Substantial future LNG supply secured

A good deal of the regasification capacity commissioned in 2009 is destined to sit underutilized until gas demand recovers from the economic downturn.

David Wood, David Wood & Associates;
and Saeid Mokhatab, Contributing Editor, LNG

As expected in the wake of the recession, 2009 proved to be a challenging year for natural gas worldwide, with demand destruction and oversupply taking their toll. However, the year was an extremely busy one for the LNG sector, with some major developments that provide optimism in the medium term, particularly in Asia. LNG and natural gas fared quite differently in North America compared to the rest of the world due to two factors: shale gas supply and the independence of gas prices from crude oil prices, which resulted in lower natural gas prices in North America than for LNG elsewhere.

The price parity between crude oil and natural gas changed substantially in North America over the course of 2009. Whereas the ratio of oil to gas prices in the US was less than 10 from 1996 to 2007, this ratio increased markedly in the first nine months of 2009, exceeding 20 in August and September to reach values that had not been seen in the US since the 1970s. In global terms, gas and LNG in the US appear significantly undervalued relative to oil.

Based on such depressed gas prices, it might be expected that less LNG would be imported into the US. On the contrary, oversupply elsewhere in the world and the commissioning of newly built regasification terminals in the US and Canada meant more LNG being imported in the first nine months of 2009 than in the corresponding period in 2008, although LNG imports in both years were substantially less than in 2007, Fig. 1. Indeed, it is net gas imports to the US from Canada that have shown the most significant decline year-on-year.

Fig. 1. LNG imports to the US are down relative to 2007, but regasification capacity is substantially increased due to the commissioning of new LNG receiving terminals.

ASIAN LNG OFFTAKE DEALS

A number of large long-term LNG offtake deals have been signed in Asia, with China and India outstripping Japan and South Korea in terms of volumes. Many of these deals have helped to underpin positive financial investment decisions (FIDs) taken on gas liquefaction projects in Australasia, with ExxonMobil being involved in some of the most significant deals. Chevron and partners, including ExxonMobil and Shell, finally sanctioned the Gorgon LNG project in September 2009.

In December 2009, ExxonMobil and its partners announced their positive FID for the Papua New Guinea LNG project, subject to finalizing separate gas sales and purchase agreements (SPAs) announced with Tepco (Japan) and Sinopec (China). In making that announcement, an upbeat ExxonMobil revealed its forecast for global LNG demand to triple, growing on average by 4% per year through 2030. Partners in the project announced some $10.25 billion worth of commitments for the project export credit agencies and commercial banks plus a $3.75 billion loan from ExxonMobil conditional on binding SPAs for all their LNG.

LIQUEFACTION EXPANDS

Whereas there were no new major liquefaction sites commissioned in 2008, several exported their first cargoes in 2009.

The way-over-budget Sakhalin-2 plant, in which Gazprom managed to muscle in with a 50%-plus-1 share holding extracted from Shell and its Japanese partners, was inaugurated in February 2009 by Russian President Dmitry Medvedev. The first cargo was not exported until late March 2009 and the plant will not reach full capacity of 9.6 million tonnes per annum (mtpa) until later in 2010, but some 65% of that capacity is contracted to nine buyers in Japan, and the remainder is destined for South Korea and West Coast US buyers via the Costa Azul regasification terminal in Mexico.

The $13 billion-plus Qatargas-2 project’s two 7.8-mtpa liquefaction trains (numbers 4 and 5) were commissioned in April and September 2009, respectively. LNG from those trains is contracted for export primarily to Europe and the US. Shareholders are Qatar Petroleum, ExxonMobil and Total. Also commissioned in August 2009 was RasGas III Train 6 (7.8 mtpa), with gas destined for Asian buyers.

In November 2009, Nakilat, Qatar’s LNG shipping fleet owner, commissioned its final four Q-Max vessels, taking its fleet to 54 ships. Expectation is that the 25 new LNG ships wholly owned by Nakilat, 14 Q-Max and 11 Q-Flex, will be fully operational. Many have sat idle during 2009. These 25 vessels and Nakilat’s 29 jointly owned ships now represent the largest LNG fleet in the world. Thirty-two of these LNG carriers are assigned to the Qatargas projects.

The delayed two-train, 7.6-mtpa Tangguh liquefaction plant came onstream in June 2009, but has suffered a number of teething problems, including leaking storage tanks that have resulted in many cargoes being canceled. Tangguh has long-term supply contracts with CNOOC for delivery to Fujian, China (2.6 mtpa for 25 years), with Posco of South Korea (0.55 mtpa for 20 years), with K-Power of South Korea (0.6 mtpa for 20 years) and a flexible destination contract with Sempra for 3.7 mtpa for 20 years, expected for the most part to be delivered to Costa Azul in Mexico.

