Regional gas exports look east

17 February 2010

Producers seek new markets as demand falls and US output rises

Two years ago, global gas demand was rising rapidly and so were prices. In mid- 2008, gas was in such demand that the price of Henry Hub gas – the benchmark for determining spot and future prices in the US gas market – had soared to about $12 a million BTUs, while some spot trades to the Asian market were commanding prices of more than $20 a million BTUs.

In the following 12 months, a combination of global recession and rising indigenous gas production in the US turned the market on its head. The average wellhead price in the US for the first 10 months of 2009 was $3.69 a million BTUs, compared with $8.59 a million BTUs for the same period the previous year, according to the US government’s Energy Information Administration (EIA). Wood Mackenzie, a UK-based international energy consultancy, predicts global gas demand in 2014 will be 200 billion cubic metres a year lower than it forecast in early 2008.

Regional exports

Liquefied natural gas (LNG) sales are an important source of income for the Middle East. In 2008, the region accounted for 42 per cent of worldwide sales, a proportion that will continue to increase as Qatar and Algeria bring more gas liquefaction trains on line. Qatar is by far the largest LNG producer in the world, while Algeria ranks fourth, Egypt eighth and Oman ninth, according to data from the statistical review of world energy from the UK’s BP. The UAE and Yemen have also recently started LNG production, while Libya produces a negligible amount from its ageing Marsa al-Brega plant.

Until recently, LNG producers were banking on Europe and the US to buy their gas as domestic production in those two regions continued to decline.

Gas supplies from a series of new LNG mega-trains in Qatar were allocated for the US market, while Algeria and Egypt, both of them well placed to supply the US, also developed plans for two new LNG trains. From 2007-09, US regasification capacity doubled to more than 95 million tonnes a year (t/y) to accommodate the expected rise in deliveries, according to the EIA.

But, instead of declining, US gas output unexpectedly increased by 7.1 per cent year-on-year in the first 10 months of 2008, and by 3.9 per cent further in the first 10 months of 2009, meanwhile demand dropped by 2.1 per cent in the first 10 months of 2009, according to EIA data. Between 2007-08, US LNG imports fell 56 per cent, from 16.2 million tonnes to 7.1 million tonnes, before recovering to 7.6 million tonnes in the first three quarters of 2009, according to figures from market analysts Purvin & Gertz.

The collapse in US demand for LNG has been mirrored in key European markets. Italy’s LNG imports fell by 34.6 per cent year-on-year in the first three quarters of 2009, and by 50 per cent compared to the same period in 2007. Meanwhile, Spain, the region’s largest LNG importer, cut its imports by 15.6 per cent year-on-year in the first three quarters of 2009, according to Purvin & Gertz.

The cheaper production costs of Middle East gas – particularly in Qatar, where gas extraction costs are largely covered by revenue from the sale of associated condensate – means that, although the region faces reduced margins on its gas, it remains both competitive and profitable as a commodity. But some Middle East producers have suffered a decline in export volumes, and there has been a noticeable shift in the geographic distribution of deliveries.

The fortunes of individual producers have varied. Qatar’s exports increased from 29.1 million tonnes in 2007 to 31.1 million tonnes in 2008, and totalled 25.2 million tonnes in the first three quarters of 2009, according to figures from Purvin & Gertz. 

In Egypt, output dipped to 10.5 million tonnes in 2008, from 10.6 million tonnes in 2007, but recovered to 8.1 million tonnes in the first three quarters of 2009.

In Abu Dhabi, exports edged down slightly from 4.4 million tonnes in the first three quarters of 2007 to 4.3 million tonnes over the same period of 2009.

Algeria and Oman have both suffered even sharper declines in output. Algeria’s exports fell from 14 million tonnes in the first three quarters of 2007 to 13.1 million tonnes over the same period of 2008, then to 11.6 million tonnes for the same period in 2009, according to Purvin & Gertz. Deliveries from Oman, meanwhile, fell from 6.9 million tonnes in the first three quarters of 2007 to 6 million tonnes in the same period of 2009. While there were reasons for the fall in exports – such as technical problems at Algeria’s Arzew export terminal and domestic gas supply problems in Oman – the shift in the gas market was an important factor in the decline.

Even more striking has been the diversion of gas from Qatar and Algeria away from the US to more lucrative markets. Algeria shipped 1.6 million tonnes of LNG to the US in the first 10 months of 2007, but delivered nothing in 2008 or 2009, according to the EIA. Qatar’s deliveries dropped from 385,000 tonnes in the first 10 months of 2007 to 65,000 tonnes in the same period of 2008, then to nothing in 2009.

Although Egypt’s deliveries to the US recovered in 2009, having dropped substantially in the previous year, the price they commanded dropped from $10.27 a million BTUs in the first 10 months of 2008 to $3.90 a million BTUs in the same period the following year, according to the EIA.

New markets

Specific data on the destination of all the diverted gas is not available, but much of it was delivered to parts of Asia and northwest Europe, say industry sources. A combination of oil-linked gas prices, growing energy demand and a relatively high dependence on gas means Asia has become an attractive home for diverted LNG. In the first three quarters of 2009, LNG deliveries to China increased by 58.2 per cent year-on-year, and those to India rose by 17.6 per cent. Competitively priced gas and declining indigenous supplies meant the UK increased its LNG imports from 300,000 tonnes in the first three quarters of 2008 to 4.6 million t/y a year  later, despite a decline in overall gas demand of 11.9 per cent. Belgium increased deliveries from 1.6 million t/y to 5.3 million t/y over the same period.

The LNG supply/demand balance is unlikely to swing quickly back in favour of the producers. The global economic recovery remains sluggish, increased US gas production will continue to narrow its supply shortfall, substantial new liquefaction capacity is set to come on stream in the coming years and global regasification capacity is expected to rise from 750 billion cubic metres at the end of 2009 to 950 billion cubic metres by the end of 2012, according to Cedigaz, the international association of natural gas companies.

The EIA expects LNG sales to the US to increase slightly in 2010 and 2011 as global gas demand recovers, but prices will be linked to the marginal cost of shale gas production, projected to be about $5 a million BTUs in 2010 and $6 a million BTUs in 2011.

As a result, the trend of diversion away from the US will continue. According to Cedigaz, 55-60 per cent of the Atlantic basin’s long-term flexible LNG portfolio, a large proportion of which is provided by Qatar, is expected to be dedicated to Europe rather than to North America in the medium and long term.

Despite the current softness in prices, the long-term demand outlook remains good, according to the International Gas Union. As the Middle East share of global LNG production continues to expand, this can only be good news for the region’s gas producers.

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