Natural gas and LNG

global trade in gas The global gas market

And oh, how it grows. Due to more efficient ways of converting and transporting natural gas to faraway, increasingly hungry energy markets, there is now manifesting what analysts call a global “dash for gas”. Based on a 2008 portfolio of global investment decisions, economists figure that LNG (or “liquefied natural gas”) will likely become more freely and flexibly traded worldwide as investors pour money into LNG infrastructure. 2008-2010 showed a  30% increase in LNG world supply, during which time global shipping capacity also expanded to 251 LNG tankers. Countries – particularly China, Japan, South Korea, and India – longing for cheaper, less volatile supplies of energy are factoring in and vying for long-term contracts. Over 1/5 of global energy use in 2009 was natural gas-derived – more of it fracked and then liquefied for trade. So if investments in LNG continue to increase, we can expect natural gas production and fracking to consistently increase too.

A few years ago, the expectation was that the supply of freely traded LNG would double but then contract after 2010. Consider that these projections were made in 2008, before the magnitude of North American shale gas plays were unveiled. The amount of freely traded LNG then constituted 40% of the total global gas supply, a volume that will surely rise as more players (such as the U.S, Canada, Australia, and East Africa) enter or increase their clout in the market. Indeed, instead of a contraction, Eurasia Group predicts that global LNG capacity will double again by 2020.

But what exactly is LNG, and will it actually change entrenched practices in regional – or global – natural gas markets?

Natural gas to LNG

British chemist and physicist Michael Faraday first experimented with liquefying natural gas in the 19th century. West Virginia received the first LNG plant in 1912, but the first safe and successful transport of LNG didn’t occur until 1959, when the first cargo was shipped from Louisiana to the U.K via a converted WWII freighter. Algeria became the first LNG exporter whereas the U.K was the first eager LNG importer. Between 1960 and 1980, terminals for receiving and exporting LNG were constructed across the Atlantic and Pacific, though the market didn’t expand until the late 1990s. LNG terminals that had gone unused in previous decades have re-opened or converted, particularly in the U.S, which has seen a marked increase in gas demand for power generation. Because only a few countries have terminals, the market for LNG remained limited until recently.

LNG terminalsConverting natural gas to LNG is no frivolous science experiment. It involves cooling gas to -160 degrees Celsius and subjecting it to high pressures necessary to transform the gas into a condensed liquid. Doing this requires building a highly capital-intensive “liquefaction” facility. For instance, Chevron’s new Wheatstone LNG project in Australia will cost $29 billion to build. And this is after technological advances have cut construction costs to nearly half of what they were a decade ago.

In liquid form, gas is far easier to transport overseas by tankers. These tankers are essentially enormous refrigerated vessels. And unlike immobile pipelines, LNG tankers can change course in response to spontaneous shifts in gas prices and demand.

Tankers can’t simply arrive at their destination and drop off a bundle of LNG. Countries need to invest in and possess receiving terminals, including regasification facilities to convert the liquefied product back to gas for consumption.  Major exporters, such as Qatar (alone supplying one-quarter of all LNG exports) will often invest in other countries’ import terminals, easing infrastructural and technical constraints on imports.

The character of LNG trade

The International Energy Agency (IEA) report predicts that gas will replace oil in the global transport sector, as the ability to trade it via LNG or pipeline becomes further enhanced. Yet if the global gas market continues to expand, it may face the same risks, geopolitical conflicts, dependencies, and crises created by oil over the past 40 years. Recall the oil embargo imposed by Arab states on the U.S in 1973, which barred oil shipments in response to American support for Israel. Oil was and has been deliberately used as a strategic geopolitical tool, rendering consumers vulnerable when hostilities erupt between trading states.

On the other hand, LNG may shift the balance of power in global energy due to the sheer diversity of suppliers involved. Few suppliers is bad for energy security and political independence, but competition amongst many suppliers and importers diminishes the political leverage that energy-rich countries previously had over those dependent on their oil shipments. Russia meets one-quarter of Europe’s gas needs, which has long been a political source of discomfort for the EU. Soon, emerging suppliers will force political undertones out of gas deals.

Oil vs. gas

cost of oil vs. natural gasBoth energy sources compete for exploration and drilling resources. Compared to oil, LNG is cheaper, necessary for electricity generation, and is a more palatable response to clean energy concerns due to its relatively low emissions character. However, oil is more easily transported and has an established global market for supply and prices, whereas LNG is still traded on a country-to-country basis in bilateral deals with a price that varies in each contract. The price of gas in these individual and long-term contracts, moreover, is often inefficiently and expensively tied to oil prices. In fact, the global gas market has yet to fully emerge. 90% of gas trade is regional and through pipelines; only 19 countries export it, only 30 countries import it.

