Royal Dutch Shell Plc  .com Rotating Header Image

Financial Times: World prepares for a transformed industry

By Daniel Pimlott
Published: December 5 2006 02:00 | Last updated: December 5 2006 02:00

Liquefied natural gas, or LNG, made by supercooling gas into liquid form to shrink its volume and make it easier to transport, has traditionally been a niche product.

However, consumption is now growing at 10 per cent a year, compared to 2 per cent a year for pipeline gas, and it is among the fastest growing energy markets in the world.

With European and North American gas reserves near or over production peaks and demand up in Asian countries with little native gas, LNG is experiencing an explosion in demand. By 2010-11 it is expected the LNG industry will have doubled relative to 2004.

In anticipation of the boom, production efforts have been stepped up across the world. More than 50 regasification terminals, which convert LNG back to gas, have been proposed for the US shores in the last few years. The global fleet of ships for transporting LNG will have nearly tripled by 2009 from the 135 afloat at the end of 2002.

“At one point, LNG studies were the only projects we had coming in,” says one LNG consultant. “I was getting bored.”

But talk to executives at the world’s leading energy companies and top of their list of worries for the future of LNG comes one issue: supply. Of the planned US projects, only six to eight are expected to be built by 2016, and last year many ships struggled to find cargoes. Global supply is expected to undershoot predictions by 28 per cent in 2012, according to PFC Energy, the consultancy.

“The challenge is keeping up with demand,” says Roland Kupers, vice president of global LNG at Shell.

Supply has been a problem because delays in production and cost rises have afflicted the business. Developments are often unpredictable because, by their very nature, LNG projects tend to be in hard to reach places with poor infrastructure.

“Projects are large and difficult, and becoming more difficult,” says Mr Kupers.

Many of the world’s biggest reserves are in high risk countries such as Russia, Venezuela, Nigeria, Iran and across the Middle East. The Australian Gorgon project, which Chevron rates as its most important, has struggled to overcome regulator’s environmental worries.

Shell’s Sakhalin 2 oil and gas development off eastern Russia exemplifies some of the problems of LNG development: its cost has doubled from original projections to $20bn, and it has suffered from ongoing environmental regulations set by the Russian government.

But despite the problems, Mr Kupers says the project remains vital to Russia and will deliver $50bn of tax revenues at $34 a barrel, and up to $80bn at $60 a barrel.

But the current demand for LNG is also exceeding what the available expertise is capable of developing. On top of this, soaring prices for basic construction goods like steel and concrete have driven costs up.

Between 1999 and 2001 the LNG market produced about 7m tonnes annually, and by 2010 it is expected to produce 55m tonnes. However, all the projects are still being built by only a handful of engineering companies. “The engineering procurement and construction market is having a hard time keeping up with the pace of development,” says Gavin Law of Wood Mackenzie.

This has led to concerns that LNG could lose its price advantage. There is also a risk that failing to provide an adequate supply will drive policy makers to pursue other options, such as gas to liquids or coal gasification. In light of this, the sector is focusing its efforts on managing expense. “The industry has never been geared up to produce this much,” says Hank Petranik, vice president of LNG at Transcanada, a leading US gas infrastructure provider. He says the key to cost lies in having long-term relationships with engineers and builders.

John Gass, president of global gas at Chevron calls the cost rises “short-term dislocations”. LNG is a long-term business, still heavily reliant on twenty or thirty year contracts with customers, he argues.

Chevron has focused on improving its project management and relying on better technology to improve efficiency and capacity to make up for the cost shocks.

But in the short term, analysts say there are few alternatives to LNG. “Its extremely unlikely that the trend towards a greater [use of] LNG can be stopped,” says Michael Stoppard of Cambridge Energy Research Associates. “You just have to look at where the world’s gas resources are and where the markets are.”

At the moment, signs are that supply is improving and becoming more flexible. Even including delays, global LNG capacity is expected to rise by 50 per cent by 2010. Ships are now fuller, indicating that production is catching up with the building of infrastructure.

Key to future supplies will be how the market responds as more gas from Qatar, far and away the world’s largest supplier of LNG, comes online. The rise in Qatari LNG output by 2010 alone will be five times what the US currently uses.

“They are really changing the scale of the business,” says Gabriel Wayne of PFC Energy. “Qatar will be a monitor for how much LNG these markets can take. The question is, does that flood of LNG change the dynamics of the market, or will the US and Europe support that level of volume growth and still leave room for more longer term developments?”

Copyright The Financial Times Limited 2006 and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

0 Comments on “Financial Times: World prepares for a transformed industry”

Leave a Comment

%d bloggers like this: