LNG spending will reach $39 billion by 2007

Jan. 12, 2004
The market for new LNG facilities will expand rapidly through 2007 and see total capital expenditures (capex) of more than $39 billion, according to a recent study by Douglas-Westwood, Canterbury, UK.

The market for new LNG facilities will expand rapidly through 2007 and see total capital expenditures (capex) of more than $39 billion, according to a recent study by Douglas-Westwood, Canterbury, UK.

Over the past 5 years, the LNG industry has enjoyed strong demand growth in conjunction with several high-profile projects that have resulted in a shift in focus away from the traditional Asian markets to a potentially vast market arising in the Atlantic Basin.

As gas production passes its peak in North America and Western Europe, gas import demands are rising. LNG is increasingly a method of choice in satisfying growing gas demand in these regions, and following the success of plants recently established in Nigeria and Trinidad & Tobago, a wave of new projects has emerged that demonstrate a potential for significant market growth over the next 5 years.

Development of LNG

Gas-liquefaction technology has its roots in the 19th Century, pioneered by individuals such as Michael Faraday and Karl Von Linde. The worldwide LNG trade, however, began in earnest in the 1960s when, after several test shipments across the Atlantic to prove the concept, the first commercial LNG trade began between Algeria and the UK.

Although the UK may have led the way in adopting LNG technology, the region in which the LNG business really took off was Asia. Japan, which had no gas production of its own, was very quick to adopt the new technology and was soon followed by such countries as South Korea and Taiwan.

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Meanwhile in Western Europe, the technology was also adopted to a much lesser extent to import gas from Africa. Fig. 1 shows the historic development of LNG liquefaction capacity.

The last 5 years have seen a 31% increase in global LNG output capacity, to 135 million tonnes/year (tpy) in 2002 to 103 million tpy 1998. As of late last year, 17 LNG export terminals were operating, running a total of 70 liquefaction trains. Several factors are driving this growth on both the demand and the supply side, including:

A Continuing growth in world gas consumption. The International Energy Agency (IEA) has forecast gas consumption to grow at 2.8%/year to 2025, compared with 1.8%/year for oil and 1.5%/year for coal. Gas will account for 28% of global energy use by 2025.

Strong import demand. Many of the major gas-consuming nations of the world either have very little gas production of their own (e.g., Japan and South Korea) or have developed and drawn down their own reserves to the point where they are now past peak production and will have to rely increasingly on imported gas (e.g., US and UK).

Monetization of stranded gas reserves. Significant natural gas reserves are a long distance from end markets or have no nearby pipeline infrastructure. Without access to markets, the produced gas is either flared or reinjected. LNG offers an access mechanism, a method of monetizing these gas reserves and reducing the environmental impact associated with gas flaring.

Technological advances. Advances in liquefaction technology have led to a fall in the level of capital expenditure required to construct new plants. LNG carrier prices have also fallen dramatically. This reduced cost of LNG developments opens up opportunities to employ LNG technology where previously it might have been considered economically unviable.

Carriers

There are currently more than 140 LNG tankers in operation. Only a few shipyards are capable of building LNG tankers because of the complexity of the vessels and the high levels of quality control required.

They are by far the most expensive type of cargo vessel, costing around three times the price of an oil tanker of similar tonnage.

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Fig. 2 shows the development of the LNG carrier fleet.

In the past, it has been normal practice for vessels to be dedicated to particular projects on long-term contracts, but spot trading is emerging as an increasingly significant element and now accounts for up to 8% of total LNG trade.

There are three main types of vessel design that have evolved and are currently in use: the Kvaerner-Moss spherical system, the Gaz Transport Technigaz (GTT) membrane, and IHI's Structural Prismatic design.

The Kvaerner-Moss system is the most widely adopted, used in about 50% of the current vessels in service. The membrane system accounts for slightly more than 40% of containment systems in use.

Plans for 2003-07

A total of 37 prospective new LNG liquefaction trains have been announced for start-up during 2003-07, offering a total of 128 million tpy of additional output. Some of these developments are expansions of existing plants, while others are entirely new ones.

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Fig. 3 shows a breakdown of these prospects by development type.

In terms of new import terminals, Douglas-Westwood has identified 41 prospects that have announced start-up dates out to 2007. Together, these offer more than 181 million tpy of new import capacity.

It should be stressed that these are development prospects, i.e., the announced plans of the players in the LNG business, and they should not be confused with our forecasts.

Announced start-up dates given by operators are often optimistic, and it will certainly be the case that some of these projects are delayed or even cancelled.

Capex trends, forecasts

Fig. 4 shows the levels of capital expenditure likely to be required to complete new LNG facilities over 2003-07.

