WORLD LNG TRADE HEADS TOWARD EXPANDED VOLUMES

Jan. 1, 1990
World trade in liquefied natural gas is moving into a period of brisk expansion. Suppliers in Asia, North Africa, and the Middle East are preparing to step up deliveries to existing customers and develop new market outlets, while new gas exporters will emerge during the next decade. In world terms, the LNG market is still very small. Only 3% of world gas production is liquefied for exports that are running at about 42.8 million metric tons/year.
Roger Vielvoye
International Editor

World trade in liquefied natural gas is moving into a period of brisk expansion.

Suppliers in Asia, North Africa, and the Middle East are preparing to step up deliveries to existing customers and develop new market outlets, while new gas exporters will emerge during the next decade.

In world terms, the LNG market is still very small. Only 3% of world gas production is liquefied for exports that are running at about 42.8 million metric tons/year.

Figures compiled in summer 1989 by Institute of Gas Technology, Chicago, show that world LNG trade has grown from two projects with deliveries of 55 bcf/year in 1964 to 17 projects totaling 2.6 tcf (73.4 billion cu m) (see table, p. 21). IGT compiled its figures before start-up of the latest international LNG venture, Australia's Northwest Shelf Project.

From this low base there is plenty of scope for expansion in the 1990s and the first decades of the next century.

Royal Dutch/Shell Group, the largest gas supplier outside the Soviet Union, forecasts that by 1995 world LNG demand will have risen to 6279 million tons/year.

LNG trade could reach 74103 million tons/year by the end of the century and 88130 million tons/year by 2010, the company predicts.

Gas producers are generally taking an optimistic view of future demand for gas in light of increasing public concern about the environment in general and postulated global warming from the greenhouse effect in particular.

They are hoping to cash in on the fact that even though burning natural gas produces carbon dioxide, the volumes released are substantially less than those from combustion of coal and fuel oil.

The gas industry could also benefit from an expected downturn in the nuclear power industry because of public disquiet. The benefits for LNG could be pronounced in Japan, the world's largest single LNG market, where any increase in demand for gas must be met by increased LNG imports.

PRICE PRESSURE

Improved LNG prospects are also linked to a more realistic, market oriented attitude toward prices among producers.

Indonesia, the world's largest LNG exporter, caved in to buyer pressure and ended the complex system of official prices that made its exports to Japan about 20% more expensive than those from Abu Dhabi.

Algeria is also taking a more realistic attitude to gas pricing. Sonatrach, the Algerian state oil company, introduced the concept of linking LNG prices to crude prices.

As part of the settlement of a long running dispute with Gaz de France, Sonatrach agreed that the link between LNG and a basket of official crude prices should be replaced by tying LNG to market prices for crude.

Traditionally, LNG has been the only viable way of using gas found in remote sites where a pipeline link to customers is not economically viable.

However, an alternative to LNG is emerging. During 1989, Shell gave the go-ahead for the first plant to produce middle distillates directly from natural gas. The unit in Malaysia will be able to produce about 12,000 b/d of product.

The company is evaluating other locations for the process, and a substantially larger plant could be built in Algeria. Other companies are researching similar direct conversion systems that could benefit from an expected increase in crude oil prices during the mid-1990s.

PACIFIC RIM

The Pacific Rim, dominated by Japan, is the largest single market for LNG. Of the 42.8 million tons/year of worldwide production, about 33 million tons/year is shipped to Pacific customers, of which Japan takes the biggest share, 30 million tons/ year.

In fact, the current upturn in the fortunes of the LNG industry was sparked in Japan, where established buyers went into the market seeking added supplies several years earlier than producers had expected.

Royal Dutch/Shell estimates that demand among the Pacific Rim countries - Japan, South Korea, and Taiwan - will increase to 55-75 million tons/year by 2010.

Long term contracts guarantee only 38 million tons/ year.

The prospect of an imminent rise in LNG demand resulted in an intensive new marketing effort by existing Pacific Rim suppliers. Indonesia, Abu Dhabi, and Malaysia are negotiating to expand deliveries under existing contracts to Japan and hoping for a similar increase in Korea.

The marketing effort parallels plans for new liquefaction capacity and construction of LNG tankers. Total-CFP has a sixth train on the drawing board for Bontang liquefaction plant.

Abu Dhabi plans an additional 2 million ton/year train at its Das Island plant, which would almost double its export capacity to Japan. Malaysia LNG has plans for a 4 million ton/year extension to the present 5.62 million tons/ year capacity at Bintulu.

