WORLD LNG TRADE TO SOAR TO 2010 IF PRICES, FUNDS LINE UP

World trade in liquefied natural gas could double or triple in the next 20 years.

Estimates are that industry may have to spend as much as $40-66 billion in new facilities and expanded fleets to meet projected LNG demand by 2010.

Fueled by soaring demand in the Asia-Pacific region, the surge in LNG trade may overwhelm current projections of the industry's ability to accommodate that growth. Some industry analysts see shortfalls on the horizon in terms of LNG plant capacity and LNG tanker fleets.

Underlying those possible shortfalls are current and projected prices for LNG, which are tied to a consensus view that oil prices will remain relatively low for the foreseeable future. Developers are unlikely to press costly grassroots LNG projects without the prospect of substantial price increases. And prospective LNG customers balk at signing contracts for speculative supplies at prices needed to justify those investments while energy prices are expected to remain relatively flat.

The result likely will be a shakeout of the many project proposals emerging in recent years. That could leave LNG far short of fulfilling its market potential absent some preferential treatment by governments on both sides of the supply/demand equation.

DOMINANT PLAYERS

The Asia-Pacific region's LNG producers and consumers will continue to dominate world trade in the fuel.

But new LNG export players are emerging, notably in the Middle East, Latin America, and Africa. On the consuming side, questions remain whether the U.S. will live up to its trumpeted potential and whether Europe will be a major new growth market.

There will be no lack of other prospective LNG supply sources beyond expansion of traditional suppliers, notably Algeria, Abu Dhabi, Alaska's Cook Inlet, Brunei, Libya, Indonesia, Malaysia, and Australia (OGJ, Jan. 1, 1990, p. 19; Nov. 16, 1992, p. 26). Among prospective sources are Qatar, Oman, Nigeria, Iran, Russia's Sakhalin Island, Indonesia's Natuna Island, Australia's Withnell Bay, Alaska's North Slope, Norway, Papua New Guinea, Argentina, Trinidad and Tobago, Venezuela, and Yemen.

Whether the industry can absorb much of the new proposed LNG capacity is anyone's guess. A key is how well the LNG industry can bring down costs of construction and transportation, especially in light of expected low oil prices and competition from ambitious new transnational pipelines.

The clamor grows worldwide for new carbon and other energy taxes as well as a host of new regulations to curb oil and coal use. Such steps ostensibly are intended to combat global warming and other claimed environmental and energy security ills the so-called dirty fossil fuels are said to pose. The new measures will amount to an indirect subsidy for all natural gas supplies by discouraging investment in competing fuels, especially in electrical power generation. Thus, with consuming nations increasing the cost of oil and coal through new regulations and taxes, LNG will gain a bigger advantage in world energy trade.

Accordingly, the environmental push that is driving much of the current projected demand for LNG may achieve what expectations of ever increasing oil prices in the late 1970s and early 1980s did not achieve: buoyant long term economics of new world scale LNG projects.

Some analysts contend increasing politicization of energy markets will be the engine that drives LNG growth in the next 2 decades. Governments seeking to reduce reliance on oil imported from the Middle East and/or to accommodate environmentalists' agendas will be the key to viability of future projects by placing priority on LNG as a fuel of preference.

DEMAND OUTLOOK

Analysts agree on a growth trend for LNG. They just differ on degree.

Shell International Gas Ltd.'s (SIG) most conservative outlook calls for global natural gas demand of 2.5 trillion cu m in 2010. SIG Managing Director J.R. Williams at Gastech '93 in Paris predicted as much as $800 billion to $1.1 trillion of combined capital spending by the natural gas industry will be needed to accommodate this increased demand.

SIG expects world demand for LNG to reach 140-200 million tons/year by 2010, with the biggest increase in demand occurring in nations that currently import LNG. However, Williams thinks that only about one third of the roughly 30 LNG projects proposed or under speculation to meet that expected demand growth will come to fruition because of fierce competition among project promoters.

