A tale of two gas markets

As US natural gas prices plunged below US$ 2.40 per mmBTU to their lowest levels in over a decade, LNG held firm near record levels in Asia, creating probably the greatest arbitrage trading opportunity in the history of any major commodity. But no one was taking advantage of this ‘sure win’ high-margin trade, (or likely will in the near term), to ship North America’s natural gas to Asia, which continues to pay between US$ 16 - 20 per mmBTU for its spot LNG cargos.

In this strange tale of two markets for the same commodity, North America’s rising natural gas production and lack of export infrastructure could ensure that its overflowing supply continues to sell for an astonishing discount to Asian prices for a few more years.

In the USA, weak demand, insufficient storage capacity and record production of over 23 trillion ft³ last year, primarily from shale, drove natural gas prices down by a third from 2010. These trends are expected to continue through the rest of 2012 and even beyond unless the weather turns seriously cold and the economy recovers strongly.

But in Asia, consuming countries can’t get enough supply from a handful of maxed-out regional producers, ensuring natural gas and LNG prices remain supported at or near current high levels. This is contributing to the worsening shortages and rising costs of electricity in the region.

Led by Asia, global natural gas consumption will grow at an average annual rate of 2.1% through 2030, outpacing oil and coal, according to BP’s latest Energy Outlook report.

Paradoxically, the prolonged weakness in North American gas prices has created a powerful long term barrier, not incentive, to export. Large industrial consumers like power and petrochemical companies are opposed to exports that will raise their feedstock costs.

The anti-export lobby cites recent studies by Navigant Consulting, Deloitte and ICF International showing that domestic US gas prices could rise by 15 - 20% from current levels if producers succeeded in exporting between 6 and 12 billion ft³/d. These price increases could hobble US attempts to revive its battered manufacturing sector.

Asia dissipating global LNG supply glut, say two separate studies

American fears are well founded according to a recent study which found that fast-growing Asian demand is starting to impact the current glut in global gas supplies.

A report distributed by consulting firm Research and Markets predicts that the glut will dissipate from 2014, with Asia-led demand expected to exceed supply by 75 million t by 2020.

China, Japan, India, South Korea and Southeast Asia will use more LNG not only to fuel their economic growth, but also to try to displace coal and oil in their energy mix to reduce pollution.

Asia’s regasification capacity to expand by more than a third from 2010 to 2015

Asia is expected to expand its regasification capacity by nearly 35% from 14.38 trillion ft³ in 2010 to nearly 19.37 trillion ft³ in 2015, according to a report by consultant GlobalData.

The report said that global LNG liquefaction capacity increased from 121.71 million t in 2000 to 273.92 million t in 2010 while regasification capacity rose from 264.33 million t to 583.51 million t over the same period.

Producing countries Qatar, Indonesia, Malaysia, Nigeria and Australia accounted for over 62.4% of the world’s liquefaction capacity while importers Japan, the USA, South Korea, Spain and the UK accounted for 78.6% of the total regasification capacity.

Another pipeline to deliver gas from Central Asia by 2013

China expects to start up its third West-to-East pipeline next year to deliver up to 30 billion m³ of natural gas from Central Asia.

Measuring a total of 18 104 km in length, the three pipelines that make up the West-to-East system will have a combined capacity to deliver 72 billion m³/yr of natural gas.

The 5200 km third network will include one trunk and six branch lines, three gas storage terminals and an LNG terminal. Operator PetroChina plans to add two lines to this network after 2015, each with the capacity to carry approximately 30 billion m³ of natural gas from Turkmenistan, Uzbekistan and Kazakhstan to China’s industrialised coastal regions in the east.

Shale to boost domestic LNG production

China isn’t just counting on imports; it is also aiming to triple its domestic LNG production to 7.5 million tpy by 2015, according to the China Petroleum and Chemical Industry Federation.

Speaking at the recent World Petroleum Congress in Qatar, Fu Chengyu, the Sinopec Group Chairman, predicted that China could overtake the USA in producing natural gas from shale and unconventional sources within 10 years.

The Chinese government has set a target for the industry to produce 6.5 billion m³ from domestic sources by 2015 and 80 billion m³ by 2020.

Japan’s LNG imports up 12% six months after Fukushima

Compensating for the loss of the bulk of its nuclear power capacity, Japan increased its LNG import by more than 12% to over 45.6 million t in the first six months of the 2011 - 2012 financial year to September 2011.

According to official data compiled by consultancy GlobalData, Japan imported 45.606 million t of LNG for the March to September 2011 period compared with 40.686 million t for the same period the previous year.

Indonesia’s state energy firms preparing to import LNG

Indonesia was, until recently, the world’s largest LNG supplier, but now faces the prospect of becoming a net importer later this decade as it is not finding and developing enough new gas reserves to meet its growing domestic energy demand.

Indonesia’s three main LNG export terminals at Bontang, Arun and Aech may be able to produce a total of only 262 cargos in 2012, down from last year’s 365 cargos. With 30 cargos already allocated to domestic customers this year, Indonesia will have only 235 cargos to meet the needs of its term customers in Japan, South Korea, China and Taiwan.

Thailand to fast forward construction of second LNG import unit at Rayong

Thai state energy company PTT is aiming to complete the expansion of the country’s second LNG import terminal by 2014 - 2015 instead of the original target deadline of 2016.

The government is expected to sharply raise the share of natural gas in Thailand’s energy mix in its upcoming revision of the country’s long term power supply master plan, or the Power Development Plan (PDP) later this year. The previous plan, which included nuclear energy and an expanded role for coal, had envisioned natural gas use to grow by 6 - 7% a year to meet 40% of the nation’s energy demand. These rates will have to be raised by at least 50%.

Vietnam seeks LNG from Australia and Qatar

Vietnam looks to be joining the growing Asian bandwagon to import LNG from Australia and Qatar.

Traditionally an energy exporter, Vietnam is facing shortages of coal and fuel as its energy demand is growing at a faster rate than its domestic production and reserves.

India expects LNG import capacity to more than quadruple by 2020

India is planning to raise its LNG import capacity from 13.5 million tpy now to 47.5 million tpy by 2016 and 62.5 million tpy by 2020, said Petronet, the country’s sole natural gas importer and LNG terminal operator.

The company is building a second receiving and regasification terminal at Kochi in Kerala state to add to its existing facility at Dahej in Gujarat.

Australia’s rise as ‘world’s LNG supermarket’

Despite worries over rising cost, labour shortages and a new carbon tax from July this year, Australia looks set to maintain its run as one of the biggest winners of the global LNG boom that began a decade ago. 

With at least eight projects underway worth a total of AU$ 175 billion and another seven being planned, the country’s natural gas production is expected to triple to over 5700 billion ft³ over the next decade, said energy economics group EnergyQuest. (US$ 1 = AU$ 0.97).

However, Australia has to ‘lock down’ as many of the projects as possible while conditions are favourable to ensure long term survival and profitability, said EnergyQuest CEO Graeme Bethune.

He warned that some projects were already behind construction schedule and over budget, while competitors were accelerating their plans to develop LNG export terminals in the USA and Canada. Government policies, natural disasters and environmental restrictions are also presenting challenges to Australia’s natural gas and LNG project developers.

Written By Ng Weng Hoong, LNG Industry Correspondent

 

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