In the last decade, the global LNG industry has undergone a considerable process of alteration, changing business models of energy companies worldwide. After strong demand growth in 2010, the LNG market experienced a glut. The US, previously a significant importer of LNG, now relies more on domestic shale gas production, transforming into a potential gas exporter and changing the global LNG trade arena. In addition, the consequences of the 2011 earthquake in Japan led to a temporary shutdown of 54 nuclear power plants, leaving the country to rely on LNG to fill its energy gap. With the plans to phase out nuclear power in the next few decades, the role and importance of LNG in Japan will increase even more. Meanwhile, growing concern about the environment, coupled with the need to enhance energy security, is driving countries to focus on LNG and increase their consumption of natural gas. Additionally, small scale LNG is increasingly discussed on the political agendas of countries seeking to ‘gasify’ remote regions (such as Russia) and improve local energy supply. Rapid developments are also taking place in the use of LNG as a transport fuel (in heavy duty vehicles and marine transport). Who knows what changes are still to come in the LNG world? This article gives a brief overview of the latest developments in the global LNG industry and some insights into future trends.
LNG – the fastest growing segment
LNG has turned into one of the fastest growing segments of the global gas industry. In the last decade, global LNG regasification capacity almost tripled, reaching 640 million tpy in 2011 compared to 251 million tpy in 1999.1 During the same time frame, the global liquefaction capacity doubled and a number of new countries entered the global LNG business, reaching a total of 25 LNG-importing and 18 LNG exporting countries.2 At the end of 2011, the world LNG trade reached 241.5 million t, growing by 8% primarily due to the sharp increase in demand from Japan as a consequence of the 2011 earthquake. According to market research performed by Ernst & Young, the global demand for LNG is expected to grow around 5 – 6% per annum over the next 15 years (faster than the overall gas market, respectively 2.5%), thus almost doubling by 2030.3 It is also projected that the number of countries with LNG import terminals could double by 2020 compared to 2012.
Emerging Asian markets and their thirst for LNG
In Asian countries, natural gas is increasingly viewed as a part of the solution to diversify energy sources in the region, secure rapidly growing energy demand, and limit growth in carbon emissions and pollution. Since the opportunities for pipeline gas transportation in the Asia-Pacific region are rather limited for geographical reasons, LNG is seen as the most viable option for emerging energy demand. In fact, the Asia-Pacific region is already a major actor in the global LNG arena, accounting for over 63% of total global LNG imports in 2011. Japan and South Korea are the two largest importers of LNG, with 78.7 and 35.8 million tpy of imports respectively in 2011.4 Smaller Asian economies are also actively joining the LNG business due to a lack of domestic natural gas resources. The Economist Intelligence Unit estimates that natural gas consumption in the Asia-Pacific region will reach 800 billion m3 by 2014, compared to 558 billion m3 in 2010, exceeding gas demand in the US. The largest increase (over 50%) is expected to occur in China.5
China’s latest Five-Year-Plan foresees ‘gasification’ of the Chinese economy and therefore implies a significant increase of natural gas share in the country’s energy mix, rising from ~4% in 2010 to 8% in 2015, with a longer-term goal of 10% by 2020. The IEA projects that China’s natural gas demand could reach 545 billion m3 by 2030. For this reason, China is expected to be the one of the biggest sources of additional LNG demand. At the moment there are seven LNG import terminals under construction in the country and several others are in the planning stage.6
With regard to LNG supplies in the Asia-Pacific region, Malaysia, Indonesia and Australia are the largest ‘local’ suppliers, although Indonesia has recently approved plans to begin importing LNG to meet its rising demand for natural gas. Qatar is still the single largest supplier to Asian markets and the number one LNG exporter in the world. However, Australia has been positioning itself to emerge as a leading player in the global LNG industry by the end of this decade.5 Currently, Australia has three operational LNG export plants, with total capacity of 24.3 million tpy and seven other LNG projects (with a total additional export capacity of 61 million tpy), which are close to a final investment decision.6 Nevertheless, some of the proposed projects might be delayed or cancelled due to higher than anticipated development costs. According to McKinsey Global Institute, the costs of building new LNG projects in Australia is nearly 20% higher than in North America.7 Besides costs, other risks, such as scarce labour supply, infrastructure bottlenecks, tight environmental regulations and the potential development of unconventional gas reserves in China and Japan endanger the future of new LNG projects in Australia.
