An expert in natural and coal seam gas has outlined the potential opportunities and pitfalls of a tightening global gas market.
Speaking at a Brisbane CSG and LNG conference in December, Cambridge Energy Research Associates global LNG director, John Harris said a recovery in demand is not likely to materially change the surplus gas situation from 2009, with a continued increase in supply in 2010.
“The main difference between 2009 and 2010 will be an increase in LNG volumes imported particularly to the North American market, which will act as the market of last resort in the absence of higher alternate paying markets,” Mr Harris said.
“The LNG market was tight in 2008, reflecting delays in commissioning new liquefaction capacity, plus slow ramp-up from new facilities. Tightness in the market was aggravated by the continued low nuclear utilisation rates in Japan. Accordingly LNG was diverted from various markets including the Atlantic to Pacific with these diverted cargoes often priced at near oil parity, reflecting the alternate fuel.
“With the economic slowdown in 2009 coupled with an increase in supply from liquefaction projects there has been very little need for short-term cargoes, meaning that few cargoes have flowed from the Atlantic to Pacific. Those which have are often priced at a small premium to the lowest alternative market, typically US or UK.”
Mr Harris said the notion of a global surplus can also be a misnomer.
“There are two markets. One market is where consumers enter into long-term contracts (e.g. power companies) where LNG is often priced on an oil linked formula. These markets are usually in Asia and to a lesser extent Europe, with smaller volumes to South America and the Middle East. For a project without a long-term contract there is the option to sell into the US whose size is large enough that provided you accept the market price you can deliver your volumes and mitigate volume risk,” he said.
Australia has a large number of proposed projects at varying stages of development, according to Mr Harris.
“While it is difficult to predict the exact order they will come to market we can be confident that significant additional LNG volumes will be exported from Australia over the coming decade as more projects take ‘Final Investment Decision’.”
The interest in Australian CSG projects has been spurred by high gas prices in recent years in key Asian markets that import LNG. Consequently, the economics of exporting LNG have become potentially attractive.
“Which has meant that an anticipated need for growing LNG imports will now be countered by a rise in US domestic supply that also appears to be relatively low cost. This means that LNG exporters may face lower prices than anticipated in the US a couple of years back.”
Mr Harris said China is important due to its major potential growth market for LNG.
“This means that new projects can look to Chinese buyers who may be able to import large LNG volumes. This means they can help anchor projects. However, note than China has close to 30 MT of contracts at various stages of negotiation and so even it could have a limit to the amount it may buy in the medium term.”
The gap for oil linked prices is probably sustainable, Mr Harris believes, because oil-linked Asian contracts provide term security of supply, especially in the case of markets such as Japan and Korea with almost no domestic gas.
“If North America prices remain low perhaps an export project will materialise. Also note that pipeline gas into Europe is mainly sold under oil based long term contracts,” he said.
