LNG capacity to grow through 2011

Adrian John, Steve Robertson - Douglas-Westwood Ltd.

Strong growth in spending on new LNG plants, vessels, and terminals is forecast by Douglas-Westwood Ltd. (DWL) in its soon to be released third edition of “The World LNG & GTL Report.”

The LNG business has grown substantially in recent years with the completion of some high-profile projects. While demand remains strong in the traditional Asian markets, much attention now is being directed to opportunities in the potentially vast Atlantic basin LNG market. Meanwhile, the limits of domestic gas production in North America and Western Europe are becoming clear and gas import demands are rising. Increasingly, LNG is a method of choice to satisfy growing gas demand. Following success of plants recently established in Equatorial Guinea, Nigeria, and Trinidad & Tobago, a wave of new projects has emerged that demonstrate the potential for serious market growth over the next five years. However, despite strong demand-side fundamentals, supply-side constraints impact the business – EPC costs are rising, final investment decisions are being delayed or postponed as a result. While major growth is still in prospect, the timing of operators’ planned expenditure is likely to move significantly “to the right.”

Development of LNG

The last five years have seen a 46% increase in global LNG liquefaction capacity, from 129 million tons per year in 2002 to 188 million tons per year in 2006. A number of factors drive this growth, including:

• Continuing growth in world gas consumption – The Energy Information Administration of the US Department of Energy (EIA) forecasts gas consumption to grow at an annual rate of 2.4% to 2030, compared to 1.4% for oil and 2.5% for coal. Gas will account for 26% of global energy by 2030
• Strong import demand – Many major gas-consuming nations have either very little gas production of their own (e.g. Japan, South Korea) or have developed and drawn down their own reserves to the point where they are past peak production and will have to rely on imported gas (e.g. US, UK)
• Monetization of stranded gas reserves – Significant amounts of natural gas reserves are a long distance from the consumer or have no nearby pipeline infrastructure. Without access to markets, the produced gas is either flared or re-injected. LNG offers an access mechanism, a method to monetize these gas reserves and to reduce the environmental impact that is associated with gas flaring
• Technological advances – Advances in liquefaction technology had led until recently to a fall in the level of capital expenditure (capex) required to construct new plants. Nonetheless, the development of larger liquefaction trains will create larger economies of scale to compensate somewhat for rising capex requirements and to sustain the economic viability of LNG.

Gas liquefaction technology has its roots in the 19th century, pioneered by individuals such as Michael Faraday and Karl Von Linde. However, the worldwide LNG trade began in earnest in the 1960s when, following a number of test shipments across the Atlantic to prove the concept, the first commercial LNG trade began between Algeria and the UK. Although the UK may have led the way in adopting LNG technology, the region in which the LNG business really took off was Asia. Japan, which had no gas production of its own, was very quick to adopt the new technology, and soon was followed by South Korea and Taiwan. Meanwhile, in Western Europe the technology also was adopted to a much lesser extent to import gas from Africa.

LNG carriers

There currently are more than 230 LNG tankers in operation. Only a few shipyards can build LNG tankers due to the complexity of the vessels and the high levels of quality control required. LNG tankers by far are the most expensive type of cargo vessel, costing two to three times the price of an oil tanker of similar tonnage.

In the past, it has been normal for vessels to be dedicated to particular projects on long-term contracts, but spot trading is increasingly significant and now is thought to account for around 13% of total LNG trade.

The main types of vessel designs are in use -- the Kvaerner-Moss Spherical System, the Gaz Transport Technigaz membrane type, and IHI’s Structural Prismatic design. The membrane system is the most widely adopted. It is used in over half of the LNG vessels in service as of 2007, and will be used in around 85% of the vessels scheduled for delivery during 2007-2010. The Moss system is used in 45% of LNG vessels in service as of 2006, and will be used in over 10% of the vessels scheduled for delivery during 2007-2010.

Trends and forecasts

The capital expenditure graph shows the levels of spending that DWL forecasts will be required to complete new LNG facilities over the 2007-2011 period. The dates refer to the year of start-up for the terminal. In practice, however, the contractual payments relating to the projects often are made in installments and most likely will be spread over a number of years and not confined to a single year. For clarity and transparency, DWL does not to try to reflect this in its forecasts, preferring to indicate the value of the new LNG facilities that come into use each year.