Global LNG market to impact US natural gas market

LNG power play

04 January 2010 00:00  [Source: ICB]

Rex Features

Liquefied natural gas (LNG) will start to have an impact on US natural gas pricing in 2010, as global production capacity proliferates

IN THE early part of this decade, there was a boom in the building of terminals and bubble-topped barges to carry liquefied natural gas, known as LNG, around the globe. The ultimate target at the time was put squarely on the gas-deficient US market.

The lead time on LNG projects in gas-rich places such as Qatar, the world's largest LNG exporter, Nigeria, Russia, Algeria, Yemen and Norway had 2009 highlighted on industry calendars as the coming-out party for the super-cooled version of natural gas as a global force.

However, over the past few years, the US natural gas supply picture has radically reversed as new drilling technology in tight-rock shale formations has unleashed a flood of supply, leading to this year's unprecedented storage builds.

Staring down the historic overhang in US natural gas, LNG players shelved new capacity and sped up maintenance at existing production trains, slowing LNG traffic globally.

But industry observers are predicting that that pent-up production of LNG will start to appear on the market in 2010 and shape natural gas pricing, an all-important power fuel and feedstock for the chemical industry, beginning this year.

"We had expected to see the LNG wave of 2009, but that didn't occur," says Teri Viswanath, director of energy research for Credit Suisse in Houston, Texas, US.

"These projects are a decade in the making. But there were concerns of bringing on a supply stream into a market with very little [in the way of] buyers."

In the first nine months of 2009, LNG imports to the US totaled 352.9bn cubic feet (bcf) (10bn m³), according to the latest data from the US Energy Information Administration (EIA).

That level was 23% higher than the period in 2008, but almost half the 691.5bcf that hit US shores in 2007.

US SHALE REVOLUTION
The US shale gas revolution has affected the entire energy sector, but might have shaped LNG decision-making as much as any market. Bob Ineson, head of the North American gas group at IHS Global Insight's Cambridge Energy Research Associates (CERA), says the emergence of unconventional gas in the US caused "the great hiatus" in the LNG market over last three or four years.

"Investment decisions to build new LNG [facilities] were scarce, as in zero," he says.

The slowdown in LNG ships to the US coincided with gas gushing out of the ground in the continental US.

"To put the order of magnitude around that, from the beginning of 2007 to the middle of 2008, US [natural gas] production increased by 7bcf/day," Ineson explains. "That's equivalent to 100% of UK production."

Then the world economy faltered, leading into 2009, wiping out massive amounts of industrial demand, while commodity prices cratered. The perfect storm of negative factors that suppressed LNG activity in 2009 will not stop cargoes sailing in 2010.

Viswanath says conservative forecasts put the 2010 increase in global LNG supply at 4bcf/day. Half of that will head for the US.

That outlook would double US LNG imports from 1bcf/day to 2bcf/day, according to Viswanath. The EIA's expectation is slightly lower, predicting an import total of 1.7bcf/day this year.

The government agency attributed its forecast to "the expected completion of additional global LNG supply projects, although the start-up dates for supply additions have historically been subject to delay."

US shale production is expected to drop this year, despite fewer rigs providing more prolific output.

But Viswanath sees LNG imports making up for the decline in output, keeping a lid on the upside of futures prices.

"For every molecule we lose in domestic production, we'll make up in imports," she says. "A stable outlook in supply, coupled with weaker demand will lead to a relatively low price environment."

She is pegging the average 2010 futures contract at around $4.60/MMBtu, down from the low-$5.00s/MMBtu in mid-December 2009. Ineson, though, sees prices moving slightly higher but not by more than a dollar.

"Our outlook assumes that production does back off and drilling activity does slow and that gets us to a slightly higher price environment than we had this year," he says. "We are not in the camp that says we are going to be at $6.00-7.00 by the end of 2010."

In the Atlantic Basin, LNG cargo prices are based on the futures prices on the New York Mercantile Exchange (NYMEX)'s Henry Hub pipeline point in the US and National Balancing Point (NBP) in the UK.

Simon Ellis, head of LNG markets for the global news and pricing agency ICIS Heren, says spot LNG cargoes are typically priced into the US and European markets at a slight premium to futures benchmarks.

The flexibility of LNG to extend gas supply beyond the insulated continental pipeline markets has some suggesting that LNG could be the catalyst for uniformity in Atlantic basin pricing.

"There is an awful lot of regasification capacity on both sides of the Atlantic, so there is quite a substantial potential to move gas back and forth and keep the markets across the Atlantic in some kind of rough convergence," says Ineson.

The futures-based pricing scenario is opposite to the long-term LNG contracts in Asia and in some parts of Europe that are linked directly to oil prices, because of its standing as a liquid global index amid no concrete regional gas benchmarks.

Crude-correlated contracts are dominating LNG cargoes priced from the recently announced projects in Australia and Papua New Guinea. Chinese state energy giant Sinopec has arisen as a buyer in the PNG project in Papua New Guinea, directed by US oil and gas major ExxonMobil.

ExxonMobil is also part of the massive Australian Gorgon LNG project that is being lead by US major Chevron, as well as partner the Anglo-Dutch major Shell.

Multidecade deals have already been announced with major Korean and Japanese LNG buyers such as Japan's Osaka Gas and Tokyo Gas, and South Korea's CS Caltex.

ExxonMobil has been lining up its resources to capitalize on the increased profile for natural gas in the coming decades, especially in its LNG moves.

The US major, also the world's largest publicly traded company, anticipates that global LNG demand will climb by roughly 4%/year in the next 20 years. By 2030, ExxonMobil has predicted that LNG will account for 15% of the world's natural gas demand.

But in the meantime, oversupply plagues the global natural gas markets. That has the US in the position of port of last resort with its LNG infrastructure far outweighing the capacity of any other destination.

US BUILDING LNG TERMINALS
There are currently nine US terminals in operation on the US Gulf Coast and Eastern seaboard, according to the Federal Energy Regulatory Commission (FERC).

Four terminals, including the 2bcf/day Qatar Petroleum, ExxonMobil and ConocoPhillips-owned Golden Pass terminal in Sabine, Texas, US, are under construction and have been rumored to open in 2010.

In addition, there are 14 other US LNG projects green-lighted by FERC that have not started construction and another eight proposed pending FERC approval.

The proliferation of LNG construction flies in the face of the hulking stockpiles in the US, but follows industry sentiment that the global LNG market will start to rebalance in the next few years with a need for new liquefaction terminals.

"It is probably a mistake to say there is a demand for LNG in the US," Ineson said. "But there is a market for it."

Ryan Hickman is a markets reporter for ICIS pricing, based in Houston, Texas, US. Ryan's chemical portfolio includes maleic anhydride (MA), phthalic anhydride, paraxylene (PX) and orthoxylene (OX). He also keeps a close eye on the US auto market.

By: Ryan Hickman
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