LNG regas capacity is outstripping new liquefaction plant at a rapid rate
Created: March 12, 2008
The ratio of regasification capacity to LNG liquefaction is set to grow rapidly over the next five years.
OECD Asia's share of world regasification capacity could shrink from over 50% now to less than 20% in only five years. Contrary to expectations, building LNG import capacity may not result in enhanced security of supply, rather power is shifting upstream to a small band of major producers.
Consumption of gas has grown fast and marginal demand is dependent on the supply of imported coal and oil.LNG regasification capacity is streaking ahead of increases in liquefaction plant, according to data compiled by Platts LNG Daily's terminal and liquefaction plant trackers.
Based on existing capacity, terminals under construction, approved or that have applied for approval, world regasification capacity will end 2008 at 448.2 Bcm a year.
Liquefaction capacity will rise to 254.1 Bcm/yr or 191.5 million tons/yr, giving a ratio (see chart) of 1.76 Bcm/yr regasification capacity for each one Bcm/yr of liquefaction.
By 2013, based on the same criteria, liquefaction capability will have increased to 419.1 Bcm/yr as opposed to world regasification capacity of 1,351.55 Bcm/yr, a ratio of 3.22 to 1.
There are in addition a huge number of projects on both the supply and demand side that are at the proposal stage. On the liquefaction side, there are an additional 54 project proposals worldwide, while on the regasification side there are 91 projects proposed.
Major buyers
Recent rises in the price of spot LNG cargoes, close to $20/MMBtu, reflect Japan's dominant position in the LNG market.
Owing to its lack of domestic energy resources, and early adoption of LNG, the country currently accounts for 40.1% of world regasification capacity (see chart).
Japan has both the money and infrastructure to absorb spot LNG, if it needs to do so. Having negligible domestic gas production, Japan's marginal LNG demand is heavily influenced by the availability of alternative energy supplies, rather than the supply/demand balance of competitive local gas markets.
In January, cold weather pushed Japanese power consumption to record levels at the same time as a major proportion of the country's nuclear fleet was off line.
Most notably, Japan's largest utility, the Tokyo Electric Power Company, had two-fifths of its 17.31 GW nuclear capacity out of action, owing mainly to an earthquake which hit its 8.21 GW Kashiwazaki-Kariwa nuclear plant in July 2007.
Japan has plans to build more gas-fired power plant and convert others to natural gas from coal and oil, indicating that its demand for gas will rise in future.
According to data from Japan's Federation of Electric Power Companies, the country has total LNG-fuelled plant capacity of about 54 GWs, or just over 20% of total power generating capacity, while around 27.3 GWs is coal-fired with a further 34 GWs accounted for by heavy fuel oil or direct-run crude oil.
Japan has relatively few plans to increase its regasification capacity. Only one new terminal has been approved, which should add 4.5 Bcm/yr capacity in 2010, although a further four projects are at the proposal stage.
South Korea is in a similar position. With little domestic gas production, it is the world's second largest importer of LNG after Japan.
Consumption of gas has grown fast and marginal demand is dependent on the supply of imported coal and oil, as well as nuclear capacity.
South Korea accounts for 12.6% of world regasification capacity, but despite growing gas demand has no new terminals planned, with the exception of one project at the proposal stage with capacity of just 2 Bcm/yr.
Together, Japan and South Korea make up just over half of the world's total regasification capacity. Import data suggests that terminal utilization runs at an average of about 50%-60%, indicating that the lack of new construction is no barrier to increases in LNG imports over the next five years.
Nevertheless, based on forecasts of new construction around the world, Japan and South Korea will face more competition and soon. Their combined proportion of regasification capacity is expected to shrink dramatically from 53.5% now to just 18.1% by 2013.
LNG consumption drifts towards the Atlantic
This decline reflects the expected major shift in LNG consumption from the Pacific to the Atlantic basin, as North America in particular starts a massive expansion in its LNG importing capacity.
North America will account for 71.6% of all new LNG terminals in the next five years, equivalent to 646.8 Bcm/yr capacity. Of this, the United States alone is expected to make up 58.9% of the new builds.
India and China appear likely to remain relatively small players in the LNG market.The United States already has 92.5 Bcm/yr of new terminals under construction, adding to its expected capacity at end-2008 of 63.3 Bcm/yr. By 2013, the country could have 595.9 Bcm/yr capacity, ignoring 13 projects at the proposal stage.
Europe too will make a substantial contribution to new terminal capacity, accounting for 22.1% of new builds, equivalent to growth in capacity from 110.2 Bcm/yr at end-2008 to 309.75 Bcm/yr by 2013. Europe also has a further 26 projects at the proposal stage. As a proportion of world regasification capacity, Europe's share will fall from roughly one quarter now to 22.9% by 2013.
Notably, the new energy consuming giants, India and China, have relatively minor roles to play in this expansion.
LNG is one of few commodities bucking the global trend of consumption moving from west to east. China's regasification capacity is expected to rise from 4.9 Bcm/year to 23.1 Bcm/yr in 2013, while India's will increase from 12.1 Bcm/yr to 29.7 Bcm/yr in 2013, fairly minor increases on a global scale.
