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LNG promise seen to ward off oil price woes

Times of India: LNG promise seen to ward off oil price woes

“Scenario planners at Royal Dutch/Shell think that gas may surpass oil as the world’s most important energy source by 2025.”

AUGUST 27, 2004

Posted 28 August 04

Even as headlines scream about $50 a barrel oil, energy firms and their investors are becoming increasingly excited about its likeliest replacement: not wind nor wave nor solar power, but gasor, to be precise, gas that is frozen and transported as liquefied natural gas (LNG). This is expected to become as ubiquitous and crucial to the global economy as petroleum is today. Scenario planners at Royal Dutch/Shell think that gas may surpass oil as the world’s most important energy source by 2025.

While oil became increasingly important during the past century, for much of that period natural gas was seen as its ugly stepsister: burnt off or stranded when discovered by accident, and rarely sought after. Demand for gas has taken off in recent years, thanks to its greennessit burns far cleaner than oil or coal, making it ideal for new power plants from California to China. And burning gas is much less carbon-intensive than burning coalmaking it helpfully less easy to blame for global warming.

Until recently, the development of a global gas market has been hindered by one inconvenient fact. Gas is, by definition, gaseous at room temperature; oil is a liquid that can easily be transported. Gas traditionally needed elaborate systems of pipelines to get it from the wellhead to the customer. That meant it was typically used fairly close to where it was produced, shipped at great expense via pipeline or, more often, simply wasted.

The rise of LNG promises to change that. Put simply, gas can be frozen into liquid form near its source, shipped to market in refrigerated tankers, warmed back into gaseous form on foreign shores and injected into the local pipeline system. Thanks to this technological advance, gas has the potential to be a fungible, global commodity like oil.

True, energy-poor countries such as Japan and South Korea have long relied on a rather clunky form of LNG. But soaring demand for gas has unleashed rapid innovation and investment that is driving down the capital cost of LNG. Tanker ships are getting bigger and more affordable. One-off project planning is giving way to economies of scale. Even so, shipping gas remains much more capital intensive than shipping oil. Building typical 5m tonne trains of LNG which include liquefaction plants, tankers and regasification terminals can cost $5 billion. Thus, as one senior gas executive puts it, only a few firms can play in this game. Still, leading executives now expect the energy industry to invest a massive $100 billion in expanding LNG over the next decade. This expansion of LNG is being driven by America, the world’s largest energy market. As demand for gas has taken off in recent years, North American supply has not kept pace, causing a spike in prices

Despite the current optimism, the huge political and financial risks inherent in the LNG business mean that the boom is not yet certain to happen. The capital required is huge, the number of firms with deep enough pockets very small, and the memory of the earlier gas-price collapse induced by America’s deregulation is fresh. As Malcolm Brinded of Shell puts it, our hopes have been dashed before.

Yet, at today’s prices, the potential rewards are fabulous for those firms with the courage, capital and competence needed to complete LNG projects.

Gas will be the fuel of choice for at least the first half of this century (and) flexible, long-distance supplies of LNG are the key. Get ready for a $100 billion investment boom, the prelude to the century of natural gas.

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