Australia became an LNG exporter during 1989 with start-up of the Northwest Shelf LNG project, which will supply 5.84 million tons/year to a combine of eight Japanese companies by 1994.

The Woodside Petroleum Ltd. group's Northwest Shelf operation delivered its first cargo of LNG last August.

Making the first delivery was Northwest Sanderling, the first of seven LNG tankers on order by Australian LNG Ship Operating Co., a joint venture of BHP Petroleum (North West Shelf) Pty. Ltd. and Shell Development (Australia) Pty. Ltd., which will operate the Australian flag vessels. BHP and Shell are among Woodside's partners in the LNG export project.

Northwest Shelf LNG price is indexed to an average of the fob price of most other LNG shipments to Japan, with a price redeterminer effective generally every quarter. Additions to liquefaction capacity at the plant are expected to track growth in Japanese demand for LNG under take or pay contracts with the end users.

Equal partners with Woodside, BHP, and Shell in the LNG phase of the Northwest Shelf Project are BP Developments Australia Ltd., Chevron Asiatic Ltd., and Japan Australia LNG (MIMI) Pty. Ltd., a joint venture of Japan's Mitsubishi Corp. and Mitsui & Co. Ltd.

Main contractor for the LNG plant was KJK, a combine of M.W. Kellogg Co., JGC Corp., and Kaiser Engineers Australia Pty. Ltd.

COMPETING SUPPLIERS

Established producers face stiff competition from potential newcomers in the scramble to supply the added volumes required in the Pacific area.

Indonesia, Malaysia, Abu Dhabi, and now Australia will take into account their experience and existing infrastructure during price and volume negotiations.

The competition will come from projects in Alaska, Papua New Guinea, and Australia, where a Chevron led group recently entered the field with its Gorgon project based on offshore gas that would make more than 5 million tons/year of LNG available.

Abu Dhabi has demonstrated that long distance shipments of LNG from the Middle East can be viable in the Pacific market if a source of very cheap gas is available.

Qatar is involved in first stage development of North field, the world's largest single offshore field, with reserves of at least 150 tcf. Second stage development plans call for gas supply for a 4 million ton/year, two train liquefaction plant. Qatargas, a joint venture of Qatar General Petroleum Corp., Total-CFP, British Petroleum Co. plc, Mitsui & Co., and Marubeni Corp., is seeking outlets for the LNG in Japan.

During the 1990s a number of the long term contracts are due to expire. Brunei is seeking to extend its contract with Japanese companies by 20 years, and other major suppliers- Indonesia, Abu Dhabi, and Malaysia-will certainly do the same.

While Japan dominates the Pacific market, Taiwan and Korea also have the potential for expansion. Korea began importing LNG in 1986 and will be looking for further supplies in the longer term, although at present the timing is unclear.

Taiwan will take its first cargo from Bontang later this year.

The 20 year contract between Pertamina and Chinese Petroleum Corp. will build to a plateau of 1.5 million tons/year. The contract has an option to expand volumes to 4.5 million tons/year.

Meanwhile, the U.S. Department of Energy recently approved a proposal by Yukon Pacific Corp., Anchorage, to export Alaskan North Slope gas as LNG to Japan, South Korea, and Taiwan (OGJ, Dec. 25, 1989, p. 34).

JAPANESE OUTLOOK

Japan's attitude toward gas in its national energy mix is crucial to the future of LNG trade.

At the LNG-9 conference in Nice, France, last year Masafumi Ohnishi, president of Osaka Gas Co. Ltd. and chairman of the Japan Gas Association, outlined immediate and longer term prospects.

He said LNG is approaching a second frontier that will dramatically increase global trade. But to ensure future expansion of the LNG market a number of issues need to be taken into account, including high costs of establishing infrastructure and supply conditions.

For Japan the greatest challenge facing the industry is the lack of a nationwide transmission grid. Unlike Europe and North America, where pipeline networks are established across state and national borders, pipeline networks in Japan are limited to service areas of major gas companies.

Imported LNG, the only major source of gas for Japan, is used in areas around import terminals.

DISTRIBUTION EXPANSION

Ohnishi said Japan needs to establish a long distance pipeline network linking Tokyo, Nagoya, and Osaka. It should be distribution oriented rather than a western-style transmission grid connecting production and consumption centers.

This sort of network would allow more Japanese utilities to acquire LNG and develop new areas of demand such as industrial applications and cogeneration. Most Japanese LNG imports go into conventional power generation.

