The current development of the global LNG industry will have substantial implications for the global gas industry and in particular for security of gas supply. Tremendous cost reductions have been experienced in all parts of the LNG chain in recent years. The fall in tanker prices over the last decade led to a much wider economic reach of LNG transportation. The dramatic cost reductions for LNG liquefaction trains, especially for expansion trains, but also for new trains such as the Trinidad and Tobago project, made LNG projects viable even if only part of the capacity is secured by long-term sales, so that the remainder could be sold on a flexible or spot basis. The recent re-opening of two US east-coast terminals and the numerous proposed projects to build new terminals in the US and Mexico provide a potentially attractive market outlet, able to absorb all volumes within the capacity of the terminals.
As most of so far undeveloped gas reserves are located far away from OECD markets, it is clear that LNG will play a key role to bring this gas to the market, when distance or natural and political obstacles make pipeline transport impossible.
At the same time, the increasing use of gas in power generation is creating a market able to absorb very substantial new gas volumes, opening the perspective for many gas-reserve-owning countries to monetise their gas reserves via LNG sales. The decreasing costs of the LNG chain, as well as the increasing number of players both on the sellers’ and the buyers’ side, are helping to overcome the rigidities inherent to LNG in the past.
The growing supply of LNG, accompanied by the increased flexibility in LNG trade, which can physically be directed to the highest value market, are adding to the security of gas supply. Contractual arrangements are also more flexible. Spot and flexible LNG purchases are increasingly used to cover part of peak gas demand. Even though a global gas or global LNG market may still be a long way off, LNG is already linking different markets together, by allowing shifting volumes between regions,
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benefiting from differences in their supply and demand balance. Indirectly this adds to the market flexibility of formerly non-connected marketplaces. However, these positive developments for security of supply, including long-term access to more gas resources and extra options to provide additional gas volumes for low-probability events, also bring more import dependence.
A key issue is to make sure that LNG trade can develop without market barriers, by streamlining administrative procedures while ensuring high safety and environmental standards for the whole LNG chain.
This Chapter looks at major trends in LNG trade, the fast growing LNG demand, the development of new supplies and the emergence of new flexible, global commercial trends. It goes on to review the implications of this spectacular development for security of supply. It also discusses possible safety concerns raised by the recent accident at the Skikda liquefaction plant in Algeria, the first serious accident in the hitherto impeccable safety record of the LNG industry since the beginning of international LNG trade.
INTERNATIONAL LNG TRADE
LNG flows have doubled in the past decade and reached 150 bcm in 2002, corresponding to around 3 mbpd, with twelve importing and twelve exporting countries. LNG now represents 22% of the world’s total cross-border gas trade, and 6% of total world consumption of natural gas.
At the beginning of 2004, there were 15 operating LNG export terminals, 43 operating LNG import terminals and 154 LNG tankers. The LNG business is growing fast:
■ 8 export terminals are being expanded;
■ 5 new export terminals are being built;
■ 8 new import terminals are being built in the OECD region;
■ 54 new LNG ships are on order;
■ Around 30 new LNG supply projects are planned;
■ Spot trading has become a reality and represents 8% of global LNG trade.
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LNG trade is projected to experience strong growth in the coming years, by rising to 360 bcm by 2010, 560 bcm in 2020 and 840 bcm by 2030 (WEIO 2003).
Figure 4.1. International LNG trade, evolution and outlook
Source: Cedigaz, WEIO 2003
The international gas trade between countries and continents has so far largely been dominated by pipeline gas, accounting for 78% of cross- border gas trade. However, the supply of natural gas markets via gas pipelines faces some technical, economic, even political limits, while cost reductions promote more LNG trade:
■ Geography: the different locations of gas reserves and gas markets are often beyond the technical and economic reach of gas pipelines, and political difficulties can be encountered in potential transit countries;
■ Some of the major traditional gas-exporting OECD countries via pipeline (Canada, the Netherlands, Norway) will approach their peak capacity of production/exports in the next ten to twenty years. Europe will continue to be well placed to import increasing volumes of pipeline gas from non-OECD countries, first of all from its existing suppliers, Russia and Algeria, but also from new suppliers, Libya, and
bcm
1985 1990 1995 2000 2010 2020 2030
900 800 700 600 500 400 300 200 100 0
North America Europe Asia/Oceania
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possibly Central Asia and the Middle East. Imports of LNG along the Atlantic coast and in the Mediterranean basin offer the opportunity of a major supplementary supply and of additional diversification.