The first train of the two-train, 6.7-mtpa Yemen LNG plant was finally commissioned in October 2009 after many months of delay, and the first cargo was exported in November.  Yemen LNG has 20-year SPAs to supply GDF Suez with 2.5 mtpa, Total with 2.0 mtpa and Kogas with 2.0 mtpa, destined for Europe and South Korea.

NEW REGAS CAPACITY

A good deal of the regasification capacity commissioned in 2009, having been planned prior to the economic downturn and the fall in gas demand in most major markets, is destined to sit underutilized for the short term at least. Capacity that is very much in demand is that in China, which saw the commissioning by CNOOC of the 2.6-mtpa Fujian terminal in May 2009 with plans for two new storage tanks to double capacity by 2011. Commissioning of the Shanghai plant, with LNG supplied from Malaysia, occurred in October 2009 (delayed by six months due to an accident) with 1.1 mtpa of capacity that will expand to 3 mtpa by 2012. A fourth CNOOC terminal of similar size began construction in the eastern province of Zhejiang in November.

The UK saw two new terminals commissioned in 2009. In July, the much-delayed Dragon 4.4-mtpa LNG terminal in Wales was commissioned with LNG from Trinidad. Equity partners are BG Group, Petronas and 4Gas. The 15-mtpa South Hook Terminal—the largest in Europe, located near Milford Haven in South Wales—finally came onstream in October 2009, some two years late. It has already taken delivery of several Q-Max and Q-Flex cargoes from Qatargas. In the fourth quarter of 2009, the UK received substantial imports of LNG into these two terminals and the expanded Grain LNG terminal, helping to depress UK gas prices to the lowest winter levels seen in recent years.

The 6-mtpa Adriatic LNG terminal in  Italy, the first offshore gravity-based facility to be installed worldwide, received its first cargo of LNG from Qatar in August 2009. The project is jointly owned by Qatar Petroleum, ExxonMobil and Edison, Italy’s second-largest utility. In Southern France, the 6-mtpa Fos Cavaou terminal, owned by GDF Suez and Total, was some 21⁄2 years behind schedule at the end of 2009 and yet to be commissioned. Meanwhile, in Northern Europe, the 9-mtpa initial phase of the Gate LNG terminal (owned jointly by Gasunie and Vopak) is under construction and on schedule for completion in 2011. These terminals will help some European gas buyers diversify their supply away from Russia.

Smaller-scale, but strategically significant, regasification projects also came onstream in Chile and Kuwait during 2009.

The Quintero regasification terminal near Santiago received its commissioning cargo in July. It is the first onshore LNG import terminal to begin operations in the southern hemisphere. GDF Suez is building a second LNG terminal, due onstream this year, at Mejillones in northern Chile with state miner Codelco.

The Mina Al-Ahmadi GasPort, about 25 mi south of Kuwait City, was built by Excelerate for KNPC. It received its first cargo from the North West Shelf LNG plant in Australia (surprisingly not its neighbor Qatar) in September 2009.

The 5-mtpa Dabhol LNG terminal, the third on India’s west coast, was finally completed in 2009, after having been suspended when 75% complete in June 2001 by Enron when its customer withdrew. Ratnagiri Gas and Power, the operator of the adjacent gas-fired power plant, plans to operate it at about 1.2 mtpa.

FLOATING GAS LIQUEFACTION

Several large-scale floating liquefaction ventures for Australia, Brazil and Indonesia were announced in 2009.

GDF Suez (60%) and Santos (40%) announced the 2-mtpa Bonaparte LNG project in northwestern Australia when GDF Suez purchased its interest in the Petrel, Tern and Frigate gas fields.

Also in northwestern Australia, Shell awarded the FEED study for its 3.6-mtpa floating LNG (FLNG) facility for the Prelude and Concerto gas fields to Technip and Samsung, with FID expected in 2011. The $5 billion-plus FLNG facility is expected to take five years to build. Production is estimated to comprise 3.6 mtpa of LNG, 1.3 mtpa of condensate and 0.4 mtpa of LPG.

Petrobras (with BG, Repsol and Galp) awarded a FEED study to Chiyoda and SBM for a 2.7-mtpa deepwater subsalt-associated FLNG vessel in December.

Inpex’s 4.5-mtpa floating liquefaction project for the 10-Tcf Abadi Field, in the Timor Sea, was approved for development by Indonesia in September.

Shell and SGC Iraq formed a JV in 2008 to gather associated gas from southern Iraqi oil fields currently being flared. An FLNG plant of unspecified size is in the early planning stages.

Concerns over long-term security of natural gas supply and perceptions of a more radical and powerful Gas Exporting Countries Forum (GECF) emerging in the coming decade as a sort of gas OPEC may explain financial support from banks and major IOCs for some of the LNG projects announced in 2009. The attraction of Australia and Brazil for future LNG project developments is not just about large gas reserves; it also helps that those two countries sit well outside the GECF’s influence. 

An extended version of this article including more-in-depth analysis can be found in the 2010 World Oil Forecast and Data Book. To purchase, click here or call +1 (713)520-4426.