To date, industry has invested almost $50 billion in current dollars in the world LNG infrastructure. Even at that, daily world trade in LNG represents only about 1/10th of the peak daily consumption of natural as in the U.S.

France's Cedigaz sees total international gas trade jumping to 550 billion cu m in 2010 from more than 400 billion cu m in 2000 and 320 billion cu m in 1991. That's out of a total world consumption projected to climb to as much as 3.13.5 trillion cu m in 2010 from 2.6-2.7 trillion cu m in 2000 and 2.1 trillion cu m in 1991.

LNG trade, while accounting for only 24-30% of all world gas trade and only about 3-4% of world marketed gas production, nevertheless will continue to be the fastest growing segment of the natural gas market. LNG demand has grown an average 20%/ year since 1970.

Cedigaz estimates world LNG trade will almost triple in 20 years, jumping to 184-212 billion cu m in 2010 from 116-130 billion cu m in 2000 and 77 billion cu m in 1991.

Drewry Shipping Consultants Ltd., London, predicts world LNG trade will climb to 170 billion cu m by 2010, a 136% jump from 1990's level, compared with a 66% increase in pipeline gas trade to 410 billion cu m in the same period.

ASIA-PACIFIC DEMAND

The Pacific Rim accounts for almost two thirds of the LNG transported and three fourths of the LNG delivered in the world.

World LNG trade rose 3.5% in 1992 to 59.5 million metric tons (79.2 billion cu m gasified), of which the Far East accounted for 73.4%, compared with 73.6% in 1991, according to the Groupe International des Importateurs de Gas Natural Liquefie (Giignl). Indonesia accounted for 39% of all LNG exports in 1992, followed by Algeria 24%, Malaysia 12%, Brunei 9%, and Australia almost 8%, Giignl estimated (Table 1).

Japan accounted for almost 65% of all LNG imports in 1992, followed by France with 11.5%. Along with Japan, South Korea and Taiwan are expected to be the major new sources of LNG import growth, and with Japan imported almost 42 million tons of LNG in 1991. The three Asian countries could absorb LNG imports of as much as 63-66 million tons by 2000 and as much as 91-100 million tons by 2010, said Ichiro Yokose, managing director, fuels, Mitsubishi Corp. He made the prediction in a paper at an oil and gas conference in Dubai last January.

Yokose expects incremental demand to 2000 in the three nations to be covered by expansion of existing supply sources in Australia, Malaysia, and Abu Dhabi and by new projects in Qatar, Oman, and Sakhalin Island. The big question is what new supply sources will come to the fore to meet the roughly 50% further increase to 2010, Yokose said.

He contends the big driver in the LNG market, Japanese demand, will be affected by:

• The outlook for electrical power demand.

• Delays in construction of nuclear power plants.

• Increases in town gas use.

• The Japanese government's policy to diversify energy sources among coal, oil, gas, and alternate fuels such as methanol.

• The current gloomy overall economic condition, which is likely to continue in the years to come.

OTHER DEMAND

In North America, few analysts see prospects of the U.S. becoming a significant LNG importer in the short to medium term.

Gas Research Institute (GRI), Chicago, last year lowered its forecast of U.S. LNG imports in 2010 by 25% from 1.2 quadrillion BTU. The previous forecast suggested U.S. LNG terminal capacity will be strained after 2000 and a new terminal will be needed by 2010.

GRI also raised its estimates of U.S. gas production and U.S. imports of Canadian gas in 2010 but cut its estimates of gas acquisition prices, including a drop in projected LNG import prices to $3.74/MMBTU in 2010 from $4.87/MMBTU it projected in 1991.

Because the pipeline load factor in the U.S. is relatively low at about 70%, gas storage and peak shaving LNG facilities will become the solution to improving load factors for pipelines, contends A. Pastuhov, president, AVP Corp., South Dartmouth, Mass.