■ For geographical reasons, any additional imports to North America can only be in the form of LNG (directly or indirectly via gas imports from Mexico). Similarly, LNG is the main source of gas for Japan and Korea, although some ambitious pipeline projects are under discussion.
■ New gas importing countries (India, China), which have only limited access to the main domestic pipeline gas networks, seek supplies adapted to their fast growing needs often concentrated in coastal regions. LNG, a maritime option with excellent modularity and progressiveness in project capacity, meets this requirement.
■ Additional LNG receiving terminals can partially compensate for lack of network integration, and allow isolated regions to be connected.
■ For all gas importing countries diversification of supply sources is a primary concern, which can be met by LNG, with its increasing number of suppliers. Another advantage of LNG is that it can in principle be redirected to other markets or sourced from other suppliers.
■ LNG is currently liquefied in the country of gas production and is therefore only subject to the country risk of the producing country, unlike pipelines which can accumulate country risks all along the transit route.
■ The opening of the power market to gas-fired power creates a large new outlet for gas. Some regions, like the Middle East, had no access to European and US gas markets during their build-up/development phase because of high transportation costs, so the lowered costs of LNG, now give them the chance to participate in the second gas expansion wave triggered by gas in the power sector and to monetise their gas reserves.
■ Gas-fired power plants, often on coastal or nearby sites, offer an attractive market for new LNG projects: several dozen projects combining LNG receiving terminals and gas-fired power plants are currently on design boards throughout the world.
■ The opening of electricity and gas markets is causing a change in traditional industrial structures, the diversification of contractual
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forms, and the multiplying of players and trading flows. This favours the growth of independent LNG import terminals (in Spain and Italy, for instance).
■ Finally, LNG is much more flexible than pipeline gas, which allows cost optimisation and arbitrage opportunities.
REGIONAL TRENDS OF LNG DEMAND
So far LNG markets have been regional. In 2002, Asian importing countries imported 69%, Europe 26% and North America 5% of world trade. Among producing regions, 50% came from the Asia/Pacific region, 23% from Africa, 22% from the Middle East and 5% from the Americas.
However, this regional characterisation is softening with the development of a genuine Atlantic basin market and eventually a Pacific basin market.
LNG demand in the Asia/Pacific basin
Asian markets, mostly Japan and Korea, currently dominate the Pacific basin. There are, however, numerous proposed regasification projects on the US west coast and Mexico, which may extend LNG trade in the Pacific basin.
The Asian market has been the entire focus and the driving force of the LNG market until recently. It imported 104 bcm in 2002, with Japanese gas and electricity companies buying three-quarters of the regional total.
Between 1985 and 2002, Asia accounted for about 70% of the increase in world LNG demand, and LNG has played a major role in diversifying sources of energy and in mitigating air pollution.
Japan was the first Asian country to import LNG and is currently the world’s biggest importer, taking 73 bcm in 2002 (80 bcm in 2003) from eight supplying countries. South Korea started to import LNG in 1986 and is now the world’s second largest importer, taking 24 bcm in 2002.
Japan has one new terminal under development, as does Korea. Taiwan began importing in 1990, and India, the latest new emerging LNG importer in the region, started its LNG imports in January 2004 at the Dahej terminal. Next to come is China with the Guangdong project,
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whose first phase is expected to become operational in 2006. An LNG terminal is also under discussion in New Zealand. Overall, the Asian market will continue to be a large market for LNG, with just under half of the world’s LNG import capacity. By 2030, the region is expected to import 260 bcm (WEIO 2003), compared with 104 bcm in 2002.
China and India are entering the LNG scene, representing possible competitors for IEA as LNG importers, mainly for the Pacific basin.
However, in view of the limited volumes projected to be imported as LNG in the next decades, and in view of large untapped gas reserves which could supply the OECD Pacific region, the influence of additional demand competition by China and India on security of gas supply of IEA countries in the OECD Pacific region seems limited.
LNG imports in China and India
China’s natural gas industry, which is at an early stage of development, is poised for rapid expansion. The government is committed to a rapid increase in the share of natural gas in the country’s energy mix. This policy is driven by concerns about the environmental impact of heavy dependence on coal and the energy-security implications of rapidly rising oil imports. While there are significant gas reserves in China, mainly in the Tarim basin in the West of the country, China is also looking for imports, as pipeline gas from Siberia and as LNG. China has several proposed LNG terminals, either planned or under development.
