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Financial Times: LNG: Opportunity lost as gas markets set to tighten

By Dino Mahtani
Published: November 9 2007 04:36 | Last updated: November 9 2007 04:36

The past decade has seen the beginnings of the creation of a global gas market with the emergence of liquefied natural gas as a fully flexible option of delivering gas supply.

Strong demand for gas-fired power stations in industrial nations coupled with high energy prices have provided the economic conditions for investment in the expensive process of cooling gas to minus 160°C and shipping it anywhere in the world in large tankers.

The LNG transport system affords consuming countries an alternative to piped gas, which comes with geopolitical risks – as European markets discovered when Russia switched off its piped gas supply to Ukraine in 2005.

Independent and national oil companies have over the past decade poured billions of dollars into building LNG plants in places as diverse as Qatar, Nigeria, Australia and Trinidad, with increasing numbers of long-term supply contracts ending up repackaged for the spot market. The past five years have seen LNG production grow by about 50 per cent as Europe has tried to diversify its gas supplies away from piped gas, demand for LNG in the US has taken off and demand from India and China has soared.

The International Energy Agency, the energy watchdog for developed countries, estimates LNG production will grow by the same rate until the end of the decade, with capacity possibly reaching as high as 600bn cu m by 2015, when LNG could account for up to 16 per cent of global gas demand.

But there are already signs that LNG markets are heading into a tight period, where supply could be constrained by a combination of cost impediments, political insecurities and security fears and environmental challenges. The size of the opportunity lost is staggering. An estimated $40bn of gas produced alongside oil was burned off globally last year – a result of the lack of gas-gathering networks in place, mainly in Russia and Nigeria.

Meanwhile, no final investment decisions for any LNG project in the world were taken in 2006, the first year with no such announcements made since 1998 and a sign that the pace of LNG development may be struggling to maintain its momentum.

While Qatar, the world’s biggest LNG exporter, plans to more than double production within four years, it faces a moratorium on new gas development until at least 2010 while geologists assess the reserve base of the tiny kingdom’s giant North Field.

Indonesia, the world’s largest LNG exporter until last year, has also been cutting its deliveries because of a slower than expected rate of reserve replacement as well as dwindling feed gas production.

On a wider level, cost problems with sourcing skills, machinery and materials have caused delays by a year or more on a variety of projects, pushing costs up by an average of more than $2bn on certain projects. But analysts say that, even without these problems, demand for LNG is set to outstrip supply.

“Even assuming that the current tightness in the LNG market is worked out in the next few years, the industry needs a new Qatar in order to maintain growth,” says Frank Harris, an LNG expert at Wood Mackenzie, the energy consultants.

Unfortunately, leading candidates such as Russia and Iran – which hold the world’s two biggest reserves of gas – look unlikely to fill that requirement in the immediate future. Interference by Russian authorities, typified by Gazprom’s eventual acquisition of a majority stake of Shell’s Sakhalin II project following the announcement of escalating costs, has further complicated plans to expand LNG capacity there.

In Iran, the threat of international sanctions or a possible US-led bombing campaign has been enough to put big companies off investing in the country’s prolific South Pars field, which is part of the same structure as Qatar’s North Field.

Meanwhile, political uncertainty surrounds the contracts awarded for two big new LNG projects in Nigeria, which has an established LNG industry and hopes to become one of the world’s biggest suppliers. Fears also run high that militancy in the oil and gas producing delta region may worsen and contribute to further delays.

Algeria, the first country to have ever shipped LNG, astonished industry executives this year by expelling Repsol as its partner in an project where costs had spiralled out of control. Even Australia, a more stable political environment than its competitors, has faced technical glitches on projects and concerns about high levels of carbon dioxide in its feed gas.

Some analysts are also wary that Qatar, which hopes to account for 20 per cent of the world’s LNG market by 2010 if all goes well, could face issues with the health of its North Field. Industry sources say that the moratorium, enforced since 2005, was sparked by the drilling of at least one dry well by a multinational company operating in Qatar. Separately, Qatargas, one of the main consortia, has also said deliveries for its second phase will be delayed by a few months. In the medium term, the tightness could force a further realignment of long- term supply contracts on to the spot market, where Asian countries, which tend to pay higher prices, are likely to end up as beneficiaries.

Copyright The Financial Times Limited 2007 and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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