The initial trading structure for natural gas, according to an article in the Hydrocarbon Processing Journal, was composed of “long-term contracts pre-sold to specific countries and end-users.” Most of the gas supply continues to move through these contracts, instead of in a free-market fashion where merchant buyers would instead move LNG to where it would be sold for the highest value, which would in turn stabilize prices across the board. Currently, there’s a steep price for natural gas/LNG in Europe, a different (and equally steep) price in Asian markets, and lower prices in North America. A single price may emerge with increased trade and supply certainty, though a contractual culture will likely be maintained, perhaps with 2-5 year supply contracts instead of previous decades-long agreements.

Future of natural gas and LNG markets

Currently, oil and gas markets are tightly linked in complex, changing ways that make it difficult to predict the future for natural gas markets. An Energy Journal study employing various market models show that higher oil prices tend to lead to higher natural gas production and consumption. But if suppliers charge high prices for gas (in a profitable attempt to match them with oil prices), a contradictory result can be less gas consumption in industrial sectors – sectors compelled to switch to cheaper fuels, especially when the conversion and export of LNG raises domestic prices for gas.

lng importsBut the dwindling supply of oil and abundant supply of gas will make it nonsensical for the prices of each to be tied together – importers will not accept it. Michael Stoppard, the senior director for Global Gas at CERA, is certain that investment decisions will change pricing and contracting practices mentioned above. A global gas market will emerge, and the number of importing countries (now at 30) is set to rise sharply. Brazil, the Netherlands, Pakistan, and New Zealand have plans to build LNG import terminals to join the crowd.

(This is) true of the boom in shale gas in America, the recession in Europe and the accident at the Fukushima nuclear-power plant in Japan. As the trade in LNG grows, it will bring more price competition between America, Europe and Asia and so loosen the tie of gas to oil prices (Economist)

Pipeline economics

LNG has become significant where the construction of pipelines is often socially and environmentally detrimental or disruptive, not to mention costly. As the capacity to produce, transport, and receive liquefied gas expands and more countries enter the market, it is believed that countries can avoid pipeline construction and shipments. Or can they?

Even if the construction of long and potentially disruptive pipelines is curtailed worldwide by the heightening prospects for shipping natural gas (or LNG) overseas, companies must still figure out how to get the natural gas extracted from fracking sites to export terminals – which often still necessitates pipelines. Accidents regarding LNG transportation are well documented. A recent – and tragic - train crash occurred in Canada, involving 72 cars of crude oil (some of it transported from the Bakken shale fracking projects) that were headed toward refineries along the eastern seaboard. The deathtoll is currently at 50. Safely transporting fracked gas to LNG export terminals in the U.S will likely be debated, especially if a larger proportion of gas reserves are committed to export.

Significance of fracking to LNG

lng terminalBy 2035, unconventional fracked gas is expected to encompass twenty percent of global gas production. While much of these reserves will meet the domestic needs of host countries, excess gas will likely be converted to LNG for export. Shale gas discoveries and extraction is thought to boost LNG trade in the long-term. Notwithstanding this possibility in Asian markets, shale gas discoveries have been widespread, not simply limited to North America. As more countries uncover their own shale gas deposits, they may stop importing LNG and develop their own reserves. Conversely, while the U.S may find it less difficult to find investors to foot the bills for new LNG liquefaction and export terminals, other gas suppliers (Russia, Nigeria, Iran, Algeria, Trinidad & Tobago, etc) suffer restraints from “domestic need, inaccessibility to international natural gas trade and infrastructure, geopolitics, and lack of capital or technological investment.”

Regardless of the mind-boggling amount of shale gas uncovered in multiple countries, current global demand for gas is still high. In fact, demand far outpaces suppliers’ ability to extract, convert, and export it. Business analysts suggest that demand from Asia will be “supply-constrained” until 2025, pending the development of crucial infrastructure in LNG-exporting nations. And the LNG industry has only just expanded enough to begin changing global gas trading patterns. If fracking is not outlawed or restrained, it will surely aid the LNG market expansion and drive lasting changes in global energy markets and relations between the players in those markets.

Global demand for gas is expected to grow strongly at 2.6pc a year between now and 2025, presenting a “huge challenge” that will require $2.5 trillion of investment…”We believe this huge demand will require all the likely new LNG supply sources including expected new volumes from North America and East Africa. Developing this new supply will require huge levels of investment – some $400bn.” (Chris Finlayson, BG Group, the Telegraph)

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