Those reeling from the latest spike in natural gas prices should discard any hopes that imported liquefied natural gas will make the commodity any cheaper over the next five years.
A report by Tristone Capital analyst Chris Theal said LNG will be in scarce supply until at least 2010, and even then it’s unlikely North American terminals will be able to pay enough to entice LNG shipments away from European and Asian markets.
“The bottom line is ... LNG is going to move where the highest bid is,” he said.
“LNG isn’t a solution to lower prices. It’s a solution to having balance in the market over the long term.”
For gas producers in Western Canada, gas prices will be determined by supply from the Lower 48 and Canada “for years to come,” while LNG exporters shop for their best deal, he said.
Theal predicts that gas prices for the rest of this decade will likely be US$7-$8 per thousand cubic feet, while foreign LNG could be delivered at US$4 per mcf plus profit.
But global liquefaction capacity is unlikely to keep pace with demand over that period, while beyond 2010 new LNG terminals will depend for supplies in Russia, Iran, Saudi Arabia, West Africa and Venezuela, all areas with high geopolitical risk profiles, he said.
Theal: Russia, Qatar will be major suppliers
Theal is counting on Russia and Qatar to become the world’s major suppliers of LNG — unseating the current leaders from Indonesia, Malaysia and Algeria — as they exploit vast gas reserves.
Giant state-owned Gazprom, already producing 20 percent of the world’s gas, is poised to gain a large foothold in North American markets, where it expects to meet one-third of LNG imports that could reach 15 billion to 20 billion cubic feet per day by 2020 from today’s 1.7 bcf
Theal, who based some of his findings on information gleaned at the sixth World LNG Summit in Rome earlier in December, said Gazprom is intent on deriving maximum value from its resources by taking a role in production, processing and marketing, although it faces challenge from rising costs in exploiting its Shtokman field in the Arctic. Partners to develop that field are expected to be announced in early 2006.
However, Theal had bad news for Petro-Canada, which is involved in discussions with Gazprom to become a partner in a St. Petersburg liquefaction facility to ship LNG to the planned Gros-Cacouna terminal in Quebec, which is being designed for send-out capacity of 500 million cubic feet per day.
He said the Russians doubt the Quebec terminal, a joint venture with TransCanada, will have the market access they want despite easy access to the United States.
LNG consumption forecast to grow more slowly
Theal forecasts that LNG consumption will grow worldwide by 6-8 percent over the next decade, down from earlier forecasts of 10 percent, reflecting a slowdown in demand in India and China because of higher commodity prices.
By 2010, Tristone believes worldwide regasification capacity will have reached 54 bcf per day, far ahead of the anticipated export capacity of 36 bcf per day. Today, LNG export capacity exceeds regasification capacity by 17 bcf to 20 bcf.
Theal said LNG supplies after 2010 face a number of challenges, including greater security of supply uncertainty, while financing hurdles and a shortage of skilled labor and engineers are hiking the cost of facilities by 15 percent facilities.
The report also said North American regasification facilities are located too far from consumers, further adding to the costs of LNG imports.
The world fleet of LNG tankers, currently 183, could double in the next decade, but the strain on shipyards may stand in the way of that objective, he said.
Even if the tankers could hit the water, the 12 years needed to train qualified tanker captains is a further obstacle.
Tristone noted that global gas reserves are an impressive 6,000 trillion cubic feet, but only 10 percent is in countries of the Organization for Economic Co-operation and Development, while 75 percent belong to seven state-owned companies.
The report said that “with questions of transparent policy and markets in Russia, nuclear development in Iran and geopolitics in Venezuela, the increased geo-political risk is likely to restrict/limit/delay investment by the majors where country, counterparty and financial risk increases."
