaysia, Indonesia and Australia. Supply from the Middle East and North Africa (MENA) region is similarly oriented to the east - in 2005 the region's producers, mainly Qatar, Abu Dhabi and Oman, exported 21 million tonnes to Asia. However, over the next five years booming demand will see the Atlantic basin catch up and fundamentally redirect global LNG traffic. US demand is the fastest growing in the world and is expected to overtake Japan by 2010. By 2015 the US will constitute 25 per cent of the world total. To meet this demand, US importers are being forced to look beyond their current producer markets - at present, Trinidad & Tobago and, to a lesser extent, Algeria. As a result, the MENA region is set to become the world's largest gas exporting market, and is expected to be exporting 64 million t/y of LNG to the Atlantic basin by 2010, compared to 54 million t/y going to the Pacific. Rising demand It is this expanding demand that is driving the huge investment in the downstream and midstream sectors of the LNG chain. Although LNG accounts for just 3 per cent of current US gas demand, it is expected to rise to 15 per cent by 2015, by which time European LNG demand will have doubled to 20 per cent of its overall gas demand. The regasification projects in key marketsin Europe - Italy, Spain and the UK - and the US point to this widespread optimism. Midstream investment is also soaring. Shipping contributes 20-30 per cent of the capital costs of an LNG project. Importers are keen to see more competition in the sector, forcing down prices, as well as a greater availability of shipping capacity to facilitate more spot cargoes. Accordingly, as the cost of building a tanker has fallen by 40 per cent in the last decade, shipping capacity is set to grow by more than 70 per cent by 2009. However, this boom is itself causing problems as the industry faces a situation where the order books of the Far East shipyards are full for the next five years. Even though regasification terminals are running typically 40 per cent below nameplate capacity, for the time being, high LNG prices and expectations of future expansion still make terminal building an attractive prospect. Shipping is also