Chinese companies have started construction of two LNG import terminals, and are holding discussions on others. The first terminal is located in Guangdong and will start importing 3.3 mtpa of LNG from Australia by 2006. A second terminal in Fujian Province, with 2.6 mtpa capacity, will bring LNG from the Tangguh project in Indonesia starting in 2007. Both terminals are scheduled to expand with follow- on phases. Other terminals along China’s eastern seaboard, including Zhejiang, Jiangsu, Shandong, Tianjin and Shanghai, could follow quickly depending on developments. Potential suppliers include Russia (Sakhalin), Malaysia, Oman, Indonesia, Australia, Iran, Yemen, and Qatar.
WEIO 2003projects that 31 bcm of regasification capacity will be built in China by 2030. The pace of development of gas infrastructure will
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ultimately depend on policy reforms to clarify the investment and operating environment and proactive government measures to boost the competitiveness of gas against cheap local coal. Important challenges remain for both the government and industry, including, in particular, the lack of a legal and policy framework to encourage and steer investment in the gas sector; and the lack of knowledge over how to best develop natural gas technology and markets.22
India is also emerging as a new LNG importer. At the beginning of 2004, Qatar’s RasGas has started to supply LNG to the Indian company Petronet after the completion of a 5-mtpa terminal at Dahej.
Its capacity could be doubled later.
India has a dozen proposed import terminal projects, but at present only three or four look likely to materialise. Only Shell continues to pursue new LNG projects, despite problems with financing, due to pricing of the gas in India, worries about consumer creditworthiness and a lack of transmission and distribution infrastructure. The 5-mtpa Dabhol terminal initiated by Enron was almost completed when the construction was halted in 2001. It is likely to be completed once a buyer is found for Enron’s share of the project.
By 2030, it is expected that India will hold a regasification capacity of 23 bcm. The prospects for a rapid increase in LNG imports will depend critically on power- and fertiliser-sector reforms. These sectors will be the main consumers of gas, but they both sell their output at subsidised prices. The government intends to reduce subsidies, however, no definite time plan has been announced for bringing tariffs to cost- recovery levels.
The dire financial health of many state power companies is likely to represent a major constraint in financing new LNG regasification plants. Three major challenges remain for the development of the Indian gas market: i) lack of sufficient transmission infrastructure, ii) lack of a coherent legal and regulatory framework for the sector; and iii) questions about the affordability of gas.
163 22 IEA (2002i).
LNG in Asia is at a transition point, with significant changes ahead in Japan, South Korea and Taiwan, as well as in the new emerging LNG markets. The market was shaken by the Asian financial crisis in 1997- 1998, when Japanese and Korean buyers found themselves stuck with volumes contracted well above their requirements. Demand uncertainty has also increased as a result of market liberalisation. In Korea, Kogas has not been allowed to sign long-term contracts. This brought home the need to reduce the length of contracts and increase their flexibility.
In this new environment, the traditional market model – based on long- term contracts indexed to oil with a security of supply premium – is now under revision as a result of changing market conditions. When renewing existing contracts, Asian LNG purchasers are seeking periods of 15 to 20 years rather than 20 to 25, more flexible off-take volumes and purchases on a fob basis23instead of the cif24basis in previous contracts.
The contracts signed in February 2002 between Japan and Malaysia were the first signal of a change in LNG marketing in Asia. Seasonal flexibility/requirements are being addressed through medium-term supply contracts with seasonal weighting and complemented by spot cargoes.
LNG pricing in the new emerging LNG markets, India and China, is a challenge, as they cannot afford the same level of prices as Japanese or Korean customers. The bidding process in China was a new procedure and has set a new benchmark. Prices for China are lower than supplies to other Asian buyers and the indexation formula is also quite different (see below). This will have repercussions in the forthcoming negotiations for renewals of contracts with Japanese buyers. 25 mtpa of contracted supply are up for renegotiation between 2009 and 2011. To the already large volume of liquefaction capacity in Asia/Pacific, additional projects (MLNG Tiga, Tangguh, Sakhalin II) combined with moderate demand growth and slow contract build-up have the potential to create short- to medium-term over-supply. However, Asia remains an important market in which producers can negotiate long-term contracts.
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23 Free-on-board (fob): Under a fob contract, the seller provides the LNG at the exporting terminal and the buyer takes responsibility for shipping and freight insurance.