Japanese companies have formed a study group, bringing together government institutions and energy businesses, to examine the possibility of establishing the transmission network.

Efforts are under way to expand the use of LNG in Japan by moving it around the country in tank trucks.

Smaller gas utilities, assisted by the national government and major utilities, are studying direct imports of LNG using small tankers.

Ohnishi said making LNG a key factor in the Japanese energy market will require supply contracts to be restructured to allow a long range perspective. Current contracts lack flexibility to cope with demand fluctuation and are not responsive to changes in the prices of other forms of energy.

"Market competitiveness should be the principal determiner of price," Ohnishi said.

By effectively using existing projects and reducing construction costs for new projects through research and development, LNG could be made competitive with other forms of energy at the burner tip, he said.

ALGERIAN POLICY

Algeria, the pioneer of the LNG export industry, is taking a more dynamic attitude to gas exports. It settled lengthy disputes with its European customers and eventually resumed LNG exports to the U.S.

The more flexible attitude to prices led to the first spot LNG sales to Japan and resumption of short term LNG deliveries to the U.K., where imported gas is used for peak shaving.

Algeria signed two small export contracts. One with Botas, the Turkish state oil and gas company, could lead to deliveries of as much as 1.52 million tons/year starting in 1990-91. Deliveries under a contract with Greece for 1.9 million tons/year are to start in 1991.

These small deals, plus short term and spot contracts, leave Algeria with a large surplus of liquefaction capacity.

Sonatrach wants to revamp the old capacity and possibly build a new unit in preparation for more contracts with Europe and the U.S.

One of the more significant moves in this strategy was Sonatrach's cooperation agreement, centering mainly on the gas industry, with Royal Dutch/Shell Group.

The agreement was signed after Royal Dutch/Shell, in partnership with Columbia Gas System Inc., started detailed negotiation of a 20 year contract for purchase of 232 MMcfd of gas for export as LNG to the U.S.

More large scale exports to the U.S. may be negotiated on a short term basis. Royal Dutch/Shell has provisionally assigned two LNG tankers to handle the Algeria-U.S. export chain.

Algeria also wants to involve Royal Dutch/Shell in a joint venture to build and operate a 193-241 MMcfd liquefaction plant at Arzew alongside two existing Sonatrach - operated export plants.

The cooperation agreement also raised the possibility that Royal Dutch/Shell would use its process to produce middle distillates from natural gas in a 48,000 b/d plant in Algeria.

The project, four times the size of the first plant approved by Royal Dutch/Shell for construction in Malaysia, would cost $1.5-2 billion.

NIGERIAN PROGRESS

Algeria's biggest competitor in Europe and the U.S. will be Nigeria. The Nigerian National Petroleum Co.-Shell-Elf-Agip combine has started site work for a 4 million ton/ year LNG export project.

It will award the main construction contract in 1991, and the chain should be operational in early 1995.

Nigeria has sweetened the project by offering the participants a 10 year tax holiday. Customers are being signed up in Europe and the U.S., and Nigeria hopes to more than double the unit's size in the long term.

The partners have chosen Technip-Snamprogetti Tealarc liquefaction technology and have hired Technip and M.W. Kellogg Co. to draft technical specifications for the project.

The high cost of establishing and operating an LNG chain has limited market opportunities for exporting gas through this type of operation.

Royal Dutch/Shell, technical adviser on the Nigerian project, says the project will achieve a major cost breakthrough by using two large gas turbines, together with large axial compressors, instead of the conventional system of four smaller conventional compressors.

OTHER COST CUTTING

Australia's Northwest Shelf Project saved an estimated $400 million by replacing steam turbines and conventional water coolers in the liquefaction trains with gas turbines and banks of air coolers.

The Nigerian project also will benefit from Royal Dutch/ Shell's acquisition of laid up LNG tankers around the world in anticipation of an upturn in the LNG market.

Of the seven tankers Shell acquired, five have been designated for use on the Nigerian LNG project due to start in 1995, and two were earmarked for a new LNG chain between Algeria and the U.S.

The acquisition hit a snag when Cabot Corp. objected to the sale of three of the LNG vessels by the U.S. government's Maritime Administration (Marad) to a non-U.S. owner, Argent Maritime Cos., which agreed to charter them to Royal Dutch/Shell.

A federal judge blocked the sale until Cabot's action against Marad is completed later this month.

NORWAY'S TARGET: U.S.