North American LNG export potential
In the early 2000s, many investments were made in North America to expand LNG import capacity in order to meet increasing demand. At that time, domestic gas production was in decline and the potential for shale gas development was underestimated. There were about 47 LNG receiving terminals in the US in the permitting phase, three existing ones were re-commissioned and eight new ones were constructed.8 Domestic production of large volumes of shale gas in the US in the late 2000s has made most of these LNG terminals redundant for gas import. The ‘sudden’ glut of domestic natural gas drove the price for this commodity on the leading US gas trading hub, Henry Hub, significantly lower than in other parts of the world. In 2012, natural gas was traded on the Henry Hub at US$ 2.90/million Btu in June – the lowest price in the last decade, while the price for LNG in Asian markets reached US$ 16 – 17.5/million Btu.6 To put this into a broader perspective, the price for natural gas on British spot market in June 2012 was US$ 9.90/million Btu and US$ 12.0/million Btu for spot LNG in the Mediterranean.2,6
The existence of attractive markets (the Asian market in particular) has encouraged owners of the US LNG terminals to consider export of cheap domestic gas. According to Sheffield & Campbell, adding liquefaction to existing terminals is a low CAPEX option since about 50% of the LNG terminal value is already invested in the marine, storage and pipeline facilities.9 The gap between the prevailing market price and estimated supply costs (i.e. net-back margin) is estimated to be more than US$ 6/million Btu for potential LNG export from the US to Japan. Although this gap is expected to narrow to US$ 4.3/million Btu, it is still more profitable than LNG sales to Europe.6
Three LNG terminals have already received authorisation from the US Department of Energy (DOE) to export LNG to all countries, including those that do not have a free trade agreement (FTA) with the US (i.e. Japan, China and India). The first, Sabine Pass, is expected to start export by 2016. There are already four supply agreements signed (for the total of 18 million tpy) with BG Group, Gas Natural Fenosa of Spain, Gail of India and Kogas.4 The second, South Texas LNG operated by Pangea LNG, received authorisation to export up to 8 million tpy of domestically produced LNG for a term of 25 years. However, this authorisation is still subject to environmental review and final regulatory approval. The latest DOE authorisation was granted in August 2013 to the third, Lake Charles LNG terminal in Louisiana (jointly owned by BG Group and Southern Union), for the export of 15 million tpy of LNG for 20 years. The Lake Charles terminal is now waiting for a permit from the Federal Energy Regulatory Commission for construction of the facility.7
Besides the aforementioned LNG export projects, the US government is reviewing over 20 applications for LNG export terminals, received in recent months. Before any decision is made, the US government must first review the impact of LNG exports on domestic natural gas supply and prices. Sheffield & Campbell estimates the potential US LNG export at around 20 – 40 million tpy by 2035. As 40 million tpy represents around 8% of US gas consumption, exports on this scale would eventually influence national gas prices. Considering the fact that gas prices are expected to rise, it is quite unlikely that all of the envisaged export facilities will materialise.
Gas hydrate developments in Japan
While much attention has been paid to shale gas developments in the US and the prospects for replication of this success elsewhere, there are several additional developments and innovations that may have a significant impact on the global LNG business.In the beginning of March 2013, several articles appeared about Japan’s successful extraction of natural gas from so-called ‘methane hydrates’ (i.e. a ‘frozen mixture’ of methane and water molecules) deposits buried at the depth of around 1 km beneath the sea, offshore Japan. This is believed to be the world’s first successful operation of such a kind. Japan hopes to begin commercial extraction of such unconventional gas reserves within five years.10 If extraction of such gas proves viable, Japan could become the next ‘game changer’ of the LNG industry.
Innovation in LNG supply technologies
One of the latest innovations, which is believed to become a major factor in the development of the LNG industry over the next 10 years, is Floating LNG (FLNG). FLNG may prove an effective method to recover and monetise remote gas assets without the need for additional complex facilities, which are required if gas is brought onshore for treatment and liquefaction. Shell is working on the first FLNG project, which is to become the largest floating structure ever built – Prelude LNG. This is a pioneering FLNG facility (488 m long, 74 m wide, weighing 600 000 t), which will be permanently placed in deep waters for about 25 years. Construction of this facility has just started in South Korea and it is expected to become operational by 2017 – 2018 with offshore Australia being the main targeted operational area.