China has a further 17 projects proposed, but chastened by the rapid rise in LNG prices appears to have turned its attention to overland pipeline projects to bring gas from Turkmenistan and Myanmar. India, by contrast, has had less success in pushing forward with pipelines.
Nevertheless, as it stands, India and China, together appear likely to remain relatively small players in the LNG market.
Overcapacity?
Growth in liquefaction capacity (see chart), while rapid at 65% over the next five years, is not projected to keep pace with the expected 300% increase in regasification. The impact of this disconnect will be felt quickly; in 2009, only 11.5 Bcm/yr of new liquefaction capacity is expected, but regasification capacity (see chart) will rise by 170.75 Bcm/yr.
While the period 2010-2011 should see 114.2 Bcm/yr new liquefaction capacity added to the global total, on current projections it will be met by an increase in regasification capacity of 404.15 Bcm/yr.
This suggests that the utilization rate of new terminals will be low. Simply building import capacity is not going to result in additional supply and, in policy terms, an increase in security of supply. This will be the case particularly where terminals are built on a speculative basis and are not underpinned by long-term supply agreements.
In addition, the market dynamics of the three main markets - the United States, Europe and OECD Asia - are very different.
In the US, while a rapid rise in LNG imports is forecast, volumes will depend in the next five years on a price set predominantly by domestic supply.
The Gulf of Mexico is expected to act as a fair weather buyer, being outbid by the more inflexible winter time demand of countries like Japan and South Korea. US buyers are expected to pick up LNG cargoes only when cheap and use storage to arbitrage between winter and summer demand.
According to Jim Crews, director of commercial operations with NiSource Gas Transmission and Storage, LNG deliveries to the US will amount to about 8.4 Bcfd by 2014, according to his company's models.
"That represents about 12% of the 64 Bcfd that the US will require at that time," he said. "LNG will be the marginal supply coming into North America with the (production) decline that we can see in the shallow Gulf of Mexico."
That is the equivalent of 86.6 Bcm/yr in 2014 as oppose to expected regasification capacity of 595.9 Bcm/yr. The US Energy Information Administration has projected demand growth in US LNG imports from 16.9 Bcm/yr in 2004 to 124.6 Bcm/yr in 2030.
By any measure, and even ignoring projects only at the proposal stage, the amount of regasification planned in the US appears to be way beyond expected import demand, implying huge overcapacity or more realistically that many projects will simply not get built.
Building regasification terminals
Building regasification terminals has some parallels with the huge expansion in the refining sector in the 1960s and 70s that took decades to absorb.
With competition for LNG increasing so fast, power appears to be swimming upstream instead into the hands of a limited number of producers. A regasification terminal for any littoral state makes sense on a strategic basis even if the economics are marginal. In times of energy shortage, it could be put to use, and, while it exists, it acts as a counterweight to dependence on pipeline supplies.
Of the new terminals likely to go ahead, eight are in countries that currently have no regasification capacity (see chart).
There are a further 22 countries that do not currently have terminals, but have project proposals.
Some, such as Ukraine and Poland, are clearly aimed at reducing their dependence on a single dominant gas supplier, Russia. Other plans, such as those in Chile and Brazil, reflect the unreliability of supplies from neighbors Argentina and Bolivia.
Elsewhere, as in the US, expansion plans are based on the widening gap between falling domestic output, pipeline imports and growing demand. The greenhouse gas emissions profile of natural gas and its embededness in the energy economy, means that imports can only rise as domestic production falls.
From a security of supply perspective, investing in regasification and storage capacity makes sense to mitigate the impact of pricing power moving to the import barrel, or in this case, import MMBtu.
However, building on such a scale reflects the market conundrum that if it looks good to one investor it looks good to all, but if everyone does it then a boom bust pattern of over investment surely follows.
And if US capacity is built predominantly on a speculative basis, its ability to create a floor to the LNG market may in fact have little impact as prices may never move that low, at least in the medium term.
Even if the avalanche of investment underway in the US is totally ignored, liquefaction output is still only just keeping pace with new regasification capacity in the rest of world. And countries like Japan and South Korea can still absorb more LNG even without building new terminals on any great scale.
The outlook is therefore very positive for LNG producers and this is encouraging them to take on more risk by keeping sales of a larger proportion of LNG flexible, in the hope that the expansion of regasification capacity will intensify competition and allow supplies to be directed to the highest priced market (see gas price snapshot chart).
However, this is a far cry from the hopes of many policy planners; adding regasification capacity was supposed to mean that LNG could act as a price cap when domestic markets became too tight.
An additional supply option meant power passing downstream to the consumer. But with competition for LNG increasing so fast, power appears to be swimming upstream instead into the hands of a limited number of producers.
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An excellent piece at Platts. These are stunning stats, a 3:1 ratio of regas terminals to liquifaction terminals. And the cost of building liquifaction plants keeps skyrocketing (thanks Frank).
I think the guy is spot on about the fact that the US will be relegated to only getting LNG during the shoulder months. |
