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FT REPORT – GAS INDUSTRY 2008: Flexibility to go where the price rises the highest

By Ed Crooks, Financial Times
Published: Mar 10, 2008

The liquefied natural gas industry today resembles the oil industry in the 1950s, according to some observers.

It is dominated by a few large international companies that can afford the massive investments that are required, and the business model is based on contracted deliveries along fixed routes from the wells to the market.

Today, oil is a highly liquid global market. The question is whether LNG will go the same way over the coming decades.

There is no doubt that the LNG market is developing very rapidly.

With volumes rising at about 7 per cent a year, it is the fastest growing of all the fossil fuel industries. The technology is not new; the first LNG deliveries were made in the early 1960s.

However, rising gas prices, along with the economies of scale that are made possible by ever bigger liquefaction plants and transport ships, have made LNG an increasingly powerful competitor with pipeline gas in most rich country markets and some emerging economies as well.

The scale of the expansion can be best seen in Qatar, where the combination of one of the world’s biggest gas reserves with limited – although fast-growing – local demand has created the perfect conditions for LNG investment.

Qatargas – the joint venture between Qatar Petroleum, the national oil company, and foreign groups including Exxon-Mobil and Total – is investing an estimated $60bn-$70bn in its LNG projects, along with other joint-venture partners including Royal Dutch Shell and ConocoPhillips, in order to lift production from about 10m tonnes a year to about 42m tonnes in the next decade.

When that point is reached, Qatar will probably be the world’s third biggest gas producer, after Russia and the US, and the great bulk of that will be delivered as LNG to customers from Texas to Tokyo.

This great increase in LNG supply – which will be reinforced by developments coming onstream in countries such as Russia, Australia and Nigeria – is expected to be matched by an increase in regasification facilities in the consuming countries in North America, Europe and Asia.

In the US and some European countries, particularly Italy, building LNG terminals has become politically highly controversial, and local objections are holding up many of the projects that have been proposed.

But ways around those objections are being found, such as the offshore LNG terminal being built for Edison, Exxon and Qatar Petroleum at Rovigo in northern Italy.

Even if only a proportion of the planned terminals are built, there will still be a substantial increase in regasification capacity.

As a result, some industry experts believe that LNG suppliers will no longer be tied to selling gas on long-term fixed-price contracts.

Mike Dickman, the co-head of Morgan Stanley’s global energy group, says: “LNG used to be a point-to-point business; until just a few years ago it was very much a contractual market.

“In the past five to seven years, however, the price of the commodity has risen to the stage where people are more willing to build regas facilities without the absolute price certainty that a contract would provide.”

He continues: “As the industry builds more and more regas facilities, the chance of switching a cargo to another market increases. All the big players have more and more ability to shift the LNG to those markets that offer the highest prices.”

Already there is a certain amount of switching.

When an earthquake forced the shutdown of the Kashiwazaki Kariwa nuclear power plant in Japan, and the country relied more heavily on gas-fired power generation, LNG cargoes that might have gone to Europe were diverted to Japan to take advantage of the high prices.

The best exponent of the flexible LNG model is probably the UK’s BG Group. It controls all aspects of the gas value chain, from exploration and production to regasification capacity.

It can move cargoes around the world to follow the price advantage, but has also secured a long-term position at the Lake Charles regasification terminal in Louisiana, so it can always be sure of getting at least the prevailing US market price for its gas.

However, a number of executives believe that this particular model will not necessarily come to dominate the industry.

Asian LNG in particular is heavily based on long-term contracts.

Saad Al Kaabi, Qatar Petroleum’s director of oil and gas, says: “Creating that type of liquid market in LNG in Asia is almost out of the question. The only places where you find really liquid gas markets are in the US and the UK.”

Linda Cook, Shell’s head of gas and power, is also sceptical, but she believes the market is evolving.

She says: “I have always been one who’s been a bit more cautious about it, maybe because the critical mass of our LNG business is in the Asia-Pacific region. So we are in tune with the big customers in that part of the world and they continue to want long-term contracts to secure their LNG.

“Having said that,” she adds. “I think the LNG business is moving towards a market that is more global and moving towards a place where we will have more flexibility.

“However, I think that movement is slow, and we will not find ourselves in a completely liquid market overnight.”

It took decades for the oil market to develop from the 1950s model to the flexible market we see today. The journey may be just as long for LNG.

© Copyright The Financial Times Ltd 2008. and its also non-profit sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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