Gas market worldwide picks up steam

As the international economy begins to pull itself out of recession, a number of recent commercial deals within the Liquefied Natural Gas (LNG) market are starting to put the spotlight back on the sector. In particular, Asian economies are beginning to ramp up their supply contracts for gas for the next few years, following a significant deterioration in early 2009. Importantly, they are also starting to focus on diversifying their sources of supply, which in turn has an impact on the major producers of LNG, such as Qatar.

Japan has recently entered an agreement through Chevron for the supply of about three million tonnes per annum of LNG from the huge Gorgon gas project off the coast of Western Australia. The $60 billion (Dh220bn) export deal involves both Osaka Gas, worth 1.375 million tonnes of LNG per year, and Tokyo Gas, worth 1.1 million tonnes per year. In addition, South Korea will be sold 0.5 million tonnes per annum for up to 20 years. In separate recent deals, China signed a $42bn export deal and India a $21bn long-term supply deal, again both with the Australian LNG industry. The Australian LNG sector has a number of planned ventures and projects, which will see the country become the world's second biggest supplier of the fuel by 2016 with Qatar remaining the biggest global supplier. The top five LNG exporters in the world are Qatar, Indonesia, Malaysia, Algeria and Trinidad and Tobago. This order is based on long-term LNG supply commitments. Qatar leads the way with an export volume of nearly 40 million tonnes of LNG, but by 2016 Indonesia and Algeria will be replaced by Australia and Nigeria.

Korea in particular is looking at diversifying its supply of the gas. This has implications for its current major suppliers, including Qatar and Oman, as Korea Gas Corporation is currently the world's number one buyer of LNG. At the moment, South Korea imports more than 90 per cent of its LNG from Qatar, Oman, Indonesia and Malaysia with the bulk coming from Qatar. Going forward, it plans to buy about 30 per cent of its requirement from Australia.

The LNG market over the past year has been difficult. Lower demand for LNG, particularly in Asia, has occurred due to the downturn. Prices have come under pressure, and, in fact, more pronounced than the price of oil despite the fact the price is partly based on the cost of oil. The sharp downward price pressure has hit LNG. This is despite Qatar supplying less than half its capacity to the market in order to try and support prices.

Qatar is beginning to raise its production capacity. It has started a 7.8 million tonnes per year LNG production unit through QatarGas, and its annual LNG output capacity is being raised to 54 million tonnes. By 2010, Qatar aims to increase its LNG production to 77 million tonnes per year. Both QatarGas and Ras Laffan Liquefied Natural Gas Company are bringing new units. QatarGas is aiming for production capacity of 42 million tonnes per annum by next year-end. As well as its traditional markets, including Japan, UK, US and China, Qatar is targeting new ones, such as Turkey which is potentially a four billion cubic metres of LNG market. Currently, Turkey is supplied mainly by Russia, Iran, Azerbaijan and Algeria. However, when there is a heavy demand or supply disruption, Turkey has to buy LNG on the spot markets that can be expensive.

Abu Dhabi Gas Liquefaction Company is considering plans to increase LNG production at its complex on Das Island beyond 2019, when its 4.7 million tonne per year LNG sales contract with Tokyo Electric Power Company expires. The expansion option would include replacing smaller existing trains with a much larger one. It would depend upon expanding gas production to cover growing domestic demand and reinjection into oil fields, while freeing up extra offshore gas for LNG export. With domestic energy demand growing at 10 per cent a year, Abu Dhabi has decided to move forward with a plan to invest $50bn in developing large onshore and shallow-water sour-gas reserves. Although the rebound in global growth has been faster than anticipated, particularly in Asia, some challenges still face the LNG market. New coal capacity coming online has also reduced demand for LNG. Also, the onset of additional LNG capacity may cause oversupply and hence the price of the gas may remain low. Some market analysts do not believe demand will really start to pick up until 2011-2012 when the coal build weakens. Indeed, gas may lag the recovery in oil due to the displacement of gas from new coal capacity. This may be somewhat over-pessimistic as the global market still has a growing thirst for the cleaner energy supply offered by gas. However, supply is starting to grow, particularly to large markets such as Europe, which may keep a lid on prices. Indeed, shipments to Europe are up by about 40 per cent from last year. Qatar has recently increased its LNG shipments to the UK and other European countries.

The global crisis affected the progress of LNG projects worldwide. The recent recovery in prices is encouraging oil and gas firms to renew their interest and investment in LNG projects, particularly in countries such as Australia and Nigeria.

Governments worldwide are focusing on adopting fuels with lower green house gas emissions. Large investment has been made by firms to develop enhanced carbon capture techniques, which can reduce emissions from power generation and oil and gas refineries. Automobile emissions are being addressed through hybrid vehicles, fuel cells or using LNG as a fuel. The use of natural gas can be applied to residential and commercial space heating applications as well as transportation, all of which helps boost the LNG demand. Prospects appear to be encouraging for the LNG market. The important Asian region is beginning to show more demand, including key markets such as Japan and South Korea, while other emerging markets are also maintaining their import levels. The US and Europe are likely to remain steady. The big question is whether the bottom has been reached in the market and the relationship between supply and demand going forward starts to improve. The trend of lower imports may have bottomed and the global industrial downturn appears to have reached its nadir now. These will help demand. The big hurdle may be on the supply side which could show a big increase over the coming year as major capacity from Qatar and other developing producers such as Yemen, hits the market. However, if forward momentum on global economic output is maintained, then there may be some upward support on the price.



- The author is a US-based commentator on business issues

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