LNG trade helps foster a global gas market

Liquefied natural gas is one way of removing price differentials between gas markets but, there are still big regional differences. A lack of liquidity makes trading the preserve of the asset owners. This was one of the conclusions drawn at the CWC World LNG Summit in Rome mid October.

So far, the companies making the most noise about LNG trade have been those with the upstream reserves and access to cargoes.

Pure trading outfits on the other hand are kept out by the lack of commodity and capacity at different stages of the supply chain.

This suggests a degree of immaturity where the incumbents control enough to keep out new entrants. One trader told delegates that what he was primarily concerned with was not prices but volume and churn, and he did not see either of those in the LNG cargo market.

"Traders won't touch LNG, it's a waste of time." Another agreed that the world was still a long way away from a fungible LNG market.

"The bid-ask spread in the Atlantic is too wide to guarantee any return unless you have a unique advantage," he said.

The prices agreed in these cases would not be likely repeatable, and so they would be of little value in establishing a benchmark.

The closest most traders can hope to get to the LNG market is placing bets on the difference between the UK National Balancing Point and the US Henry Hub, without taking a physical position.

And with no standard master agreements covering such basic terms as gas quality, destination flexibility and differing views on what mechanism to use for sharing proceeds from diverting cargoes, access to the market remains restricted by its complexity and opacity.

"How would you calculate the division of profits in a case where a tanker picked up volumes at two separate terminals, perhaps a month apart, and then sold them elsewhere three months later?" Asked one delegate.

And supplies are anyway tight, with production shortfalls in Indonesia and delays to the Snohvit LNG project making it more and more of a seller's market.

Traders at Norwegian producer Statoil considered various options for mitigating its exposure to the much-delayed Snohvit LNG project, including invoking force majeure and using pipeline deliveries from its Algerian assets.

But in the end it bowed to the inevitable and delivered a cargo to Spain's Iberdrola, bought from Malaysian Petronas.

For some of the bigger traders though, like banks, taking a physical position is an integral part of the business.

Merrill Lynch's stake in Papua New Guinea LNG, which it took last May, is designed to take advantage of Asian and US markets and in the latter it will be the principal offtaker.

As well as finding the LNG market an attractive one in its own right, as it is another link in the value chain, it will enable the US bank to offer more services to new clients, such as national oil companies.

It hopes to bring the plant on stream in 2011, having awarded the front-end engineering and design contract in the first half of next year.

But others said that more ingenious traders could take advantage of arbitrage opportunities, such as Excelerate's scheme. With no onshore regasification needed for its LNG, its projects can move ahead much faster.

One vessel would act as a reception terminal and vaporize and pipe ashore deliveries brought from other vessels when that market offered the best price.

Excelerate has about five vessels knocking around the world acting as floating storage, despite the cost of keeping a conventional vessel, which is about $65,000/day.

And Suez filled up a tanker in Asia in late summer with the intention of offloading it into a higher-priced market in northwest Europe this winter.

In that case though it had already sold Atlantic LNG to Osaka, which is not exposed to the same price pressures as others in the market. And at least two others are believed to be awaiting their chance to capture higher prices.

This is where projects, such as the Dubai Multi-Commodities Center come into their own. The aim is to build at least nine tanks of 200,000 cubic meters capacity each, for storing LNG.

That would be about 12 vessels full, where the market could meet to agree on prices for delivery to the Atlantic and Pacific basins. Boil-off would be dealt with by a small liquefaction plant.

Traders would deal in a "Dubai blend" of LNG, a consequence of mixing gas from different sources. DMCC would not take a position on the price, just provide the capacity. Depending on the interest, the tanks could be built and operational by 2011.

Up to 15 tanks of that size could be built. With many off-take contracts requiring 100% take-or-pay, and plants having operational difficulties that are by nature unpredictable, the ability to inject or trade gas in store would help smoothe price volatility resulting from short-term gluts and shortages.

Cherniere, which has a number of regasification terminals coming into operation in the US Gulf, said that the amount of LNG production contracted to utilities, as opposed to merchant operations, is going to fall to about 55% by 2010, which would help a market to develop.

