A fluid situation: The dynamics of the global LNG market are shifting

The global market for liquefied natural gas (LNG) is in a period of flux. While natural gas prices over the past few years have become partially decoupled from the price of oil, some customers still complain of the impact of crude prices on the market. Furthermore, as prices on the Henry Hub market in the US have nosedived, global spot prices have remained firm and even increased. However, even in this period of uncertainty, Qatar has retained a strong market position, based on its huge and reliable supply. The country has also built its strategy on the stability of long-term contracts and the ability to divert supply to profitable markets.

GAME CHANGER: The LNG market witnessed a significant shake-up in 2011. The nuclear shutdown in Japan resulting from the 9.0 earthquake and Pacific tsunami in March 2011 had a substantial impact on global LNG trade. As a result of the natural disaster, Japan closed all but one of its 54 nuclear reactors, which have a combined generation capacity of 48.96 GW, or 21% of the country’s total installed capacity.

To mitigate these losses, the Japanese government has been relying more heavily on gas-fired generation, which has led to a spike in the country’s LNG imports. In the second half of 2011, LNG consumption among Japan’s top-10 power utilities companies was up 18.7% to 26.7m tonnes, according to the Federation of Electric Power Companies. Platts has estimated that the country will require 53.4m tonnes of LNG in 2012.

INCREASED PRICES: This dramatic spike in LNG consumption – coupled with robust demand from emerging economies such as India and China – has led to a significant bump in prices. Rafael McDonald, an analyst at IHS Cambridge Energy Research Associates, told US-based publication The Street that the Japanese crisis, coupled with high oil prices on which Asian spot LNG prices are based, pushed spot prices in the second half of the year to an average of $15-16 per million British thermal unit (Btu) from $10.

Qatar, with its huge LNG capacity, has been well situated to benefit from this. According to the Japanese Ministry of Finance, Qatari LNG imports rose 55% to 11.9m tonnes in 2011. Such a dramatic increase will have allowed Qatar to maximise revenues from its production, given the high prices persisting in Asia and the potential current premium in the Japanese market. In February 2012 Bloomberg reported that 1m Btu of Qatari LNG cost $17.12 in Japan, compared with $8.87 in the UK, citing January data from shipbroker Poten & Partners. Bloomberg stated that, factoring in transport and regasification costs, the return on shipping Qatari LNG to Japan, rather than the UK, is 138% higher.

Producers are not the only ones reaping the benefits of a diverse market. Shipping rates in spot markets are high, according to Muhammad Ghannam, the managing director of LNG shipping firm Nakilat. The global reach of Qatari gas sees the company operating between Qatar’s North Field and 23 countries worldwide, using 54 carriers. The rise of other producers in far-flung corners also bodes well for the shipper. “People are speculating that places such as Australia will enhance LNG production, causing demand for vessels,”

Ghannam said. Qatari operators are benefitting from having included diversion clauses in their LNG supply contracts. Qatargas, for instance, has built long-term deals in premium markets where LNG is needed most with the goal of optionality, making diversion from markets such as the UK and the US a possibility.

GLOBAL REACH: As such, Qatar has become a major player in many markets, both in Asia and Europe. For example, the UK, which has seen its own North Sea gas production dwindle over the past 11 years, has become highly reliant on Qatari LNG. UK government data shows that Qatari LNG imports accounted for 52% of the gas consumed in the country in the first nine months of 2011, up from 11% for the whole of 2009, leaving the UK heavily dependent on supplies from Qatar.

Qatari operators are in a strong position and they have the flexibility to go wherever the maximum returns are.

This confidence was evident in April 2012 reports of negotiations taking place between RasGas and the Indian government for the delivery of an additional 5m tonnes of LNG. According to business and financing publication Live Mint, Qatar was requesting $15.96 per MBtu, which would hit $20 per MB tu factoring in transport, regasification and tariff costs.

Such negotiations suggest a dramatically altered market, in which operators such as Qatargas and RasGas hold the cards. This situation may persist in the short to medium term, with an April 2011 report by Vitol, an LNG trader, suggesting that there will be a shortfall in supply of 389bn cu feet in 2013, and that this will rise to some 812bn cu feet by 2015.

AUSSIE RULES: This tight market is unlikely to persist in the longer term, with export capacity expansion in Australia and the US set to dramatically alter the supply landscape over the coming decade. Australia is currently the world’s fourth-largest LNG exporter, with annual exports of 20m tpa. However, if all plans in the pipeline come to fruition, they could reach 80m tonnes by 2020, according to the newspaper The Australian.

US EXPANSION: The real game changer, however, is likely to be the US, where the landscape has changed dramatically in the past five years with the development of better techniques for extracting shale gas. As recently as 2010 Qatar was shipping 45.6bn cu feet of LNG to the US, making it the third-largest importer, behind Trinidad & Tobago and Egypt, according to BP’s “Statistical Review of World Energy 2011”. However, marketed natural gas production in the US has increased from 18.9bn cu feet in 2005 to 24.2bn cu feet in 2011, making it the world’s biggest natural gas producer. The US is, therefore, poised to go from being a gas importer to a large-scale LNG exporter. Given the price slump that has accompanied this glut (US gas has lost 87% of its value since December 2005, falling to $1.97 per MB tu in mid-April 2012, down from $15.78), US exports will likely have a strong competitive edge in the international market. Seven companies have plans to export LNG from the US. If all these projects are approved and delivered, they would bring an additional 100m tonnes of LNG per year to the market. So far only one firm, Cheniere Energy, has received permission to export LNG to countries that do not have a free trade agreement with the US. The government ruled to allow Cheniere to build a $10bn liquefaction plant in Louisiana.

Even if the government only approves Cheniere, the implications for the global market will still be significant. The firm plans to export 18m tonnes of LNG by 2016. Given the price discount US gas will be able to offer, this poses a threat to current operators. With Australia also boosting capacity, the market is likely to look very different by the end of the decade. However, new markets may open up. Hamad Rashid Al Mohannadi, the managing director of RasGas, told OBG: “We see great potential in emerging markets, where economic growth and environmental awareness are driving demand for new supplies. In the coming years, we expect Thailand, Indonesia, Singapore and Malaysia to begin importing LNG.” With several long-term contracts in place, the flexibility to divert supplies and competitive production costs, Qatar should remain a significant global player.