by James Herron

07-02-08 Lower than expected global supplies of liquefied natural gas this year will likely push up wholesale gas prices in the US and Europe.
New projects due to begin production should have increased global LNG supply by around 30% from last year but many of the biggest schemes have suffered technical problems and delays in commissioning. Supply is likely to be short just as demand is surging in Asia, resulting in increasing competition for the commodity and higher gas prices worldwide, industry experts told.

LNG is natural gas cooled to liquid form and transported around the world in large tankers. The technology has enabled industrialized economies to tap new gas reserves in the Middle East, Africa and the Arctic that are too remote for pipeline access. As gas reserves dwindle close to the main centres of demand the International Energy Agency expects the volume of LNG traded internationally to quadruple by 2030, with the fastest import growth in Europe and the US.
But current gas liquefaction projects are being slowed by cost overruns, technical problems and labour shortages. Out of just over 56 mm tpy of new LNG production previously scheduled to become available in 2008, only a third is expected to make it to market before the end of the year, while two-thirds is unlikely to reach commercial levels of production until 2009.

Two ambitious Arctic LNG projects, Norway's Snoehvit and Russia's Sakhalin-II, have run into trouble. Technical problems mean StatoilHydro's 4.2 mm tpy Snoehvit plant will run at no more than 60% capacity in 2008 and may have to shut down for repairs in 2009. The start of Gazprom's 9.6 mm tpy Sakhalin-II development has been deferred a year until spring 2009.
Indonesian state oil company Pertamina has said the 7.6 mm tpy Tangguh LNG plant has been delayed until March 2009. A spokesman for Yemen LNG said the 3.45 mm tpy Balhaf project will start up in December, but a person familiar with the project who requested anonymity said he didn't expect to see commercial deliveries until later in 2009.

Delays are most critical in Qatar, the world's largest LNG producer. The start of the first half of the 15.6 mm tpy QatarGas 2 project, whose gas has been earmarked for the UK and the US, has already been postponed from the end of 2008 to June due to labour shortages. Qatar's Oil Minister Abdullah bin Hamad Al Attiyah said the first cargoes should be exported some time between July and September.
"There is a risk that they may take some time to get up to full capacity because of the complexity (of QatarGas 2)," said the person. "The first cargo will be in September at the earliest but it could be even later than that."

The second half of QatarGas 2 production is now expected to start up in 2009. Al Attiyah said Qatar's other main LNG project, RasGas, is still on track to start up its sixth production train with a capacity of 7.8 mm tpy in the fourth quarter of 2008. However, another person familiar with that project said shortages of all kinds of skilled workers in Ras Laffan city, the centre of Qatar's gas industry, are also highly likely to delay RasGas' start-up.
"We've revised our short-term (LNG supply) outlook downward this year, primarily driven by commissioning hiccups," said Blake Roberts, a director at US-based consultancy Cambridge Energy Research Associates.

For the projects that are expected to begin producing this year, like Australia's Northwest Shelf LNG due in the fourth quarter or the sixth production train of Nigeria LNG that started in December last year, Roberts anticipates a slower ramp up to full capacity lasting around 3 months.
"There's hardly any new supply coming on this year, "said Deutsche Bank analyst Jennifer Gordon.

Meanwhile, rapidly rising demand in the more mature Asian market has diverted much of the supply intended for western shores to Japan, South Korea or China. The flow of LNG from the Atlantic Basin to Asia surged in 2007 after an earthquake last summer shut down Tokyo Electric Power's Kashiwazaki-Kariwa nuclear power plant -- the world's largest. The company expects the plant to remain offline until the middle of next year.
That incident caused Japan's LNG imports to increase 7.4% last year as its gas-fired power plants worked harder to fill the gap left by the nuclear outage. To meet this demand, Asia was taking more than a million tons of LNG a month from the Atlantic Basin late last year, reducing the supply available to Europe and the US.

UK utilities have complained that the country's two LNG import terminals have run at an average capacity of only 17% this winter, contributing to higher domestic gas prices. Four of the UK's big six utilities have already increased their retail gas and electricity prices by 15-20% this year.
LNG imports to the US this winter have also been minimal, said Gordon, although this had less impact on prices because of mild weather and brimming natural gas stocks. With Japan already paying more than double the price of gas in Europe or the US for acargo of LNG in January, Gordon expects this pattern to continue.

"I'm still mystified why there is such a huge amount of imports expected in the US this summer," she said. While most expectations are for the US to import 2 bn to 3 bn cfpd of natural gas as LNG over the summer, Gordon believes it will be more like 1.5 bn cfpd, much less than the 4 bn cfpd last summer.
The US is usually the dumping ground for spare LNG cargoes in the summer months, which it has used to fill storage, "but the current price is not going to attract them," Gordon said.

A Dow Jones Newswires poll of 12 financial institutions in January predicted an average US summer gas price of $ 7.48 per mm Btu, making it a less attractive LNG export destination than even the UK, where gas for delivery this summer is currently trading on forward markets at $ 9.33/mm Btu.
"If, at the end of this winter, we've got (storage) inventories below 14 tcf, it will be hugely bullish for natural gas prices," Gordon said.

Spain is also likely to feel the effects of a tight LNG market this summer, she said. Reservoirs that feed Spain's hydroelectric plants are only 33% full, the lowest level since June 2002, she said.
"There's a deficit of three terawatt hours (of hydroelectric energy). That's going to have to be replaced by gas."

The impact in the rest of Europe is less clear cut.
"The reason the gas price is high in the UK and northwest Europe is partly because of fewer LNG deliveries caused by high prices in the Far East, but also because of problems in Norway including the slower than expected ramp up of Ormen Lange and the Kvitebjorn shutdown last year," said industry consultant Morten Frisch.

After an eight-month shutdown, StatoilHydro started the Kvitebjorn gas field at half capacity in January, but will have to shut the field down again early in the summer to repair a pipeline. The ramp up of production to full capacity at Ormen Lange gas field will proceed slowly because of delays in the drilling program, StatoilHydro said.
If things do not go according to plan in Norway, the quantity of LNG available to Europe next winter will be even more important. If new supply from Qatar and other producers is arriving as planned, it will help the supply demand balance and soften prices, Frisch said.
"Time will tell when this is going to happen," he added.