Momentous investment decisions finalized several years ago assure that Liquefied Natural Gas (LNG) is set to become a more freely traded flexible worldwide commodity, and will reshape the global market's traditional pricing and contracting practices, according to remarks to be given by Cambridge Energy Research Associates (CERA) Senior Director for Global Gas Michael Stoppard at a briefing being held at CERAWeek 2008.
Despite substantial delays in LNG projects, a slowdown in project go-aheads, tougher upstream terms, joint-venture issues and spiraling costs, "the LNG armada has already set sail," Stoppard says. However, he added, current difficulties "raise major questions about the pace of growth of LNG beyond 2010 and its ability to deliver. They do not materially affect the growth story to 2010 which is 'baked-in,' based on momentous investment decisions made several years ago."
Over the next 24 months, as a result of these investments, according to Stoppard global LNG supply will grow by almost one-third; the supply of flexible -- or "tradeable" LNG will double; global LNG shipping capacity will increase by more than one-half; and utilization of LNG regasification capacity in the Atlantic basin will fall below 50 percent.
Together these factors set the stage for a more traded global gas market within the next two years.
The areas in which recent investment commitments are underpinning the near-term growth of the global LNG market, according to Stoppard, include liquefaction capacity and regasification terminals.
Liquefaction capacity will increase approximately 30 percent in the next 24 months, to 247 million metric tons (mt), or 341 billion cubic meters (Bcm), from today's 190 mt (262 Bcm). About half the investments at Ras Laffan in Qatar, with Russia, Yemen, Australia and Indonesia also adding significant capacity.
Investment in regasification terminals is rising at a faster pace than the associated liquefaction – not surprisingly in view of the fact that regas represents only 10-15 percent of LNG supply chain costs and should, therefore, always be in excess over liquefaction. For aggregators, surplus regasification is essential to being able to move shipments between regions as needed. For buyers, regas is the ante to sit in on the global gas procurement game. The expanding number of countries considering building LNG import facilities ranges from Brazil and the Netherlands to Pakistan and New Zealand.
The new LNG supply will be much more market flexible than the traditional LNG trading structure whereby long-term contracts pre-sold to specific countries and end-users with fixed points of dispatch and delivery – rigid terms previously believed necessary to finance the large capital requirements of LNG producers and importers, according to the CERA analysis. Recent years have seen dramatic change in these contracts that is not fully recognized since most supply continues to move under long-term contracts. Many newer contracts are not dedicated to a specific market or end-user, but to an aggregator or merchant buyer who will seek to move the LNG to the market of highest value, as with most other commodities.
CERA estimates that 40 percent of LNG supply under construction is "non-dedicated" and flexible to trade. Most is either in the Atlantic Basin or the Middle East, with the Pacific Basin continuing to favor old-style contracting. Supported by the expansion of supply, shipping and regas capacity, the amount of flexible trade will double by 2010, and will surely transform thinking in the industry, although supply will remain in the hands of a relatively small number of key players.
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