Consumers need not fear shortage of LNG

Nov 17, 2008 01:00 AM

The deepening financial crisis and collapse in oil prices is all but certain to delay a number of LNG projects, but consumers need not fear a shortage since an economic recession may stifle demand growth.
Somewhere between three and just short of a dozen liquefied natural gas projects may be delayed or even scrapped as the financial crisis dries up access to credit, industry participants say, tightening supply.

However, while considered conventional LNG wisdom up to a few months ago, shortages early in the next decade are no longer a given, thanks to a recession and to gas alternatives in the United States that may free up supply intended for that market.
"The gas industry will not be spared from this crisis," Hassan Marican, chief executive of Malaysia's Petronas said at a gas conference in Hanoi.

Malaysia is the world's second largest exporter of LNG after Qatar. LNG trading on the Asian spot market has already slowed to a trickle as many buyers hold off on uncertainty about future demand. Spot prices have fallen between $ 4 and $ 7 from above $ 20 per mm Btu) a few months ago, which still pales next to the 60 % collapse in crude oil over the same period to below $ 60 a barrel.
Japan, the world's largest LNG importer, expects the downturn to slow gas demand, according to the chairman of Osaka Gas. And Toyota Motor Corp, the world's top car maker and a large power consumer, has cut its output forecast for the fiscal year to March 2009 by 6 % to 7.92 mm units on the back of the crisis, signalling slowing end-user demand for electricity and thereby gas.

"In the car-building regions of Japan, demand has dropped already," said a trader with a large North Asian buyer. "Major Asian buyers are covered for the winter, unless the weather ends up colder than expected."
Up to 173 mm tons of LNG capacity could come onstream before 2015, according to consultants Wood Mackenzie. Absorbing that would require annual demand growth of more than 10 %.

Consultants at FACTS are scrambling to revise their forecast for world LNG demand to grow by an average 11 % annually, or 23 mm tpy from now until 2012, according to Wood Mackenzie. Others agree that demand growth will slow. The International Energy Agency expects high prices that have made some consumers opt for cheaper, but dirtier fuels, to slow the pace of growth in the world's hunger for natural gas.
The move to cleaner fuels, such as gas, has been a strong driver for LNG growth in countries such as India and China in recent years. China has plans for a slew of LNG import terminals.

Add shales
To the economic worries can be added a boom in unconventional gas production in the United States that may free up volumes originally intended for that market.
"The increase of unconventional production could have a much more profound impact on LNG demand than the economic crisis," Frank Harris, head of global LNG consulting at Wood Mackenzie in Edinburgh, said. "Some of the LNG capacity currently under construction that was earmarked for the US market, where is it going to end up?"

US gas production is expanding to currently nearly 60 bn cfpd, due mainly to shale gas, or gas trapped in sedimentary shale beds found across North America.
While more difficult and costly to extract, shale has become a big factor in growing gas supplies as conventional wells decline. Even at around $ 7 per mm Btu, lower than global prices, US natural gas prices are still above a $ 2 average seen in the 1990s. Wood Mackenzie, too, is in the process of revising its demand and supply forecasts and Harris said unconventional gas production will shave a significant amount off of its current forecast for 10 bn cfpd of US LNG demand by 2020.

Supply down
To be sure, the supply bottleneck may still come in the second half of the next decade, depending on how long and how heavily demand suffers from the current downturn, two factors few are willing to hazard a guess on at this point. High construction costs and a decline in the number of project approvals, often due to environmental concerns, have long been reasons for project delays and the anticipated crunch.
"Will there be enough contractors and resources for all projects to develop, I doubt it. So there'll be some delays and cancellations," independent consultant Andy Flower said at a recent conference in Singapore, speaking about the about 35 mm tpy of possible Australian capacity by 2014.

And the financial crisis is making it harder for new supplies to get access to credit, especially for those projects that are not backed by large multinational oil and gas majors.
"The current financial crisis is going to have some effect," said Gerard Schuppert, manager of global LNG marketing and sales at ConocoPhillips at the same conference. "But the real question is: can the industry develop new supplies fast enough," Schuppert said.

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