Figure 1. LNG Capital Investment Forecast
orldwide demand for liquid natural gas has
ncreasing steadily due to economic growth, a d interest in cleaner sources of energy, and ng production of indigenous natural gas in the 30 demand centers. In the U.S., the anticipation
25
eased LNG imports has created a surge in
tcation capacity; at the same time, investment20
ave risen, prices have softened, and Europe is
15 fully competing for LNG shipments. To manage 11 uncertainty and mitigate risks, importers 10 ontrol capital and operation costs. In addition,
52 ful companies—eager to improve their return ts and reduce overall financial exposure—are 0 ing marketing, trading and operations.
f the market: new demands spur competition orldwide demand for natural gas has been growing
steadily at an annual rate of almost 4 percent for 26 years. In the U. S., LNG imports almost tripled between 2002 and 2004,
from 226 Bcf per year to an average of 600 Bcf. Over the next two decades, U. S. demand is expected to grow by 0.56 Tcf annually. At the same time, domestic production will continue to decline—and unconventional reserves, such as coal bed methane, will only partially offset that decline.
Thanks to technological advances, LNG is now a cost-effective solution even when natural gas reserves are far from their point of consumption. (LNG becomes more competitive than pipeline gas beyond 1,600 miles.) Moreover, LNG export is the only viable (and now economical) route for reserves that were previously deemed as “stranded,” including those in Trinidad and Tobago, West Africa, and the Northwest Shelf of Australia.
Increased demand for LNG in the U. S. is mirrored in Europe. While Asia Pacific accounts for 65 percent to 70 percent of global LNG demand today, scenarios from Booz Allen Hamilton’s global gas model project that by 2015, the combined demand from the U. S. and Europe will exceed that of Asia. Not surprisingly then, the LNG industry is experiencing a large wave of capital investment worldwide, both on the liquefaction and regasification sides. (See Figure 1.)
Although the long-term picture for LNG appears rosy, U.S. importers face a number of market challenges that threaten near- and medium-term profitability
Over-capacity of regasification: With expectations of steady growth in demand for natural gas, the industry has invested aggressively in regasification facilities. In the U. S., which currently has five facilities, more than 40 gasification
Liquefaction
Regas
24
22
17
16
6
5
4
2
0
2007
Source: Booz Allen Hamilton
2008
2009
2010
2011
2012
Author
Herve Wilczynski is a vice president at Booz Allen Hamilton, based in Houston. He specializes in strategy setting operation excellence and large transformations in the energy industry. His experience also includes capital project effectiveness, innovation, supply chain management and manufacturing strategy across various capital intensive industries. Contact Wilczynski at Wilczynski_herve@ bah.com or (713) 203-8143.
terminals have been proposed and 17 of those have been approved. Most of those LNG facilities will come on line in 2012. However, inventory levels of natural gas are already at record highs, and regasification capacity utilization is forecasted to average only 60 percent.
Competition for cargoes: U. S. importers are in competition with Asian and European markets, where natural gas prices track the price of oil more closely and therefore, as long as oil prices are high, provide higher netbacks. In the U. S. over the past three years, increasing unconventional production combined with flattening growth in demand (mostly due to offshoring of industrial customers) has led to relatively soft prices for natural gas, averaging about $6.30/ Mcf. This means that, contrary to practices in other markets, U. S. gas prices are no longer coupled with oil prices. As a consequence, LNG exports to the U. S. declined by 10 percent between 2004 and 2006.
Increasing landed costs: Several factors are driving higher landed costs for importers entering new supply contracts: high transportation costs due to skyrocketing oil prices; increased liquefaction project costs; and delays in completing projects. For every million metric tons of annual production, capital costs increased from about $200 million in 2000 to as much as $600 million today. The time required to build liquefaction facilities jumped from three to at least four years.
Regasification project challenges: Regasification projects are impacted by the costs of material and services, which have escalated rapidly over the past three years due to global supply constraints. In addition, political sensitivities
LNG continued on 40
References:
Archives