Chris Skrewbowski on the dramatic shortage of new LNG mega projects

Petroleum Review (UK) editor Chris Skrebowski talks about the extraordinary findings in his latest report on liquid natural gas projects with GPM's Julian Darley.

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LNG Mega Projects Report from the July 2007 issue of Petroleum Review:

LNG – few new projects and no project go-aheads

The LNG market currently presents users with a paradox. Demand is booming and rising numbers of countries are looking to LNG imports for increased security of supply and to cover emerging production shortfalls. Yet on the supply side virtually nothing has changed from a year ago in terms of plans for new liquefaction capacity, writes Chris Skrebowski.

The global LNG market currently presents a somewhat mixed picture. The great fear of recent years – that there would not be enough shipping or regasification capacity – has been addressed so effectively that both are now in surplus. In 2006, excess LNG carriers were moved out of the Atlantic trade and into the Pacific trade when freight rates fell in the Atlantic. By the end of the year even this was not enough to balance the market and in the latter half of the year a number of LNG vessels were used as floating storage.

Construction of regasification capacity and operational experience giving higher than anticipated throughputs have largely laid to rest fears about lack of regasification capacity. Current estimates are that European regasification capacity utilisation is in the 45% to 60% range. In the US lack of LNG import demand growth means current regasification capacity is more than adequate and operating at quite low utilisation rates. In fact, LNG imports in 2006, at 16.56bn cm, were below the 2005 level of 17.87bn cm (according to the BP Statistical Review of World Energy 2007).

The key liquefaction capacity side also presents a mixed picture. In 2006 all the expected new capacity came onstream as planned, with the Rasgas II train starting up in December 2006 rather than in early 2007 as previously expected.

For 2007, new capacity appears to be coming onstream on schedule, although so far the only start-up this year has been Equatorial Guinea’s EG LNG project, which delivered its first cargo in May (for more details see p11).

For 2008, the changes from last year’s table are that Qatargas II train 4 is now expected to be commissioned in 2007 and the Donggi project has come in.

For 2009, both the Angola and Gassi Touil projects have slipped to 2010 compared to last year and Brass LNG to 2011. Timing on the Iran LNG project has become uncertain.

Considerable uncertainty remains for projects due to start-up in 2010 and later. In the course of a presentation during IP Week, Andy Flower, an LNG consultant, produced a listing of projects that had been expected to get final investment decisions (FIDs) in 2006 (see pp 40–41 and table on p42). This is because no FIDS have been signed off in the last 18 months.

The reluctance of companies to commit to building new capacity appears to stem from two prime influences. The first is the rapid inflation in construction costs, which is reported to have reversed all unit costs reductions in the last 20 years. This means new liquefaction trains will have markedly higher unit costs than recently built ones. The second uncertainty is the market reaction to high prices. There has been a tendency to believe gas demand is unresponsive to price. This belief in the low price elasticity of gas demand has been undermined by the gas demand falls seen in 2006 in the US, Chile, Austria, France, Hungary, the Netherlands, Portugal, Romania, Slovakia, Russia, Switzerland, the Ukraine, the UK and the Philipinnes. Although special circumstances may account for some of these declines, the general view is that gas prices may have reached the point where demand is impacted. As a result of these two concerns, virtually all LNG projects not underway are currently being reassessed.

The problem is that the lack of new projects is now certain to produce a supply shortfall around 2012. The time from FID to first gas is normally around four years. The just completed Equatorial Guinea LNG project achieved three-and a-half years from FID to first gas, but a number of long lead time items were committed to six months before the FID, so the four-year rule holds.