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U.S. LNG imports halved by better Asian fuel bids Cargoes from Atlantic basin steam east for better prices in Japan, Korea; U.S. surge in unconventional gas wells may mean long-term low prices in North America Allen Baker For Petroleum News
Imports of liquefied natural gas into the United States have all but fallen off a cliff this year. Total landings will be just 350 billion to 360 billion cubic feet for 2008, according to Energy Department analysts.
That’s less than half the amount the nation imported in 2007. It’s just a third of the 937 bcf the Energy Information Administration expected in its January analysis. Just one of the seven existing North American terminals could handle the entire amount.
For next year, EIA figures LNG imports will total just 410 bcf. That’s far below the 1,179 bcf it was projecting as recently as January.
Strong Asian demand Strong Asian demand has drained LNG out of the Atlantic basin, said analyst Damien Gaul of the EIA in two late November interviews with Petroleum News. Even the mid-2007 startup of a big Marathon-led LNG project in Equatorial Guinea (capacity 163 bcf annually) didn’t move the market significantly. Cargoes from that plant are pretty much going to the Pacific basin, Gaul said.
“This year there’s been strong demand in Europe. But it’s really been Asia that’s lured a lot of the cargoes away,” Gaul said. “There’s been a minimum of 50 billion cubic feet a month from the Atlantic basin that’s been diverted to the Pacific basin.” With the longer sailing times, Asian prices have to be significantly higher to make it worth the trip.
Japan has been importing an extra 20 bcf a month just to replace the electricity that was being generated by the world’s largest nuclear plant. That plant was damaged by an earthquake and isn’t expected back on line until sometime in 2010.
Summer price spike Prices for LNG delivered to the big three consumers — Japan, Korea and Taiwan — rose to the equivalent of $20 per thousand cubic feet last summer, though the price has come down to $13 to $14 per mcf recently, Gaul said.
“Higher prices are beginning to bite on the demand side,” says Frank Harris of Wood Mackenzie, the Scottish energy consulting firm.
Demand growth in the Pacific basin is now “steady, rather than spectacular,” he said in a September presentation. Last April, Harris was predicting an LNG supply shortage early in the next decade and a major shortfall by 2020. He’s not backing away from that analysis.
And the International Energy Agency is still expecting a gap between supply and demand as early as 2012. In its World Energy Outlook 2008, the IEA says: “Shortfalls in the availability of LNG could push up prices and encourage the faster development of indigenous resources in importing regions.” LNG production rose just 0.4 percent in the first nine months of this year compared with the same period in 2007.
No spare cargoes Bigger volumes of LNG aren’t likely to come to the United States as long as demand in Asia continues strong and prices in the North American market remain low.
“There are not really any spare cargoes available in the world market to come to the United States,” said Gaul of the EIA.
Back in the summer of 2007, he noted, there was a spike in U.S. imports of LNG. Cargoes from Trinidad and other Atlantic basin producers ramped up so they could supply Europe in the winter months at high prices, then send their LNG to U.S. ports in the summer, when European demand slackened.
Ample storage capacity in this country makes it the consumer of last resort when tanks are full elsewhere.
Oil price link Recent long-term contracts have been linked to the price of oil, rather than the fixed-price contracts that were being negotiated in the early years of the LNG trade, say both Gaul and Harris. Qatar has been leading that change.
A lot of new capacity will be coming on line in the next three years to serve the Pacific Basin, and Qatar is adding six big new trains, Harris said.
Each Qatari train will supply about 8 million tonnes of LNG a year, or the equivalent of about a billion cubic feet a day. That LNG is “inherently flexible,” Harris said — it can go to either the Atlantic or the Pacific basin.
The Qataris have been pretty firm about insisting that contracts for LNG from that country will be priced at the LNG’s energy equivalent in oil, Harris said, and other suppliers have been following that lead.
Low U.S. prices projected But in recent months U.S. production of natural gas from shale and coalbed sources has boomed, and North American prices have plummeted.
In a Nov. 24 analysis, Wood Mackenzie predicted U.S. gas prices will trade in the range of $5 to $6 per thousand cubic feet for the next five years. That meshes with the current EIA forecast, which projects that Henry Hub prices will decline to $5.99 per thousand cubic feet by 2016, then rise to $7.32 per thousand cubic feet in 2030.
“We are now in a position of significant potential over-supply brought about by the huge success in the development of shale gas plays,” Jen Snyder told the Houston Energy Forum. He’s the head of Wood Mackenzie North American Gas Research.
That consulting firm predicts the Haynesville shale play could ramp up production and quickly rival the Barnett shale, now producing 3.8 bcf daily.
“Our models suggest that the Haynesville shale, if developed in our most bullish case, could be bigger than the current size of the Barnett within five years,” according to upstream analyst Robert Cooke, who made that projection in July.
Snyder noted in November that many analysts have predicted a “floor” on gas prices at the marginal cost of producing from more expensive shale plays.
He disagrees.
“Simply stated, there is no requirement for the rapid near- to mid-term development of some of the more expensive or challenging shales such as the Marcellus or Horn River,” he said. “We believe that there are sufficient volumes available at the development break-even price of $5.50 per mmbtu or below for the market to balance.”
Murky future That sort of price isn’t likely to appeal to LNG producers around the world. So their cargoes likely will head for other ports unless there are contracts in place or there is simply no room in the storage tanks elsewhere.
But the world is changing quickly, and the new realities in the LNG supply and demand picture aren’t easy to sort out.
Tight credit markets have caused at least half a dozen LNG projects to be delayed or canceled. On the demand side, several gas-intensive oil sands projects in Canada have been delayed or cancelled. A recession means less industrial demand.
LNG supply shortages that were expected to show up early in the next decade may be pushed a year or two into the future if the recession stifles demand growth, particularly in Asia.
That’s already being reflected in the real-time marketplace, says Gaul of the EIA
“Market conditions now are changing quite rapidly,” he said. “There are reports of reduced demand in Japan and Europe, and of storage facilities filling up. There are discussions that there will be LNG cargoes looking for a home.”
But for this year so far, home has been just about anywhere but the United States.
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