"Until load factors are significantly improved, I do not believe (U.S.) LNG imports will increase...during the next decade," Pastuhov said in a paper written for presentation at Gastech '93.

"It is possible, however, that in the event either the Venezuelan project gets a new life or that LNG out of Trinidad becomes a reality, some of the output from either projects or both may come into terminals such as Cove Point and/or Elba Island.

"I do not believe those imports will be for baseload supplies, but rather such imports will be more for winter supplies, especially if the pipeline load factor improves with time."

Cedigaz contends the conditions are ripe for LNG to boost its share of Europe's gas market. However, uncertainties persist over the cost of new LNG supplies relative to world market gas prices and how effectively gas will back out electrical power as a result of environmental initiatives.

Cedigaz expects European LNG imports to more than double by 2010, claiming 10-12% of Europe's gas market by then. While traditional suppliers Nigeria and Libya will account for significant increases in LNG supplies to Europe, other suppliers will be needed after 2000. Cedigaz looks to Nigeria to fill some of the gap by 2000, with longer term European LNG supplies coming from Qatar, Oman, Iran, and even Norway.

Other countries could join the list of LNG importers. Institute of Gas Technology's LNG Observer points to India's consideration of several pipeline and LNG import projects to accommodate an expected spurt in natural gas demand for environmental reasons-high sulfur coal provides more than half of India's primary commercial energy consumption.

One such project under consideration is being pushed by an Enron Corp. group to build a 2 million kw gas fired power plant on India's western coast that will be fueled by LNG. Enron recently signed a letter of intent to buy 2.5 million tons/year of LNG from Qatar's Ras Laffan LNG project beginning in 1997-98.

DEMAND PARAMETERS

Cedigaz contends demand for LNG will continue to swing in line with markets for No. 2 and No. 6 fuel oils.

"The overall heavy fuel oil market has shrunk considerably over the last 20 years, but in the recent period it has shown clear signs of resilience," Cedigas Pres. M. Valais and Gen. Sec. S. Cornot-Gandolphe said at Gastech. "It is becoming increasingly reasonable to discard a scenario that envisions the disappearance of this product, which is bound to continue to play a swing fuel role, covering accidental or chronic shortages of other fuels intended for industry and electricity generation."

Cedigaz noted increasingly stringent environmental standards for heavy fuel oils, notably sulfur content, could increase the costs of those fuel oils by 60-100%. An example of LNG's environmental premium is the electric power Generation sector. Compared with coal, natural gas could command a premium of $2-3/MMBTU at the power station gate for projects planned in Europe and Japan for 2000, Valais and Cornot-Gandolphe said.

Cedigaz also sees public opposition to nuclear power and hydropower's limited applications as helping natural gas enjoy the biggest growth in electric power market share.

LNG VS. PIPELINES

Perhaps the most critical factor in demand for LNG will be the relative status of gas pipelines. Cedigaz cites these factors in its claim that balancing of natural gas markets by pipeline is reaching its limits:

• The growing geographic distance between reserves and markets implies that the pipeline solution may be physically, technically or economically infeasible.

• Most major traditional pipeline exporting countries are reaching the limits of their export capacity. No major onshore exporter has effectively emerged on international markets since the late 1970s.

• Importing countries want to diversify supply sources, but since the range of pipeline exporters is narrow, reliance on more distant imports via LNG is ultimately necessary.

• The proliferation of remote gas markets, which have good potential but are far from the major gas pipeline networks in Asia and Europe, also tends to favor the establishment of LNG receiving terminals instead of pipeline connection to these networks. The modular, phased nature of an LNG project also lends itself well to these developing markets.

• Increasing capability, of power utilities to purchase natural gas at a higher price and in significant volumes could create a new class of LNG buyers owning their own terminals, especially in Europe, similar to importing Japanese utilities.

• Increasing awareness of political instability affecting pipeline deliveries, such as recent gas pipeline supply cutoffs in the C.I.S.

NEW EFFICIENCIES BOOST LNG

New efficiencies in downstream gas technologies can boost the economics of LNG.