While regasification facilities were now looking a little less tight, the problem for the US was more a matter of securing supplies, said Cherniere's president Keith Meyer. Nigeria alone is planning a Qatar-like rise in output, from 21 million mtpa in 2006 to 51 mtpa by 2011.

But there remain doubts about the ability of all projects to come on stream in that year, as cost inflation is running in double digit growth and there is a shortage of skilled manpower and materiel.

The fact remains that in most cases, those most able to take advantage of the arbitrage opportunities are the vertically integrated producer-shipper-marketers, with capacity to play around with.

When Algerian state Sonatrach says it has filled up its slots in the UK Isle of Grain terminal, that is true, since it has the rights to use half the capacity under a 20 year agreement with BP having the other half.

But if the price this winter is higher elsewhere than in the UK and Sonatrach can take advantage of the spread, then that will be the market at work, says its marketing vice president Chawki Rahal.

He said there were only two liquid markets, the UK and the US, and there was not much long term visibility, even there.

Market tightens and costs soar

The market for liquefied natural gas is tighter now than at any time in the recent past, with soaring costs and shortages of manpower and materiel deferring projects. The days of $200/mt are long gone; it's more like $300/mt now, said a Bechtel expert.

And Gaz de France reckons that regasification costs have gone from Euro1.40/MWh to Euro2.00/MWh for all new capacity. And prices are higher in the oil market too, making it tougher for the international majors to negotiate upstream deals.

Speaking for the global oil companies, ChevronTexaco and Repsol agreed that higher oil prices made it tougher to negotiate as the national oil companies would want a bigger share of the profits.

This would hinder access to equity gas and liquefaction capacity as they control some 56% of the world's gas reserves. A ChevronTexaco executive Geoff Cowper said the national oil companies were moving downstream into regasification, and the spreads were getting "thinner and thinner."

"It will be tougher, we can expect that," said Repsol's supply and marketing director Alberto Alvarez. But he did look forward to increasing arbitrage opportunities, albeit of a more complex nature.

Repsol, through its activities with Gas Natural LNG, which it also controls, with the Stream joint venture, is increasing its equity gas from 3.2 million mtpa now to 11.4 million mtpa by 2011 and would jointly market another 12.1 million mtpa with Sonatrach, propelling it into the ranks of the top three biggest movers of LNG.

Its share of the last volume could be between 25% and 30%. It also has an agreement with Gazprom to develop LNG in Latin America for the Atlantic Basin, and upstream LNG in the Baltic, and it has stakes in two 5.8 million mt/year terminals in Italy: at Trieste in the north and Taranto in the south.

And forecasts of future demand for gas in any delivery form are equally vague, with even reputable bodies such as the International Energy Agency giving heavily revised annual forecasts of European demand for gas for power generation, as coal and nuclear rise to the challenge of calming fears about security of supply, especially in the US.

Inevitably the question of long term contracts came up, with two national oil companies on the panel, Nigerian National Petroleum Corp and Sonatrach, agreeing that the spot market could not support the capital intensive demands of an LNG plant.

"The costs are much heavier on the upstream side than the downstream side," said Rahal.

"The costs are not balanced." But he pointed out that 100% sales volume commitments are not now necessary for project partners to give approval. And the length of a long term contract was also reducing, he said.

A lawyer at Baker Botts Steven Miles said trade would not replace long-term contracts, although the latter could support the former.

Nor was it a straightforward discussion between the national oil companies on one hand and foreign investors on the other.

An NNPC spokesman said that the incumbent majors were not making it easy for new entrants to join projects.

"The industry structure is skewed towards the international oil companies, and it is hard for new entrants to access the market effectively," he told the delegates.

Two other NNPC officials declined to comment to Platts on the status of talks regarding the stakes in Brass River project that NNPC would reportedly like to transfer from Eni and Total to Centrica and BG, but they appear to have stalled.

One did say though that the government cannot under the law transfer shareholdings unilaterally, and that none of the existing partners, including NNPC, wanted its shareholding to be diluted.

Created: October 25, 2006

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