The supply of LNG for the world market will be tight for years or decades to come, even with huge new liquefaction facilities being constructed or planned in Qatar, Nigeria and elsewhere, according to a top consultant in the field.
The LNG industry “seems to have developed an obsession with LNG supply,” Frank Harris says.
His conclusion: That obsession is justified.
“The big challenge facing the LNG industry in the foreseeable future is actually getting access to sufficient gas reserves, or enough gas supplies to feed growth,” Harris told the LNG15 conference in Barcelona, Spain, on April 24. Harris is head of global LNG for Wood Mackenzie, the prominent energy consulting firm based in Edinburgh, Scotland.
“The big issue is, is there actually going to be enough LNG supply to meet demand?” Harris said. “We think this is an issue in the short, medium and long term.”
Wood Mackenzie forecasts world LNG demand will triple by 2020, with consumption by then of more than 500 million tonnes a year, the equivalent of 25 trillion cubic feet of natural gas. That’s up from 141.5 million tonnes in 2005, or around 7 tcf.
While technical and cost issues dominate the short-term picture, there’s actually a shortage of available gas around the world that’s suitable for LNG development after around 2012, Wood Mackenzie figures. Harris even sees a role for small independents in finding new supplies to feed the world LNG market later in the century.
Short-term squeeze
On the surface, it appears that there should be sufficient LNG from existing projects or those under construction to meet market demand until around 2010. But Harris notes that things aren’t so rosy in the real world of complex and expensive liquefaction trains.
“In the last two or three years, we’ve seen more problems than we would have expected (in liquefaction plants), particularly with the new LNG plants,” he said. “At the same time, we’re seeing a number of countries now trying to fast-track their plans to import LNG. So the demand is actually picking up above our base forecast.
“Putting those two things together, between now and 2010, we think there are going to be times when there’s not enough LNG to go around.”
Competition for limited supplies of the clean fuel could increase fuel prices around the globe, while diverting LNG away from North America, where gas prices are comparatively low. U.S. imports have actually declined the last two years as shipments were diverted to more lucrative markets in Europe.
Overruns and delays
Demand for LNG is rising steadily as developing countries import the product to power their manufacturing bases and developed countries try to reduce their dependence on dirtier and more carbon-intensive fuels such as coal.
Taiwan, for example, uses LNG for 90 percent of its gas use, the bulk of that for power generation. The island’s LNG consumption is expected to rise 38 percent by 2010 to 10.5 million tonnes that year.
Meanwhile, mushrooming costs and environmental issues have delayed some big LNG projects around the globe.
It was a shot heard round the industry when Shell announced that its big Sakhalin 2 LNG project was going to cost around $20 billion to develop, rather than the original projection of $10 billion, and its completion date was pushed back. A final investment decision on the Chevron-led Gorgon project off Australia has been postponed repeatedly, partly because costs are rising so quickly.
“We’re seeing huge increases in capital costs for LNG projects,” Harris said. “A lot of the players are sort of taking time to sit back and say, ‘Are there things we can do to the project to change the economics, to improve the economics?’
“This takes time to work through, leading to delays.”
Near-term supply constraints are popping up due to political and geopolitical issues as well. “For example, it’s very difficult to see how Iranian LNG projects are going to move forward in the current environment,” he said. Iran holds 15 percent of the world’s proven recoverable gas reserves, second only to Russia.
Exporting countries also are seeing rising demand in their local markets, which means supply that would have gone to LNG export is instead being burned in the home country.
NOCs flex muscles
Meanwhile, the big international oil companies are being locked out of a large portion of the supply. The vast majority of known gas reserves in the world are owned by government-controlled oil and gas concerns, known as national oil companies or NOCs.
Just the three top national oil and gas companies, in Russia, Qatar and Iran, control more than half of the current known reserves. Those companies are flexing their muscles, as Gazprom did in its essentially forced purchase of a stake in Sakhalin 2 and in its negotiations over development of the giant Shtokman offshore field.
“Whilst there’s still scope for the international oil companies to get involved in developing those reserves, the outlook is getting bleaker,” Harris noted. With high oil prices, the national firms are flush with cash.
“The NOCs don’t need capital. They don’t need technology. And the national oil companies want to work together,” Harris says. They’re picking each other as partners rather than the supermajors. NOCs such as Petrobras and Petronas are now well-established players. On top of that, big service companies such as Schlumberger are eager to sell their expertise, and global drilling firms will punch the holes.
The deep pockets and operating experience of the big international oil companies aren’t as vital as they once were, and the elephant fields are scarce, so companies are willing to cut their profit margins ever thinner to get new business.
New frontiers
The current known reserves of gas in the ground total around 6,400 tcf, according to BP’s annual count. That seems flush when you figure that a typical LNG project will consume something like five to 10 tcf in a 20-year period.
But there is one reason or another why much of it is not suited to LNG development.
Some gas has too much carbon dioxide. Some deposits are spread over too large an area. Other fields are close enough to markets that the gas can be moved there by pipeline.
Or the gas may be far from the coast, as in eastern Siberia, “so it makes no sense to transport gas thousands of kilometers by pipe, then liquefy and turn it into LNG,” he says. “It makes sense to build the pipeline a bit longer and take it to market by pipe.
“There’s a lot of that 6,400 tcf that’s not available for LNG,” Harris concludes.
For the international majors and even some of the smaller private companies, “it creates a strong strategic imperative for the industry to start exploring,” Harris says.
Less above-ground risk
“A number of LNG players are taking something of a gamble, going into new areas with more subsurface risk,” Harris says. They may not find gas, or the gas they find may not be adequate to support the billions of dollars that an LNG train costs.
“Why take on the risk?
“If they do find gas and it’s the right quality for LNG, the above-ground risk is a lot lower. There are no national oil companies or domestic market.”
For Woodside’s Pluto discovery off Australia, Harris pointed out, the company is expecting to start shipping LNG about six years after discovery.
“That’s really quick by historic standards,” he said, noting that many gas discoveries have waited in the ground for a couple decades.
“If you find gas now, the ability to monetize the gas quickly is much better than it used to be.”
With big oil discoveries coming a lot less frequently, the industry is focusing more on LNG-related exploration, Harris said. Some is in areas where LNG plants are already operating, such as Australia and Nigeria, where the existing operations will take the new gas at some point or can be expanded. Other exploration is coming in genuinely new areas such as Papua New Guinea.
“Exploration needs to be a key part of any company’s strategy in LNG,” Harris concludes. “The national oil and gas companies’ strategies are evolving. To keep growing, the international companies have to do more exploration. And there’s an interesting role for the smaller companies in this business as we go forward.”
