The LNG trade has existed for only fifty years and yet its supply has become crucial to many economies. The most substantial increases in the numbers of deliveries and market players have taken place since 1990. This first of two parts will look at the top changes in LNG in the last twenty years. In the second part, we will look at the factors that are now fundamental to the LNG industry as well as what lies ahead. As the LNG trade evolves to meet the varying demands of buyers, the question will be whether LNG is more than just a specialized subset of the gas industry.
LNG – The Historical Context
Liquefying natural gas began as a means of supplying gas to markets not adequately served by pipelines, as well as a means of monetizing otherwise stranded gas reserves. The Methane Pioneer delivered the first LNG cargo from Louisiana to the United Kingdom in 1959 as an experiment that prompted Shell to order two 27,000 cubic meter purpose-built LNG ships for the Algeria to UK trade. By the 1970s, countries such as Algeria, Indonesia and Abu Dhabi led the way to supply the emerging LNG market. Elsewhere around the globe, infrastructure for liquefaction plants, LNG carriers, and regasification (i.e., receiving) terminals began to expand as LNG’s role in meeting global energy needs started to be recognized.
Japan’s demand drove the Asian market in the early 1980’s before Taiwan and Korea began taking cargoes later in the decade. In 1989, Australia joined the other two major Asian exporters, Indonesia and Malaysia.
By 1990, a total of eight countries were exporting more than 50 million tonnes to thirty terminals using a global fleet of 61 specialized LNG ships, some with up to 125,000 cubic meters of cargo capacity. Despite considerable growth, however, LNG continued to be viewed as a “niche” fuel for a “club” of only a few international players. In fact, as of 1990, the Middle East had yet to become a real factor in LNG supply.
LNG Trade in 2011
A leap forward to 2011 sees a substantially different LNG trade that has grown to over 200 million tonnes per annum supplying no less than ten percent of global gas demand. The largest demand for LNG continues to come from Asia where over half of the world’s regasification facilities are located. The Middle East is the largest exporter due primarily to mammoth Qatar LNG projects. There are now 17 producing countries with Angola and Papua New Guinea due to commence by 2014. There are more than 90 import terminals around the globe with many more expected. Cargoes are delivered by over 300 double-hulled LNG ships with up to 250,000 cubic meters of capacity. Although still considered a luxury import in developing countries, LNG is no longer considered a “niche” business.
Top Five Changes in the Last Twenty Years
LNG has clearly come into its own. So what has changed in the LNG trade in the last 20 years to make it so successful?
- Qatar is the largest supplier of LNG at 77 million tonnes of capacity per annum and has set the standard for LNG projects through its integrated chain of production and supply. Qatar also benefits from regional price fluctuations through short term and spot sales while still supplying LNG under long term contracts to Atlantic and Asian markets.
- Initially, the enormous development cost of LNG infrastructure required long term contracts to give confidence to financiers. The LNG trade is now more flexible through spot market sales and producers are able to sell in smaller quantities, yet maintain the same or greater volumes of sales.
- In the US, shale gas has had a “game changing” effect on energy markets through improvements in extraction and production technology. The major increases in US gas supply, offsetting a perceived deficiency, seem set to allow existing US terminals to take advantage of price spreads via LNG export swing capability.
- A rapid acceleration in LNG technology has meant that the LNG supply chain is more efficient and versatile. In Dubai and Brazil, floating regasification facilities are used to meet increased seasonal demand. Offshore facilities also allow for the development of otherwise uneconomical stranded gas and mitigation of supply security issues.
- Korea rapidly became the LNG ship builder of choice after producing its first LNG ship in 1991. In 2011, China looks also to become a major shipbuilder with increased production of purpose-built LNG vessels.
In 2011, substantial change in a variety of factors has made the LNG industry far more sophisticated and efficient than it was even a few years ago. In the second part of this article, we will look at “realities” learned from the past twenty years and consider what lies in store for the LNG trade over the next twenty years.
This paper is based on a presentation made by Philip R. Weems of King & Spalding LLP to the Association of International Petroleum Negotiators (AIPN) in Singapore on December 15, 2010. The views expressed in this article are those of the writers.