Plus, some more options for “stranded gas.” Capacity to handle LNG, that is, regassify it is growing much faster than the facilities to turn it into liquid gas (which reduces it to 1/600th of the volume) in LNG facilities. The demand for LNG will double by 2015.
Liquefied natural gas
A more liquid market Oct 2nd 2008
From The Economist print edition
- AMID the waters of the Adriatic, some 40 kilometres (25 miles) south of Venice, a curious new structure is being installed. It is the size of two football pitches, as tall as a ten-storey building and will soon be connected to the shore by a 15-kilometre pipeline. It is a regasification terminal, which will take deliveries of liquefied natural gas (LNG) and turn it back into a gas before pumping it ashore—and it is the first such plant to be located at sea. That has allowed its owners, Exxon Mobil and Qatar Petroleum, both oil and gas firms, and Edison, a local utility, to avoid the permitting problems that have hampered regasification projects in crowded countries such as Italy. Such innovations are helping the LNG business to grow dramatically—but they are also changing it in unpredictable ways.
- Natural gas is cleaner than other fossil fuels, and gas-fired power plants are relatively cheap to build, prompting a “dash for gas” by European and American utilities in recent decades. Demand for gas is still growing in rich countries, even as their thirst for oil has faltered. But domestic supplies have been shrinking. Europe, in particular, is becoming ever more dependent on gas imported by pipeline from Russia.
- That is where LNG comes in. It allows producing countries to profit from “stranded gas” located far from big markets, and lets consuming countries diversify their supplies. The gas for the Adriatic terminal will come by ship from Qatar. Another 14 countries, from Indonesia to Equatorial Guinea, export LNG; 18 import it. Whereas global gas consumption is growing by 2-3% a year, according to Royal Dutch Shell, another oil and gas firm, demand for LNG is growing by 7-10%. It now accounts for a quarter of the international trade in gas.
- The International Energy Agency (IEA), a watchdog for rich countries, expects LNG trade almost to double between 2006 and 2015, to 393 billion cubic metres a year. But regasification capacity is growing much faster. Existing terminals can take in 617 billion cubic metres a year, says the IEA, and others under construction should increase that to 846 billion cubic metres by 2010.
- Energy firms have found clever ways to overcome permitting problems, beyond putting terminals offshore. One trick is to build plants just over the border in a more welcoming country: Sempra, an American firm, has built a regasification plant in Mexico, just across the border from California, where regulators have yet to approve such a facility. Excelerate Energy, an American firm, owns LNG tankers that can regasify their cargoes on board, and then send the gas ashore through pipelines—another way to avoid building a big onshore plant.
- Most LNG is still sold under long-term contracts that underpin the huge investments required for liquefaction plants. But the surfeit of regasification capacity has created opportunities to divert cargoes to the most lucrative market. Last year, for example, an earthquake in Japan forced the closure of several nuclear plants, leading to a surge in demand for gas for power generation. Several LNG shipments were diverted from the Atlantic to Asia to take advantage of the higher prices on offer there. As a result, the number of shipments arriving at an American terminal belonging to BG, a big gas firm, fell from 48 in the second quarter of the year to one in the fourth.
- The prohibitive expense of building liquefaction plants will prevent any completely speculative developments, says Umberto Quadrino, the boss of Edison. But some global gas giants are committing to buy ever more LNG from liquefaction plants without lining up subsequent buyers, which will let them sell it to the highest bidder instead. The proportion of LNG in the hands of such middlemen will rise from 12% to 25% when all the plants now under construction start running, says Michael Stoppard of Cambridge Energy Research Associates, a consultancy.
- Yet the price LNG will fetch depends on supply as much as demand. Technological innovations might yet make it cheaper to produce. Shell, for example, hopes to build offshore liquefaction plants that could be towed from one gasfield to another, dramatically reducing overheads. Other firms plan to ship compressed, rather than liquid, gas—a less capital-intensive process that might make smaller fields profitable.
- Meanwhile, America has recently reversed a steady decline in domestic gas production, thanks to new technology that allows firms to tap previously inaccessible gas trapped in coal, shale and some types of sandstone. Gas production in America grew by 4.3% last year, and by 9% in the first quarter of this year. This unexpected spurt will delay America’s emergence as a big importer of LNG by a decade, in Mr Stoppard’s view. And America is not the only country with big reserves of “unconventional” gas. Firms in Australia and Canada are rushing to adopt the same technology. Any country with lots of coal, including China, India, Russia and much of Europe, should be able to increase gas output in the same way. Several firms in Australia even plan to use such gas to make LNG.