Liquefied Natural Gas (LNG) is natural gas in its liquid form cooled to - 259 degrees Fahrenheit (-161 degrees Celsius), which turns gaseous when warmed through a process of regassification to be used in heating and cooking as well as electricity generation and other industrial uses. LNG can also be kept as a liquid to be used as an alternative transportation fuel (California energy. com). Natural gas can be transported from far-away sources in the form of LNG. Since LNG occupies just a fraction of the volume of natural gas, it is more economical to transport across large distances where pipeline transport is not possible.In many parts of the world, gas remains the preferred fuel for economic and environmental reasons. Gas is preferred over coal and oil for its low Carbon dioxide emission. Nevertheless, the choice of fuel and technology for new power plants will centre on the price of gas relative to other fuels. The sudden boom in North American unconventional gas production, together with the impact of the recession on demand, is likely to contribute to an acute surplus of gas supply in the next few years. Global LNG production in 2007 grew by 9%, continuing the strong growth that has seen output increase by around 53% in five years (gas market, 08). The aim of this article is to critically discus the future impact of increase exportation of Liquefied Natural Gas on world energy markets.
Overview of the World Energy Market
The first commercial shipments of LNG ever, were Atlantic Basin movements from Algeria to France and the UK in 1964. But after early Atlantic enthusiasm for LNG cooled, Northeast Asia became the driving force for LNG trade (LNG, 2009).
Gas prices have increased gradually in global markets in the past few years caused by unprecedented oil and coal prices which encouraged power generators to switch to gas, rigid supplies, gas demand in new markets and delayed investments (Gas market, 2008).The upward trend in gas demand worldwide is set to resume, though the demand growth significantly depends on the strength of climate policy action and economic growth (WEO, 2009).
The fast development of unconventional gas resources in the United States and Canada, has altered the gas-market outlook in North America and in other parts of the world (WEO, 2009).The world’s natural gas resources are easily large enough to cover any likely rate of demand increase through to 2030 and beyond, though the cost of developing new resources is set to rise over the long term (Gas market, 2008).
Demand and Supply
As demand increases and cost of building new liquefaction plants are more expensive, the LNG market is set to remain fixed in coming years. However, long-term prices may not continue rising if more supply surfaces in the next decade (LNG, 2009). China and India account for 51% of incremental world primary energy demand in 2006-2030 as a result of strong economic growth. Steady economic growth and industrial expansion, population increase and higher urbanisation rates drive demand growth in countries. Growth in energy demand is fastest in the Middle East and Asia, as shown in figure 1.
Figure 1 World primary energy demand by region
Source: World Energy Outlook, 2009
Fig: 2 LNG global demand and availability
Source: LNG, 2009.
In order to meet the demand growth, the world’s natural gas producers will need to increase supplies by 48 trillion cubic feet between 2006 and 2030.
FORECAST INCREASE IN LNG EXPORTS
Exporting countries
With more than 40% of the world’s proved natural gas reserves, the Middle East accounts for the largest increase in regional natural gas production from 2006 to 2030. The four major natural gas producers in the Middle East: Iran, Saudi Arabia, Qatar, and the United Arab Emirates: Russia, Yemen, Angola, Peru and Algeria (Energy outlook, 2009).
Fig 3: MENA Natural gas exports
Source: WEO, 2005
Factors Affecting LNG Exports
These factors include:
· World population and GDP
The World population is projected to grow at an annual average rate of 1%, from 6.5 billion in 2006 to 8.2 billion in 2030. The population continues to grow most rapidly in non-OECD countries. Economic growth is by far the most important determinant of the overall demand for energy services. The rate of growth in world GDP is projected at an annual average of 3.3% over the period 2006-2030 reflecting the rising power in the world economy of the non-OECD countries, where growth will remain fastest.
· Unconventional gas
· Gas to Gas competition
The global trend towards liberalisation of natural gas markets has been to let “gas-to-gas” market competition set prices for the commodity. Ideally, competition would drive equilibrium prices to the long run marginal costs of the supply necessary to meet demand. LNG investments create special problems for the competitive commodity model. The investments are capital-intensive with low short run marginal costs, even if long run costs remain high. This is particularly true in the case of domestic supply, which often determines the prices against which imports must compete (LNG, 2009)
Gas Cartel
The Gas Exporting Countries Forum (GECF) aims to generate cooperation among gas producing and exporting countries, foster mutual interests by favouring dialogue between producers, consumers, government and industry, and to endorse a stable and transparent energy market. Indeed, since its creation, concerns have been raised in the energy markets that GECF could become a “Gas OPEC” that would restrict natural gas production and export in order to increase prices (IEA, 2009).