Small scale LNG and LNG as a transport fuel
An increasing role of gas in the energy mixes of various countries in the world (coupled with environmental and health concerns and regulations), together with seasonal variations in gas demand and the scattered location of gas fields has influenced several countries to consider development of small scale LNG terminals. Such terminals are designed for LNG carriers with a smaller size (from 7500 to 35 000 m3) compared to larger vessels used in the large-scale LNG business (70 000 to 265 000 m3). Small scale terminals are also characterised by a smaller LNG storage tank capacity, smaller send-out flow rate and send-out pressure than large-scale LNG terminals.11 Current advances in gas processing technologies, increasing efficiencies in liquefaction, transport and regasification equipment have reduced the cost of small scale LNG plants. It has also made their development more economical for gas deliveries in remotely located areas with low demand and without sufficient gas transport infrastructure or where pipeline gas supplies are not feasible. Small scale LNG will increase the market for natural gas by distributing LNG to the end-use from either a LNG plant, LNG import terminal or directly from a LNG carrier using a combination of both sea and land based transport. Currently, small scale LNG is hot topic on the political agendas of various countries and it is expected to experience rapid development in the coming decade, making natural gas a more accessible fuel.
LNG growth will also be driven by transportation. According to Jay Copan, the transport sector is the single largest contributor to oil demand in many countries, consuming approximately one-fifth of global primary energy supplies.12 Copan mentions that emission requirements coupled with a narrowing gap between operation costs of diesel fuel and LNG are the primary factors driving growth for LNG as a transportation fuel. Marine transportation represents another potential market for LNG. With the International Marine Organization introducing restrictions on emissions (coming into force in 2015 in the Emission Control Areas and 2020 for the rest of the world), LNG is becoming an alternative to current bunker fuel, due to its relatively low emissions. Copan reports that: “the use of LNG instead of diesel engines can reduce a ship’s CO2 emissions by 25% and cut its sulphur emissions by more than 80%”. Currently, five ports are busy developing LNG bunkering infrastructure in Sweden, Belgium, the Netherlands and Singapore. According to Lloyd’s Register, demand for LNG as a bunker fuel could account for as much as 8% of the global bunker fuel demand by 2025, but will be highly dependent on the pricing of LNG and competing fuels.13
Driven by steadily rising global energy demand and environmental concerns, the fundamentals of the LNG industry remain strong and it can be expected that LNG trade will continue to grow, at least in the near-term. Many changes and innovations have taken place during the last decade, transforming the LNG business into what it is today. The American shale gas revolution, potential development of other conventional and unconventional gas resources around the world, the growing role of Asian-Pacific markets in the global LNG trade and technology innovation are contributing to rapid change in the landscape of the global LNG industry with more yet to come.
- ‘The LNG industry’, GIIGNL, 2011.
- ‘World LNG report’, International Gas Union, 2011.
- ‘Global LNG: will new demand and new supply mean new pricing?’, Ernst & Young, 2013.
- Kiernan, P., ‘The Asian energy equation’, LNG Industry, January/February 2013.
- ‘Tankers on the horizon: Australia’s coming LNG boom’, The Economist Intelligence Unit, 2012.
- ‘World Energy Outlook 2012’, International Energy Agency, 2012.
- ‘World energy news’, Financial Times, 2013.
- Kenneth B. Medlock III, ‘Impact of shale gas development on global gas markets’, Natural gas & electricity, April 2011.
- Sheffield, J., and Campbell, J., ‘LNG Global Survey’, LNG Industry, March/April 2013.
- Theaustralian.com, Available at http://www.theaustralian.com.au, 2013.
- Andrieu, C., ‘Small-scale LNG import terminal: not as simple as a reduced one’, LNG 17 proceedings, Houston, Texas, USA, 2013.
- Copan, J., ‘Turning the wheels’, LNG Industry, January/February 2013.
- Lloyd’s Register, ‘LNG-fuelled deep sea shipping. The outlook for LNG bunker and LNG-fuelled newbuild demand up to 2025’.
Written by Nadja Kogdenko, Energy Delta Institute, The Netherlands. This is a shortened version of an article that features in the September/October issue of LNG Industry. To read the full article, subscribe here.
Edited by Ted Monroe
Read the article online at: https://www.lngindustry.com/lng-shipping/02102013/the_changing_face_of_lng/