CERAWeek: Global LNG supply on rise; project costs falling

Warren R. True
Chief Technology Editor-LNG/Gas Processing

HOUSTON, Feb. 12 -- Global LNG supply by 2013 will jump, as nearly 100 million tonnes/year of liquefaction projects currently near start-up or under construction come on line. In a global market that for the first time faces an abundance of LNG supply, vessels, and regasification, prices will move toward convergence.

For new projects, debt financing will be available, even as the world's financial markets struggle to recover from collapse. Project developers, however, may have to accept more onerous terms and offer lower risk to participating banks. At the same time, projects costs, which in late 2008 began to move lower, will continue to back away from the unsustainable levels of last year.

Natural gas demand, currently contracting in the global recession, will inevitably recover, providing larger and newer markets for the widened global gas trade.

These are some of the views offered by speakers Feb. 11, CERAWeek 2009's Gas Day, in Houston.

LNG supply, pricing
Daniel Muthmann, vice-president for global LNG supply at E.On Ruhrgas AG, noted the "tidal wave" of LNG supply on the horizon and said that, as a result, the commodity is moving "toward [global] price convergence" in the long term. At the same time, LNG supply is becoming more flexible, able to move more readily among the world's three regional markets.

Ahmed al-Khulaifi, chief operating office for Qatar Liquefied Gas Co. Ltd., shared this view, saying before yearend QatarGas alone will bring online as much as 24 million tpy of additional capacity. He said globally there was as much as 84 million tpy under construction over the next few years.

"All available LNG will be produced and delivered," he said; "the only question is to which market." The current downturn that is depressing demand will last "for only a short time; history tells us gas demand will turn around."

Supporting this viewpoint in the same session, Pat Blough, Chevron Global Gas vice-president for gas commercialization, stated "long-term fundamentals support investment."

Blough noted Chevron is perhaps unique among international operating companies in that it will make financial investment decisions on several large and expensive LNG liquefaction projects in the next 5 years. "LNG investments," he said, "require a very long view."

CERA Director John Harris cited the figure of 100 million tpy due on stream by 2013 and added that "as much as 300 million tonnes of proposed LNG projects are in frontend engineering and design, a step before final investment decisions. And, he added, "we are seeing a major drop in raw material prices" and a consequent reduction in project costs.

Harris sees LNG viable, especially in Atlantic Basin markets, even with natural gas prices bumping near $4.80/MMbtu. "Below a certain level, LNG will displace a great amount of coal-fired [electric power] generation," he said.

Shale influence
The 800-lb gorilla in the room for CERA's LNG discussions, however, was US shale gas.

Chesapeake Energy's Chairman and CEO Aubrey McClendon conveyed the scale of the shale gas threat to the economics of LNG in North America.

For starters, he repeated Chesapeake's estimates for possible reserves for the four major US shale plays: Barnet, the oldest: 75 tcf; Fayetteville: also 75 tcf; Haynesville: 500-700 tcf; and Marcellus: 1.5 quadrillion cu ft.

He noted that shale gas, which burst onto the US natural gas scene only recently, now comprises as much as 40% of supply and is "largely responsible for the current oversupply" of natural gas.

That overhang, he said, is being quickly reduced as gas drilling rigs leave those basins. In 2008, he said, "it took 1,500 rigs to replace 25% of depleted reserves and to add about 7%. By yearend 2009, natural gas [reserve] growth in the US will decline by about 10%."

He said, "We will see a two-thirds reduction in [the drilling rig] fleet," spurred not only by reduced demand but also by "reduced access to capital."

For McClendon, the "single reality that will guide future planning is the abundance of natural gas," whereas it has been its scarcity that has dominated past plans.

Contact Warren R. True at warrent@ogjonline.com.

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