A look at liquefied natural gas markets

December 11, 2012
Written by
Lisa Brodeur is a quality assurance supervisor at 360 Energy.
Lisa Brodeur is a quality assurance supervisor at 360 Energy.
Short-term liquefied natural gas (LNG) deliveries have been a big part of the global natural gas market in the past two years. Prior to this, the majority of countries importing LNG were doing so on a long-term contract basis, including the U.S.

However, over the last two years, with a rise in domestic natural gas production and a drop in natural gas consumption, the U.S. has not been in a position where they have needed contracted LNG deliveries. With that being the case, many of the deliveries that have typically been dropped on US shores are being redirected elsewhere – predominantly Asia.

 

Unfortunately short-term LNG deals are not sizeable enough nor are they guaranteed, so for suppliers, they do not provide the stability or income to warrant the investment that is needed to develop LNG projects. The short-term markets that have been around in the last couple of years are beginning to disappear, as many suppliers begin to sign long-term contracts for the amounts they have been shipping in short-term deals.

 

LNG suppliers will be looking to focus on more long term contracts in the future in order to develop and build the infrastructure that is required to ship LNG. Currently supplies are barely meeting demand, even with the shift away from U.S. shores. The biggest reason for this is that countries in Asia, in particular Japan, have put a hold on nuclear power post-Fukushima, and have therefore significantly increased their LNG requirements. As their need for LNG rises, so do the costs for Japan. With LNG indexed to oil prices and global oil prices continuing to rise, so do the prices for LNG. As supplies tighten, the price will rise even faster, making it even more difficult for Asian countries to continue to bring in the quantities they need. Without nuclear power though, the options are very scarce, putting a heavy economic burden on most of the countries currently importing LNG.

 

With LNG becoming such a big topic in the oil and gas industry, there are several large suppliers looking to begin building the infrastructure required for LNG in both Canada and the U.S. This would not only include the possibility for export internationally, but also use domestically, in the form of long haul transport trucks. While the investment for these types of vehicles is higher than a traditional diesel fueled truck, the drastically lower price of LNG currently makes it viable to switch fuels. Looking out several years, domestic North American LNG demands may be significantly higher than they are currently, should the transportation industry really take hold of this relatively new technology.

 

As the short-term market eases off for LNG, which has begun over the last six months, there will be more discussion into the pricing structure of long-term contracts. The one thing that most agree on right now is that market is not going anywhere; it is only going to continue to grow. Supply deficits are expected to reach 175 million tons per annum by the year 2025. Without the guarantee of higher prices, suppliers are not going to continue to build infrastructure in order to ship LNG.

 

In North America, where natural gas is beginning to become a big industry due to the arrival of so much shale gas into the marketplace, many port cities will be looking to develop LNG export facilities. Long-term contracts will be key to the development of these facilities. On the other hand, in order to keep LNG cost competitive, it will be necessary to ensure that LNG contract prices do not exceed the price of diesel on a per unit basis.

 

Lisa Brodeur is a quality assurance supervisor at 360 Energy.

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