International Gas Trade
The global gas trade is the fastest growing segment of primary energy, with the exception of renewable energy which is growing from a much lower base production. The gas trade is expected to continue to increase by more than 2 - 3% per year for the next twenty years. Much of this will be within the borders of countries; however, an increasing amount will involve crossing international borders by pipelines and LNG, and will involve emerging economies such as China, India, SE Asia, and Latin America.
International Pipeline Trade
As the global demand for gas increases and local supply options decline, the requirement to import gas via pipelines that cross international borders increases. Crossing international borders raises the complexity and risks of pipeline investment. It has been stated that every international border crossed raises the complexity of a project by an order of magnitude - this explains why pipelines, with the notable exception of Eastern Europe to Western Europe, are largely confined to domestic or single-border crossings. Crossborder pipelines amplify commercial risks, especially when third-party countries that are neither sellers nor final buyers of the gas are involved. These transit countries demand fees or other concessions - such as cheap or free gas - from producers or consumers, or both, in exchange for allowing pipelines to cross their territories.
The scale of international pipeline projects, both completed and planned, is staggering, with the majority of future pipelines connecting central Asia to markets in Europe and Asia. Pipelines to export Iranian gas are mired in internal politics, while pipeline projects to connect South East Asia will like be superseded by regional LNG trade. North America is poised to become a surprising player in future gas pipeline construction as shale gas production becomes abundant and economics of selling gas to regional and international markets become compelling. As one would expect, the price of steel and construction may make many of these projects commercially and technically challenging.
Liquefied Natural Gas (LNG) Trade
Worldwide trade in LNG has steadily increased since the first delivery of LNG from the United States to the United Kingdom in 1959. In 1964, Algeria became the site of the first commercial LNG plant, initially exporting its product to the United Kingdom. LNG is the most exciting and fastest growing of all the fossil industry trades, and is poised to continue to attract more companies and countries in the decades to come. Total LNG trade has increased nearly 5 times from the 1990 level, to ~250 million tonnes today.
The number of LNG producing countries steadily continues to grow, from 8 in 1996 to 15 at the beginning of 2008 and ~30 by 2020. The number of consuming countries is also growing, currently over 25 countries have terminals, encouraging the LNG trade to become more competitive and market driven. A recent IEA estimate calculates more than $250 billion of new investment, in all parts of the LNG chain, will be required to meet demand until 2030.
Two distinct LNG trade regions have developed over the past few decades; the Atlantic Basin and the Pacific Basin. Until Qatar, and to a lesser extent, Oman, began to export LNG to both regions in the mid-1990s, the two regions were largely separate, with unique suppliers, pricing arrangements, project structures, and terms. There were occasional spot sales with suppliers from the Pacific Basin selling to the Atlantic Basin customers. However, long-term contracts between the regions began with Qatar and Oman selling to Europe and North America. Qatar, playing the role of swing producer, has 77 MTA (out of around 250 MTA worldwide capacity) and, with its favourable location, can play the role of the swing producer exporting to both the Atlantic and Pacific Basins. Cargoes are now routinely sold and transferred between the regions.
The 2011 earthquake and tsunami events in Japan demonstrated that the global LNG market is robust enough to handle unexpected disruptions - in this case, a surge in LNG demand in Japan as it struggled to maintain its power production in the wake of the nuclear shutdown - without any major shortages or price spikes. It may have been fortunate that the crisis occurred as Spain and other European buyers were experiencing economic slowdown and the US domestic gas production was surging, thereby freeing up Atlantic cargoes for Japan. The experience has undoubtedly convinced buyers that the global LNG trade is now mature enough to handle disruptions, and the belief that LNG supply security should be more important that competitive price is now looking increasing weak.
The growth of spot and short-term trade, along with new trading and 'aggregator' entrants into the trade will hasten the evolution of the LNG industry into a more 'traditional' commodity, with competitive prices, shorter term contracts, and arbitrage across markets. This trend is being resisted by many LNG producers, especially the higher cost future producers such as the multitude Australian projects with projects under construction.
The growth of US shale gas will have very significant impact on the global gas markets. The prospect of relatively cheap LNG (especially if US gas prices stay low) priced on a 'gas-on-gas' basis (instead of the traditional oil-linked prices) at very large volumes (the US could easily export over 50 MTA by 2020) will be disruptive to the LNG trade. It is hard to estimate when the impact will cause a shift in the mindset in Asia Pacific, but in this uncertain environment, buyers may want to avoid long-term oil-linked priced deals - and sellers may want to sign these type of agreements as soon as possible!
For many decades, the Pacific Basin was the centre of LNG innovation and activity. The Pacific trade, previously accounting for more than 70% of worldwide trade but now lower due to increased LNG imports to Europe, includes exports to Asian consumers from Asia, Western Latin America (Peru), Middle East and, in the future, East Africa. The convergence of the Atlantic and Pacific markets has grown due to the efforts of producers such as Qatar who are able to arbitrage across both markets. Once North American and East African project begin to export LNG, this trend will accelerate as these new entrants would be able to supply both markets as well.
Main buyers in the Pacific region are Japan, South Korea, Taiwan (the 'JKT' buyers), and emerging buyers such as China, India, Thailand, Indonesia and, in late 2013 Singapore. Both Singapore and Thailand are aiming to become LNG hubs that will allow cargoes to be offloaded, stored and resold when the prices are favourable. Singapore, in particular, is encouraging LNG trading companies to relocate to the island-state by granting favourable taxation. Japan's dependence on LNG has grown after the 2011 disasters and there are signs that Japanese buyers are beginning to be less conservative and willing to emulate buyers such as Korea's KOGAS, which has become the world's largest buyer of LNG by taking large interests in projects and, in some cases, technical (ie: FLNG and Unconventional) and exploration risks.
The Atlantic LNG trade has developed differently than the Pacific trade. Until last decade, the regions were completely separated, with no common LNG suppliers. The regions have begun to converge as Qatar, and to a lesser extent, Oman, have begun to supply both markets. The growth of the spot and short-term markets has also encouraged markets to cooperate. However, there remains large price disparity between the markets which will likely continue until new large scale suppliers (such as the US) disrupt both markets with new pricing schemes and flexible supply.
The Atlantic basin is dominated by key European markets; UK, Spain, Italy, France and Belgium / Holland. LNG has been imported into Continental Europe since the mid 1970s, when France signed an agreement with Algeria. In the past few years, a majority of European countries with sea ports have built LNG terminals.
European pipeline trade from Russian and CIS is largely influenced by the German market; likewise the North African pipeline trade is under the control of French, Italian and Spanish interest. Gas from Norway is sold to both continental and UK markets.
The US import market was expected to be a significant LNG player - however, with the incredible growth of shale gas production since 2005, the US share of the world wide LNG trade is minimal - though the US continues to import large volumes of Canadian gas via pipelines. The likely prospect of North American LNG exports around 2016 onwards will, however, disrupt the global LNG trade and potentially cripple the LNG pricing formulas (sustainability of oil-price linkages ) and contract terms familiar with buyers today. If the US experience of shale gas is repeated in other regions, an unlikely prospect due to a variety of reasons, the global gas markets could be altered radically.
LNG Export Projects
The author has created an LNG Project Database that details key facts and data of approx. 90 LNG projects. This includes projects that are operational, under construction, under development and speculative projects. The database can be accessed by the LNGProjects iPhone/iPad app available on iTunes. Please click on the button below to download the app from iTunes.