Norway still harbors hopes of entering the LNG export business in competition with Algeria and Nigeria but without the advantage of access to cheap transportation.

Originally, state owned Den norkse stats oljeselskap AS hoped to use arctic offshore gas from the Tromsoflaket to penetrate the U.S. East Coast market.

Development of that gas is on the back burner, and attention has switched to a smaller, more economically viable scheme using surplus gas from fields in the North Sea.

Statoil, operating on behalf of the Norwegian gas sales group, signed a letter of intent with Enron Corp. designed to have Norwegian gas on sale in the U.S. beginning in 1993.

Tentative start-up has been postponed to late 1994. Negotiations with Enron on prices and volumes are continuing.

Statoil says the project's elements need to be settled this year to enable construction of a liquefaction plant at Karsto, north of Stavanger, and two LNG tankers to be ready for 1994 deliveries.

The sales group has been encouraged by interest shown in the chain by two of the most experienced LNG operators, Royal Dutch/Shell and Total, which may both invest in the project.

Royal Dutch/Shell and Total also turned up as potential investors and partners in proposals by Petroleos de Venezuela to build a 5 million ton/ year plant in eastern Venezuela aimed at the U.S. market. The project, to cost $2.5 billion, aims for a 1995 start-up.

Algeria, Nigeria, Norway, and Venezuela have one thing in common. All are confident that the U.S. market will have room for more LNG imports beginning in 1994-95 and companies ready with defined projects capable of meeting that demand will gain a foothold in a long term market.

U.S. LNG IMPORTS

The recent revival of LNG imports into the U.S. points to LNG's growing significance as a component of U.S. gas supplies.

Energy Information Administration figures show that LNG imports into the U.S. peaked in 1979 at about 269 bcf, then plummeted to 1.9 bcf in 1986-a single spot market cargo of Indonesian LNG Distrigas received at Everett, Mass.-and none in 1987.

In 1988, U.S. imports of LNG climbed to 17.5 bcf. Just through August 1989, U.S. LNG imports had jumped to 62.3 bcf, already totaling more than any full year since 1983, all to the Distrigas terminal at Everett.

The Everett terminal has been the only U.S. facility receiving LNG since 1985, when Distrigas took 25.8 bcf from Sonatrach. That was also the last year any LNG shipments reached the U.S. under a long term contract until Sonatrach resumed shipments to Distrigas in 1988.

Distrigas, a unit of Cabot Corp., filed for protection under federal bankruptcy laws in September 1985 in the wake of Federal Energy Regulatory Commission Order 380, which killed variable cost minimum billing.

Sonatrach disputed the Distrigas contract suspension, which they later resolved in February 1988. Their subsequent amended agreement covers 8-17 cargoes/year of LNG for a total of 48 cargoes during 3-5 years.

A second 2.8 bcf tanker-load of LNG was scheduled to arrive last week at the Trunkline LNG Co. regasification terminal in Lake Charles, La., under a resumption of deliveries of Algerian LNG to the Panhandle Eastern Corp. subsidiary. The first cargo under the program Trunkline developed with Sonatrach's Sonatrading unit arrived in mid-December (OGJ, Dec. 18, 1989, Newsletter).

Two LNG tankers - Sonatrach's Mostefa Ben Boulaid and Panhandle's Louisiana - will continue operating through the winter to support sales levels of as much as 180 MMcfd. Current contracts are in place for 120 MMcfd, and contracts are being negotiated with other prospective buyers.

The program is expected to build to a three ship level in the 1990-91 heating season as Pan National Gas Sales Inc., another Panhandle unit, acquires more contracts.

Trunkline began importing Algerian LNG at Lake Charles in September 1982 and halted the program in December 1983 because of the high cost of LNG vs. domestic gas prices.

Suspension of the contract with Sonatrach sparked a dispute that was resolved in 1986 with Sonatrach receiving $200 million and acquiring an 11.7% equity stake in Panhandle.

Panhandle and Sonatrach struck a new deal in 1987 covering supply of 3 tcf/year of Algerian LNG to Trunkline during 20 years offered at competitive prices and without take or pay or ship or pay obligations for Panhandle.

Southern Natural Gas Co. is studying the possible resumption of imports into its Elba Island, Ga., terminal, idle since April 1980. Although there are no firm plans, Sonat has established a marketing unit, Sonat Marketing Co., to develop supplemental gas supplies, including LNG.

In addition, Columbia's joint venture with Royal Dutch/Shell would revive deliveries of LNG to Cove Point, Md., idle since December 1980.

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