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The dates refer to the year of start-up for the terminal. In practice, however, the contractual payments relating to the projects identified will often be made in installments and most likely will be spread over several years, not confined to a single year.

For the sake of clarity and transparency, we do not attempt to reflect this situation in our forecasts. Instead, we focus on attempting to indicate the value of the new LNG facilities that come into use each year.

The overall trend is one of strong market growth, and global capex on LNG developments over 2003-07 will total slightly more than $39 billion, nearly double that spent over the previous 5-year period.

LNG export facilities

Over 1998-2002, the data indicate that nearly 34 million tpy of liquefaction capacity was brought on stream by new LNG export facilities and that the capex associated with constructing these facilities (excluding upstream costs but including all terminal costs: plant, storage, marine facilities, etc.) totaled some $10.7 billion.

For 2003-07 period, new liquefaction plants coming on stream will have a total output capacity more than twice the amount brought on stream over the previous 5 years, and global LNG export capacity will reach more than 200 million tpy by 2007.

The associated capex, forecast at slightly less than $20.5 billion, will not quite reach double the amount spent over 1998-2002. This reflects the falling cost of constructing liquefaction facilities.

LNG carriers

Shipyards in Asia, the region having built nearly all of the LNG carriers that entered service 1998-2002, dominate activity in the newbuild LNG carrier market.

Over the next 5 years, a total of 69 new carriers will be constructed, 61 of these in Asia, the remainder in Western Europe.

Capex associated with these new vessels will be more than $11 billion, an increase in spending of 62%.

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Analysis of our data (Fig. 5) indicates that the average LNG vessel price has fallen to as low as $162 million in 2002 from around $250 million in 1998. The fall in price over this period was largely due to intense competition among shipyards in the Far East, Korean shipyards in particular.

While the market will remain competitive, we anticipate a slight increase in average vessel costs out to 2007, peaking in 2006 at $172 million.

LNG import terminals

A significant growth in spending is also forecast for import terminals. Over the 1998-2002 period an estimated £2.6 billion was spent on new LNG import and regasification facilities.

Asia accounted for 70% of this spending, with 22 million tpy of new capacity becoming available in this region.

Over the forecast period we see Asia continuing to be the most significant region in terms of capex but also expect Western Europe to emerge as an important new area for import terminal projects.

The two regions are each forecast to bring on stream slightly more than 28 million tpy of additional capacity, with global additions to import capacity over the period expected to total nearly 88 million tpy.

We anticipate that capex spending of $7.5 billion will be required to bring this additional capacity online.

The LNG industry is renowned for its diligent standards and has an excellent safety record, albeit not entirely without incident. Public perception about the risks of LNG, however, often appears to be misconceived, and as a result local opposition to new facilities is common and perhaps now more vigorous, given the continuing worries over terrorism. This seems to be a particular problem in North America and Western Europe.

Unfounded local opposition to proposed terminals many not always affect the outcome of planning applications, but it can certainly delay approval and also put off developers and project investors.

Examples of project delays include the Cove Point, Md., terminal, which was finally reopened last year but reportedly took more than 21 months to gain approval from the US Federal Energy Regulatory Commission after concerns were raised over the proximity of the terminal to a nuclear power plant.

In Mexico, plans to locate an import terminal in Rosarito, south of Tijuana, Baja California, adjacent to a power plant operated by Petróleos Mexicanos (Pemex) were strongly opposed and are now looking uncertain amid suggestions that the necessary land-use permit may be denied.

In Italy, the BG Group has obtained approval for its terminal at Brindisi, but this terminal also faced significant local opposition.

The impact of these difficulties may well be that more operators choose to locate import facilities offshore. Several concepts for offshore terminals exist at the moment, many of which are located in the areas just identified. These include ChevronTexaco's Port Pelican development in the US Gulf of Mexico, BHP Billiton's plan to locate a floating terminal 22 miles off the Ventura County, Calif., coast, and a plan proposed by ExxonMobil Corp. to locate an offshore terminal near Rovigo, Italy.

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The author
Steve Robertson ([email protected]) is a market analyst for Douglas-Westwood Ltd., Canterbury, UK, and is lead author of the company's World LNG & GTL Report 2003-2007. Previously he had undertaken research on the firm's projects for investment banks and contributed market analysis to several DWL studies including the Subsea Processing Gamechanger Report, the World Offshore Drilling Report, and the World Floating Production Report. Robertson holds a BSc in computing and economics and previously worked in the defense and financial sectors. He is a member of the Institute of Petroleum, which recently joined with the Institute of Energy to form the UK Energy Institute, and the Society for Underwater Technology.