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U.S. imports of LNG drop for 2nd year EIA analysts expect rebound this year, but shortages of feedstock gas and European competition for supplies are potential roadblocks Allen Baker For Petroleum News
Imports of liquefied natural gas into the United States declined in 2006 for the second straight year, as European customers outbid U.S. firms for the fuel. Those findings come in a new report from the U.S. Energy Information Administration.
With delays in several projects around the world, including Chevron’s Gorgon and Gazprom’s Sakhalin 2, LNG production may not grow as fast as projections — or worldwide demand. That could keep prices high and may divert LNG supplies away from the U.S. market.
High European prices Last September, for example, netbacks to the big LNG operation in Trinidad and Tobago for shipments to Spain were $9.17 per million Btu. Shipments to the United Kingdom brought producers $5.32 per million Btu, still a big payday compared with the $3.71 netback for shipments to the U.S. terminal at Lake Charles, La.
Netbacks are the price that LNG producers get after subtracting transportation and other marketing costs. And a voyage to Spain or Scotland is far longer than a trip across the Caribbean and the Gulf of Mexico to Louisiana, so the prices at the consuming end in Europe were even more impressive.
“Competition has diverted much of the supply away from us,” said Damien Gaul, one of the authors of this month’s report, in a Petroleum News interview. “But this market has been the focus of a lot of LNG suppliers, so we think the supplies will get here.”
Gaul’s EIA report predicts imports of around 770 billion cubic feet this year, up 35 percent, and around 1.08 trillion cubic feet in 2008, a further increase of 39 percent.
Existing facilities can handle those amounts easily. U.S. import terminals in the Atlantic basin already can bring in 1.7 trillion cubic feet annually, and capacity will more than double by the end of 2008 with expansion of one terminal and the addition of three new Gulf Coast ports. The Sempra port in Baja California will also provide LNG import capacity for the West Coast market.
Slim pickings But so far, U.S. prices haven’t proved high enough to pull in even a quarter of the LNG available in the Atlantic basin market, as spot cargoes are being lured to Europe, which is consuming 88 percent of the available LNG in that market.
Last year, U.S. LNG imports slumped to an estimated 12.1 million tonnes of LNG (equivalent to 580 billion cubic feet of gas), less than 3 percent of the U.S natural gas market. The import figure was down 8 percent from 2005 and 11 percent below the peak of 652 bcf in 2004.
Still, Gaul figures new supply from Equatorial Guinea, Norway, and then Qatar and Yemen, will bring enough added LNG to the Atlantic basin market that more of it will end up in the United States. While Qatar and Yemen may ship their product mostly to Europe, their addition to the market, expected in 2008, should loosen the supply equation somewhat.
“It’s difficult to discount the fact that there’s lots of new supply,” Gaul says. “In the next couple of years, there’s going to be even more supply.” Since the U.S. is by far the largest natural gas consumer in the world, “this market has been the focus of a lot of LNG producers, so we think the supplies will get here,” he said.
Other analysts are more pessimistic, and some think the worldwide LNG supply squeeze could last until 2011 or longer.
High projections Gaul admits that the EIA projections have been off the mark in the recent past.
“We’ve been expecting these LNG supplies to show up, but they didn’t show up in the last year and a half,” he notes.
As the EIA report indicates, expanded liquefaction capacity doesn’t always result in as much new tonnage as anticipated.
While new capacity was added in Egypt, Trinidad and Tobago, and Nigeria since 2005, the report says “maintenance delays and lack of available feedstock gas caused LNG production in the Atlantic basin during 2006 to grow at a much lower rate.” Asian competition LNG is a big part of the supply equation in Asia, notably in Korea and Japan, both of which have “demonstrated a consistent willingness to outbid U.S. importers,” and both of which have locked in future supplies with contracts that are often a quarter of a century long, the report says.
South Korean LNG imports rose 20 percent in 2006 to the equivalent of 898 bcf. LNG imports by Asian countries altogether are estimated at 4.9 tcf, up 10 percent for the year and more than eight times the U.S. import figure.
Both South Korea and Japan rely on LNG for more than 90 percent of their natural gas supplies, and both use the gas extensively for power generation. So they have swallowed costs that quadrupled since 2002. Spain has a similar need for LNG to produce electricity.
The United States, conversely, has a diversity of supply in its various production basins, as well as in Canada. And this country has managed to deal with seasonal peaks by using extensive underground storage. The mild hurricane season and this year’s mild winter have led to higher stockpiles than usual and a weaker U.S. market.
Delays and overruns In the longer term, LNG supplies may not rise as quickly as the builders of the multi-billion-dollar liquefaction trains may hope. Costs for those facilities are rising at an alarming rate, and the plants are taking more like four years to build, instead of three.
A recent Bloomberg report quotes sources at Bechtel Inc., the big San Francisco engineering firm, as saying the cost of a liquefaction train has tripled since 2000, to $600 million for each million tonnes of annual LNG capacity. And the prolific fields that supply the huge projects may not be able to sustain such huge quantities if they are drained at a rapid rate.
Other factors go into the mix as well, as they do in the world oil market.
In Nigeria, rebel attacks have made things uncomfortable for Shell and other big oil companies operating there. Iran sits under a political cloud as well.
“Geopolitical developments likely will continue to play a major role in energy prices and supplies, as has been the case in Nigeria and elsewhere,” the EIA report concludes. “Lastly, and perhaps most importantly, the degree of competition from other countries will be a crucial variable that determines the actual flow of LNG to the United States.”
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