J.T. Jensen, president, Jensen Associates Inc., Boston, contends the introduction of combined cycle gas turbine generation boosts the premium the market places on natural gas beyond its clean burning characteristics.

"By combining lower capital cost with higher thermal efficiency than boilers can achieve, the combined cycle units enable the buyer to pay higher prices for fuel and still remain competitive," Jensen said at Gestech. "Distillate, rather than residual oil, is the only practical alternative fuel."

LNG netbacks improve still further when the premium from combined cycle technology is augmented by an increase in world oil prices, especially when the LNG fuels a baseload unit.

With oil at $25/bbl, the wellhead netback for an LNG fueled combined cycle unit could be as much $3.12 compared with 98cts for a dual fired, LNG/steam boiler, according to Jensen.

LNG CARRIER OUTLOOK

Critical to LNG project viability is shipping, contends Drewry, which estimates will account for at least one third of the $3.5-4.5 billion cost of a new grassroots project.

Drewry notes there is almost no secondhand market for LNG carriers and estimates newbuilding prices have soared to $270-290 million for a 125,000 cu m vessel from $120 million at yearend 1986.

The London shipping consultant believes newbuilding prices will rise slightly in the near term because:

• World shipbuilding capacity will remain constrained by the limited number of yards with experience in building LNG carriers and by orders for other vessels.

• Subsidies will continue to be phased out.

• Shipbuilders, notably in Japan, will face labor shortages and higher costs.

As a result, shipowners will seek to maintain their vessels as long as possible, rendering obsolete the current standard of 20-25 years, assuming government regulations aren't a barrier.

Shippers also will continue to find ways to trim LNG transportation costs, which Drewry estimates at anywhere from 27-37cts/MMBTU for existing Algeria-Europe trade to $2.27/MMBTU for a proposed Qatar-Japan project.

FINANCING, PRICING

While SIG estimated that 10-15 new LNG projects might be implemented by 2010 at a cost of $40-60 billion in current dollars, other estimates put the capital needs as much as $80 billion. According to Pastuhov, government agency funding, such as that from the World Bank and export-import banks will provide little more than encouragement via policy steps and creating the right financial climate.

He contends three primary factors will strongly influence availability of funds for expansion of LNG trade:

• Competition from other energy projects-for example, $12-17 billion projected for Saudi Arabia alone.

• Turmoil in currency markets and eventual outcome of the Maastricht (European unification) treaty.

• Reimbursement of debt from the former U.S.S.R. owed to the West estimated at more than $25 billion.

Perhaps even a bigger challenge for the economic viability of future LNG projects is how well the industry can coexist with the current trend for open markets and third party access pioneered by the U.S. and Canada and making inroads in Europe.

Pastuhov contends that in order for LNG projects to be financeable, the price of LNG must be further decoupled from the price of crude oil than it has to date to reflect the former's "added value" to environmental and energy security concerns.

Jensen thinks the greatest barrier to increased interest in LNG in North America has been the combination of weak and volatile gas prices aggravated by the supply deliverability bubble and gas on gas competition.

"In February 1992, when European border prices were in $2.50/MMBTU range, and Japanese prices were close to $3.50, spot prices at the U.S. Henry hub in Louisiana fell to a 10 year low of $1.07," he said.

"While prices dramatically increased to $2.60 at one point in the fall of 1992, the volatility of the price structure is of itself disturbing to an industry that needs prices that are high enough and predictable enough to justify long term LNG contracts."

In the end, says Pastuhov, questions of LNG pricing and financing are secondary in expansion of LNG trade.

"The most important and crucial factor in the expansion of the LNG trade will be the political aspects of each project.

"Only in cases where the producing government and the receiving government see advantages for each other, which is to have LNG as a fuel of preference, will LNG projects be implemented. If the political will is such that both governments want to have such a project, the financing will become available."

Copyright 1993 Oil & Gas Journal. All Rights Reserved.