EIA: LNG trade entering expansion period

The U.S. Energy Information Administration predicts strong growth for worldwide liquefied natural gas trade through 2015. EIA notes that eight nations export LNG (Indonesia, Algeria, Malaysia, Australia, Brunei, Abu Dhabi, Libya, and the U.S.) and eight import it (Japan, South Korea, Taiwan, Belgium, France, Spain, Turkey, and the U.S.). LNG trade jumped 44% during 1990-96, rising from 2.6 tcf to 3.6 tcf.

Oct. 27, 1997

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The U.S. Energy Information Administration predicts strong growth for worldwide liquefied natural gas trade through 2015.

EIA notes that eight nations export LNG (Indonesia, Algeria, Malaysia, Australia, Brunei, Abu Dhabi, Libya, and the U.S.) and eight import it (Japan, South Korea, Taiwan, Belgium, France, Spain, Turkey, and the U.S.).

LNG trade jumped 44% during 1990-96, rising from 2.6 tcf to 3.6 tcf.

The largest consumers were in Asia, which imported more than 2.8 tcf of LNG in 1996, more than 75% of world output. Japan is the largest user, importing in 1996 about two-thirds of the world's total LNG trade of 3.6 tcf. South Korea was second at 13% and Taiwan third at 3%.

EIA said that, despite the success of individual projects and its regional importance, LNG overall accounts for only 5% of world gas consumption and so far has had only a marginal influence on world patterns of gas use.

Growing demand

The role of gas in the world's energy supply is growing rapidly.

EIA predicts total world gas demand will reach 145 tcf by 2015, an 85% increase from 1995.

The highest growth rates in gas demand are projected for the developing countries, where overall demand is expected to rise 5%/year during 1995-2015. Developing Asia is expected to see gas consumption increases of almost 8%/year.

EIA said that if world nations impose caps on carbon emissions to combat global warming, gas could get an additional boost, because the same level of energy derived from burning gas saves 50% of carbon emissions relative to coal and 30% relative to oil.

"As gas use is growing rapidly worldwide, LNG consumption appears to be increasing even faster than that of piped gas, making it likely that the LNG share of total gas will rise over the next 10-15 years.

"LNG markets appear to be entering a new round of expansion, with a more diversified range of customers and suppliers. The largest proportion of increased LNG use will occur in Japan, South Korea, and several newly industrializing Asian countries, including India, Thailand, and perhaps China."

EIA said there is a growing number of LNG supply contracts, although LNG prices are higher than prices of competing fuels, because it is environmentally a clean fuel (compared with coal and oil) and its markets tend to be where pipelines are unavailable.

Japan, South Korea

LNG accounts for more than 97% of Japan's total gas consumption.

Most comes from Indonesia, although there are imports from Australia, Brunei, Malaysia, the U.A.E., and the U.S.

In 1996, Japan diversified its supplies even further by signing a 25-year agreement with Qatar. The Jan. 10, 1997, delivery of 65,000 tons (about 3.2 bcf) of LNG marked the entrance of Qatar into the industry.

Qatargas is contracted to supply Tokyo utility Chubu Electric with as much as 6 million tons/year of LNG (292 bcf). This is the first of three projects under way to export up to 12 million tons/year (584 bcf) from Qatar's North gas field by 2000. The second project, Ras Laffan LNG, is under construction and scheduled to be on stream by mid-1999.

Virtually all gas consumed in South Korea is LNG. South Korea began importing LNG about 10 years ago as a clean alternative in the electric utility sector, and it fuels about 10% of electricity generation.

Korea Gas Corp. is increasing gas supplies to residential, commercial, and industrial users. The residential sector share of gas use is expected to grow to 40% from 34% during 1996-2010. Korea Gas has estimated that LNG imports will more than triple in that time.

Japan's gas demand is predicted to increase 83% in the next 20 years, and LNG use in South Korea is projected to grow 173% in the next 15 years.

Other nations

EIA said there is expanding interest in LNG resources in several other countries of developing Asia.

Thailand and India have made major plans for establishing LNG supplies. Thailand signed contracts with Oman to begin shipments of LNG in 2003.

At yearend 1996, India's state-owned Gas Authority of India Ltd. made an international call for LNG supplies as part of a $10 billion project to diversify its energy sources. It plans to build regasification plants at Ennore on the southern coast and at Mangalore on the western coast.

It has identified four more sites for terminals. Each 2.5 million ton/year (122 bcf) terminal would cost $1.1 billion and could be on line by 2005.

India would like to import LNG both from Persian Gulf and southeast Asian countries. The government has identified LNG as a long-term fuel for the electric power sector.

In China, Shanghai is seeking foreign funds and technology to help build a $300 million LNG storage unit to reduce its reliance on coal. It would import 3 million metric tons/year (146 bcf) to meet its requirements. An LNG project would take an estimated 5 years to complete, using gas from Southeast Asia or Australia.

U.S., Europe

European buyers of LNG include Turkey, France, Belgium, and Spain.

