LNG ruling the world? OPEC loosing grip. 
by Dr. Cyril Widdershoven

The North African region is booming, E&P opportunities are piling up every month, mostly focused on the discovered gas potential of the region. As stated by a journalist this week “Turn on a natural gas tap in Spain and out pours an exotic blend from Algeria, Libya, the Gulf States, Norway, Nigeria and Trinidad.” More than half of this arrives by Liquefied Natural Gas (LNG) tanker, whose features are becoming a much more common sight on the high seas, with major implications for global gas markets.  In 1999, gas consumption grew by well over 20 per cent in Korea, Portugal and Turkey, and by more than 10 per cent in Spain, China and the countries of the continental America’s southern cone, according to statements of BP data. Japan, again recovering from its economic downturn, has shown a yearly increase of demand of around 8 per cent per year. 

As Asian demand is expected to reach 650,000 bpd in 2001, and global demand at 800,000-900,000 bpd, gas demand is intrinsically growing too. The natural gas market, an analyst stated this week, is in a flux. The Middle East and Asean gas grids will become reality by 2005, fundamentally changing the role of gas in the energy mix. “New LNG contract will be different, as buyers will ask for better benchmarks, shorter contract terms and more take-or-pay flexibility.” 

However, the real surprise and strategic change in the total energy supply mix is that, even that there is no global shortage, a lot of the current and future production growth is not in the Middle East or Asia, but in North Africa, Central Asia and Russia. Supply will be the problem. As it takes years to build pipelines, the LNG option is preferred by the majority of players. Spain is one of the best examples. Spanish demand will grow 118 per cent in the next 10 years. Of its 16.3 billion cubic meters of domestic consumption, 35 per cent came via pipelines from Algeria, through the Maghreb pipeline, with another 13 per cent across the Pyrenees, via the northern Europe gas grid.  The rest was sea borne, as LNG. “Spain is a typical LNG country”, says Dick de Jong, director of global business of Royal Dutch/Shell, “It’s the hind leg of the whole pipeline infrastructure and will always pay the highest price for piped gas from Northwest Europe and Russia.” 

Asia is a totally different story. Three quarters of the world’s LNG is already going to Asia, mostly Japan and Korea. China is the new goldmine. LNG is going to supply a good part of Chinese demand for decades ahead, with a trans-Siberian pipeline still in the planning stage. 

Currently, 128 LNG ships are operating globally, with a further 29 on order. Hyundai Heavy Industries in Korea believes that orders will rise to 50 by early 2002, and industry players report a three-year lag time for any new orders. In the USA, user of 27 per cent of world gas output, redundant LNG receiving terminals are being brought out of mothballs to take advantage of compelling price differentials. “The economic of LNG are excellent,” said George Kaiser, of US Kaiser-Francis. The landed cost for Trinidad LNG supplies in the US including asset amortization is $2.50-2.75 per thousand cubic feet, while the US wellhead price for piped gas is close to five dollars and transport costs add another 50 to 75 cents. 

According to Martin Houston, executive vice president responsible for LNG at BG Group, stated that “cost are being driven down, and LNG is now competitive with piped gas over anything more than 2,000 kilometers (1,243 miles). Also, there is another positive aspect of gas pricing. “It is unlikely that we will see global gas pricing within the next decade,” says Houston. “However the trend is clear – an increasing convergence of market prices.” All in all, the time for LNG is right now, in the next decades, pipelines will take a shot at these margins. With huge pipeable gas supplies in Russia, Turkmenistan, North Africa and Alaska, LNG may never provide more than five to 10 per cent of the market. However, the latter projects are still in their planning stages or under sever regional and international constrictions. The world will definitely see more and more of the huge bulky LNG tankers in the near future.  

One of the major contributors is the ongoing Ras Laffin/Dolphin project in Qatar. Last week’s affirmation that Ras Laffin will be in the market to raise approximately $1.2 billion in bank and export credit agency financing for the third LNG train expansion of the LNG production project shows the impact of growing project demand forecasts. It will provide the LNG for supply and purchase contracts signed July 31, 1999, with Petronet LNG Ltd of India. It has been reported that to protect the credit of the original Ras Laffan Project, the expansion and financing will be implemented in a separate project company. The eight years of production history from Qatar’s North Field confirm the deliverability of the world’s largest non-associated gas field.

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Reprinted as submitted.