· Proximity to markets
The proximity of reserves to markets and production costs will continue to drive regional prospects for gas supply. Gas transportation, whether by pipeline or as liquefied natural gas (LNG), remains very expensive and represents a significant share of the cost of gas delivered to consumers. A significant part of the world’s gas resources is located far from the market and cannot yet be extracted profitably. Those resources are large enough to meet the projected increase in global demand (WEO, 2009).
· Technological improvements
Impact on World Energy Markets
The recent rapid development of unconventional gas resources in North America has changed the gas-market outlook with important implications for the rest of the world. The share of unconventional gas in US gas output is projected to rise to almost 60% in 2030. This boom in unconventional gas production, together with the impact of recession on demand, will prolong the glut of gas supply for the next few years having far-reaching consequences for the structure of gas markets, with suppliers to Europe and Asia-Pacific coming under pressure to adjust pricing terms under long-term contracts, to de-link gas prices from oil prices, sell more gas on a spot basis and to cut prices to stimulate demand (WEO, 2009).
Decoupling gas price from oil price
The four major regional markets whose gas pricing patterns influence the price of LNG in world gas trade are: North America, UK, European Continent, and Northeast Asia (LNG, 2009). High oil prices affect each regional LNG market differently. Natural gas prices remain strongly linked to oil prices, either directly through indexation clauses in long-term supply contracts or indirectly through competition between gas and oil products in power generation and end-use markets. Thus, the prices of gas traded internationally and locally in markets around the world have risen sharply in recent years with oil prices, though price differentials can fluctuate. Prices begin to rise after 2015 in line with oil prices. Although the development of gas-to-gas competition is expected to weaken the contractual links between oil and gas prices over the projection period, gas prices are not expected to fall relative to oil prices. Competition would be expected to exert some downward pressure on the prices of gas relative to those of oil. This is assumed to be offset by rising marginal supply costs for gas as the distances over which gas has to be transported, by pipeline or as liquefied natural gas (LNG) increase. The growing share of LNG in global gas supply and opportunities for short-term trading of LNG are expected to contribute to a modest degree of convergence in regional prices over the projection period. The decoupling and the recoupling of oil and gas prices in surplus and shortage respectively, is economically logical. Economic theory (fig. 4) outlines the behaviour of price to changes in supply and demand (WEO, 2009).
| Fig 4.  |
| Fig 5: assumed natural gas prices relative to oil |
Source: WEO, 2009.
Substitution effect
Natural gas consumption in the non-OECD countries grows faster than in the OECD countries. Production increases in the non-OECD region accounting for more than 80% growth in global production from 2006 – 2030. With world oil prices projected to return to previous high levels after 2012, consumers opt for the relatively cheaper natural gas for their energy needs. In addition, because natural gas emits less carbon dioxide than other fossil fuels, governments implementing policies to reduce greenhouse gas emissions may encourage its use (WEO, 2005).
Implication for world energy markets
MENA will play a major role in meeting the world’s growing energy needs through 2030. The volume of oil and gas produced and exported by MENA countries in aggregate increases significantly. Despite the mutual economic benefits of increasing energy trade, growing imports from MENA countries will have major implications for energy security in consuming countries. In the short term, expanding trade will intensify the risks of a severe supply disruption. A particular cause for concern is the reliance on strategic transportation channels through which almost all the oil and gas exported by Middle Eastern countries must flow (WEO, 2005).
The Homerun
With the glut of unconventional gas sources due to improved technology, LNG exports are bound to increase- changing the overall structure of the gas market. This has important implications for the energy market as LNG prices reduce significantly reducing the bargaining power of monopolies like Gazprom. The feasibility of gas cartel formation is significantly reduced. However, consuming nations can reduce market power of exporters by promoting competition among energy sources- by Liberalizing domestic energy sectors and developing technologies that facilitate fuel switching, thereby improving energy efficiency.NUTSHELL:
This is by far one of the most interesting articles I have put up on the site THIS YEAR. Kunaba, in this article, examines a quite topical issue as contemporary oil and gas economics of Liquefied Natural Gas (and indeed of the future) cannot be discounted- even more so as the developments in this field are fast evolving. Kunaba's analysis starts with a simple analysis of LNG and graduates the discussion to the more complex issues which affect the world energy markets. An enticingly readable flow of thought will take the most untrained mind in Liquefied Natural Gas through the pressing issues without losing the essence of the structured economic argument. For more information on this article and to view Kunaba's professional profile, click here.-->
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