In Spain, LNG accounted for 81% of the country's total gas consumption in 1995. However, pipeline connections to Algeria and to the European grid will cause LNG to lose out in Spain to conventional gas sources in coming years.

EIA said demand for LNG in western Europe may grow by as much as 155 million tons/year (7.5 tcf) by 2010, about 90 million tons (4.4 tcf) of which is covered by existing supply contracts. About 50 million tons (2.4 tcf) of European LNG demand could be met by supplies from the Middle East.

The Atlantic LNG project currently under construction in Trinidad, scheduled for completion in 1999, is expected to market a large part of its output to Spain and to the Northeast U.S.

In the U.S., LNG accounts for a small portion of total gas consumption.

EIA said this is not expected to change in the next decade, although some increases in quantity purchases are expected, especially once the Trinidad project comes on line in 1999.

Capacity

EIA said although gas supplies for LNG facilities are relatively cheap, the processing and transportation equipment is highly specialized and can cost billions of dollars.

For each 1 MMcf delivered to end users, less than 30% of the cost is for the raw gas and the rest is for processing and transportation.

Existing liquefaction plants currently account for more than 3.6 tcf/year of capacity. Planned extensions to existing capacity involve additions of more than 1 tcf/year of capacity. New projects under construction should add another 1.5 tcf/year of capacity.

Prospective capacity additions of 1.4-4.1 tcf/year from 1997 to beyond 2000 are in various stages of planning and negotiation.

"Thus, it is possible that LNG processing capacity could nearly triple in the next decade or so. Much of that proposed capacity will be in Asia, where liquefaction capacity has the potential for doubling to more than 4.6 tcf/year."

Capacity in the Middle East, currently 0.2 tcf/year, could expand to nearly 1.3 tcf/year with projects currently under construction, with an additional 0.7 tcf being considered for post-2000.

EIA said a successful LNG project must have sufficient proved reserves of gas to support liquefaction capacity for 15-20 years. To ensure adequate deliverability of gas at the end of the project, reserves ought to be 25-35 times larger than the annual capacity of the plant.

Costs

EIA said production costs (including applicable production taxes levied by the host government) need to be low, typically less than $1/MMBTU and preferably 50¢/MMBTU.

A liquefaction facility, including a jetty and loading facilities for LNG tankers, is typically the most expensive element in an LNG project. About $300-900 million of capital cost for each 1 million tons/year (about 133 MMcfd) of capacity seems to be typical of current projects. Operating costs are relatively minor.

Each project requires several dedicated LNG tankers, and each 135,000 cu m (3 bcf) tanker costs about $260 million.

Regasification terminals cost considerably less than liquefaction plants, about $700 million (1988 dollars) for a 500 MMcfd facility-equal to 56¢/Mcf. Regasification energy requirements will also consume a further 2.5% of the delivered gas.

"The immense large capital costs of each link in an LNG project impose their own logic. Projects can be undertaken only by large organizations with great financial capacity and a depth of project management skills."

LNG project costs can vary considerably, particularly with respect to the effects of local construction costs. A project might have production costs of 50¢/MMBTU, liquefaction costs of $2.50, and transport costs of 75¢, for a total of $3.75/MMBTU delivered to the regasification plant.

Recent developments

EIA said several market developments have created a modest boom in LNG growth.

"LNG projects have generally been based on a firm supply contract between buyer and seller, in which the buyer is required to 'take or pay.'

"In practice, this has meant designing in excess capacity, so that excess liquefaction capacity is available most of the time and 'spare' tankers are available to cover scheduled overhauls.

"Consequently, many LNG producers have volumes of LNG available in excess of contract volumes and have been willing to sell these volumes on a developing spot market at competitive prices."

EIA said spot trading in LNG-grown from almost nothing in 1992-currently accounts for about 3% of the total market.

Also, contract disputes between buyers and sellers have made LNG from existing plants unexpectedly available.

And some LNG projects are now old enough so that their original 20-year supply contracts have expired. The owners of these projects have more pricing flexibility than owners of prospective future projects.

Projects that have collapsed have produced a flock of uncommitted LNG tankers available for spot charter or sale at a fraction of construction cost. As of 1993, one source estimated that nine large LNG tankers (14% of the worldwide fleet) were idle.

Finally, the cost of adding capacity to existing plants is considerably lower than building a new plant. This has paved the way for the expansion of the market.

The development of the LNG spot market has also reduced the risk inherent in new LNG projects. Rather than contracting for firm volumes, operators have proven willing to proceed with projects out of faith that contracts will ultimately materialize or that some of the LNG can be sold on the spot market.

Growth potential

EIA sees several ways the LNG market could expand.

It said more nations may elect to build regasification facilities, improving technology may cut LNG capital costs, the spot market may continue to grow, LNG may get a boost as a "clean fuel," and its use as a "peaking" fuel may grow.

EIA said two significant unknowns could affect the longer-term outlook for LNG growth.

It said an international treaty to restrict carbon dioxide emissions could substantially increase the need for gas.

And it said there are large gas hydrates reserves near some of the major LNG markets. If the hydrates could be developed as another clean-air alternative for generating power, it would cut LNG growth.