Expansion of LNG threatens gas glut

By Ed Crooks
Published: March 8 2009 18:44

A huge expansion of global capacity for producing liquefied natural gas is set to bring additional volumes on to an already depressed global market.
Plants scheduled to come on stream over the next year will increase global LNG production capacity by 30 per cent, putting downward pressure on natural gas prices worldwide, particularly in the US and Britain.

LNG – gas super-cooled to -160°C so that it can be transported by tanker – has been the fastest-growing fossil fuel of the past decade. It provides only about 7 per cent of global gas supply but plays an increasingly important role in meeting marginal demand.
A wave of LNG projects approved in the middle of the decade – in particular the vast facilities in gas-rich Qatar – is due to come on stream this year and next.
Some of their production has already been sold on long-term contracts but much of it will go into spot markets, where prices have fallen steeply over the past year.
Professor Jonathan Stern of the Oxford Institute for Energy Studies said that gas demand had “gone off a cliff” worldwide, with electricity generators and industrial users such as car manufacturers cutting their use sharply.
Prof Stern estimated that Asian and European markets could shrink by 10 per cent this year.
Asian buyers are using flexibility in their contracts to take less gas, leaving sellers to look for markets in the US and Europe.
Several new terminals for receiving LNG are also coming into operation in the first half of this year, including Sabine Pass in Louisiana, South Hook in Wales and Rovigo in north-east Italy.
Much of the surplus gas is likely to head for the US. LNG from Qatar costs about $2.50 per million British thermal units to deliver to America, according to Frank Harris of Wood Mackenzie, a consultancy.
That makes it competitive in the US market, where the Henry Hub benchmark price was at a 29-month low of $3.93 per million BTU on Friday.
Mr Harris said that companies with LNG projects due to come on stream this year “would not be rushing hell for leather to get production at full tilt”, and the additional volumes coming on to the market were likely to be well below the planned increase in capacity.
However, projects under construction cannot be deferred indefinitely. So if the new plants do not reach full production this year, they are likely to do so next year. “2010 may be the really horrendous year,” Mr Harris said.
Copyright The Financial Times Limited 2009