Natural Gas to Become New Global Energy Commodity
Wednesday, 07 May 2008
Natural gas is set to become the new global energy commodity due to market-changing pricing, contracts and emerging arbitrage opportunities. Michael Stoppard, Cambridge Energy Research Associates senior director for global gas, said at CERAWeek 2008 in Houston. "Momentous investment decisions finalized several years ago assure that liquefied natural gas (LNG) is set to become a more freely traded, flexible, worldwide commodity, and will reshape the global market's traditional pricing and contracting practices," he said.
Despite substantial delays in LNG projects, a slowdown in project starts, tougher upstream terms, joint-venture issues and spiraling costs, "the LNG armada has already set sail," said Stoppard. However, he added, current difficulties "raise major questions about the pace of growth of LNG beyond 2010 and its ability to deliver.
"They do not materially affect the growth story to 2010 which is "baked in,' based on momentous investment decisions made several years ago."
Due to investments, he predicts global liquefaction capacity will increase about 30%. to some 247 million metric tons during the next two years, up from today's 190 million metric tons.
Meanwhile, LNG shipping capacity will increase more than 50% by 2010, with a record 58 ships to be added to the existing fleet of 251 during 2008. In addition to allowing expanded arbitrage opportunities, abundant shipping capacity will allow for new market solutions, such as using ships not only to transport LNG but also as floating regasification and storage vessels.
Investment in regasification terminals is rising at a faster pace than the associated liquefaction-not surprisingly in view of the fact that regas represents only 10% to 15% of LNG supply-chain costs. For aggregators, surplus regasification is essential to being able to move shipments between regions as needed. Countries considering building new LNG import facilities include Brazil, The Netherlands, Pakistan and New Zealand.
As a result of these investments, global LNG supply will grow almost 33%, global LNG shipping capacity will increase more than 50% and utilization of LNG regasifi cation capacity in the Atlantic Basin will fall below 50%, all during the next two years, he said.
The new LNG supply will be much more flexible than the traditional LNG-trading structure. Before now, long-term contracts pre-sold to specific countries and end-users with fixed points of dispatch and delivery-rigid terms previously believed necessary to finance the large capital requirements of LNG producers and importers.
Recent changes in these contracts are not fully recognized because most supply continues to move under long-term contracts. However, many newer contracts are not dedicated to a specific market or end-user, but to an aggregator or merchant buyer who will seek to move the LNG to the market of highest value, much like most other commodities.
Stoppard estimates 40% of LNG supply facilities under construction are "non-dedicated" and flexible to trade. Most is either in the Atlantic Basin or the Middle East, with the Pacific Basin continuing to favor old-style LNG contracts.
Supported by the expansion of supply, shipping and regas capacity, the amount of flexible trade will double by 2010, and will transform thinking in the industry, although supply will remain in the hands of a relatively small number of key players, he said.
The bulk of the new supply will flow into the Atlantic Basin and, in particular, to North America, the world's largest gas market and the most open in terms of liquid trading hubs and accessible gas storage. With U.S. domestic gas production reaching a plateau, LNG imports into North America reached record levels in 2007, but the sharp step-up in imports will come in 2009.
"North America's increased role in LNG will challenge the pricing and contracting practices of old," Stoppard says. "Sales into North America will necessarily be short-term and involve more spotprice risk. A three-way accommodation will be needed to bridge the needs of the traditional Asian and Continental European clients focused on the long term, the security of supply with the market-based needs of North America and northwestern Europe, and the proliferation of scattered, small-market entrants."
The increased capacity of North American storage will also facilitate flexibility in the global market. Robert Ineson, CERA director of North American natural gas, said, "North America has over 4 trillion cubic feet of working storage capacity, which is already providing an important buffer against market swings around the world. This role is set to grow in the years ahead."
Stoppard said, "A growing and more flexible supply, available shipping capacity, the development of a network of regas portals to allow arbitrage to take place, and the bringing together of the great markets of Asia, Europe and North America will be the result."
Source: Red Orbit