24 Cost, insurance and freight (cif ): A cif price means that the cost of transportation, insurance and freight to a given destination are all included in the price. The seller is usually responsible for arranging transportation.
LNG demand in the Atlantic basin
LNG trade in the Atlantic basin (Europe and North America) is expected to quadruple over the next 10 years, going from 47 bcm in 2002 to around 210 bcm in 2010. It is commonly projected that LNG imports into Europe will grow from the current level of 9% of total gas consumption to 25% by 2010/20, and into North America from 2% in 2003 to 15% by 2020/25.
The US will be the key for LNG market growth. LNG imports doubled in 2003 to 14.6 bcm. Under the impetus of gas demand growth and assuming a sustained level of gas prices (they amounted to $6/million Btu at the beginning of 2004), LNG imports are expected to increase sharply.
US EIA Annual Energy Outlook 200425foresees an increase of 15.8% per year between 2002 and 2025 to 136 bcm. This is a major change with previous official outlooks. All four regasification terminals are now re-opened, with a current importing capacity of 29 bcm/a. In addition, four new projects have been approved and more than 30 proposed LNG regasification projects have been announced. Total capacity of the projects amounts to 33 bcf/d (340 bcm/a).
Part of the LNG deliveries from Algeria and from Trinidad and Tobago to the US are received under long-term contracts. Spot cargoes have been imported from Qatar, Nigeria, Australia, Oman, Indonesia and Abu Dhabi. The spot LNG sales market is very active in the US, with 12.6 bcm or 86% of total LNG supplies received under spot or short-term sales in 2003. Over the long term, LNG is likely to be an attractive option for increasing gas supplies to the US as costs of LNG compare favourably with costs of most new domestic supplies.
Contracted supplies from Norway, Qatar, Nigeria, Trinidad and Tobago, Australia, Algeria, Egypt and Indonesia already exceed 50 mtpa (although not all contracts are firm – see Chapter 6). In particular, US companies are negotiating major long-term supplies with Qatar. ExxonMobil signed an agreement with Qatar Petroleum to supply around 15.6 mtpa to the US for 25 years (Rasgas III). Deliveries are expected to start in 2008-09. Conoco Phillips has also signed a Memorandum of Understanding with Qatar for
165 25 EIA (2003a).
long-term supply of 15 mtpa of LNG to the US market (Qatargas III).
While the companies contracted the gas on a long-term basis, they will sell into the US market under short or spot sales conditions.
On the other side of the Atlantic, the European LNG market is also very dynamic. Europe imported 42 bcm of LNG in 2002, representing 9% of European gas consumption, although the share is much higher for some Mediterranean importers. In Spain, for example, LNG accounts for 58%
of gas supplies. In Europe, LNG competes with pipeline gas, and both compete with other fuels. European buyers choose LNG either to diversify their gas portfolio or to supply areas far from the main gas grid or to optimise their grid. The major suppliers have been Mediterranean countries: Algeria and, to a lesser extent, Libya. Since 1999 and 2000, additional LNG supplies have come from Nigeria and Trinidad and Tobago.
LNG is likely to vary in importance in different regions of Europe, due to economics of transportation related to geographical positions. LNG will have a competitive advantage along the Atlantic side on the Iberian Peninsula, in parts of France and the UK, whereas for the rest of Europe pipeline gas will have an economic advantage. With some 50 bcm/a of new LNG supply projects currently identified, LNG will not be able to replace the need for more pipeline gas into Europe, but it may make an important contribution to the growth of the European gas market, in particular in Mediterranean countries and the UK. The share of LNG will be influenced to an extent by the gas policies of Norway and Russia.
Continuing increases in demand and the reforms of European gas and power markets are leading to new opportunities for LNG, especially for the Mediterranean countries. Despite strong competition from pipeline suppliers, LNG deliveries to Europe are expected to rise steeply, reaching 240 bcm in 2030, approximately six times as much as in 2002 (WEIO 2003). The current existing capacity of the 11 operating terminals is 56 bcm/a. This is going to expand to 100-120 bcm/a by 2010. New LNG receiving terminals are planned in France, Italy, Spain and the UK, which is going to resume importing LNG. In Turkey, oversupply meant that the new Egegaz terminal at Izmir is lying idle, built without supply or off-take agreements in a country already well supplied with pipeline gas.
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