LNG supply build on track despite growing pains.

Special To Pipeline & Gas Journal

Despite "operating problems and teething start-ups," short- and long-term global LNG supply is building strongly on the way to becoming a more than $65 billion market that meets 15% of the world's natural gas demand by 2012, according to a new

"CERA's 2004 projection that the LNG industry would grow in the eight years to 2012 by the same amount as in the first 40 years of its history now looks, if anything, overly cautious," writes Senior Director for Global LNG Michael Stoppard in the new CERA report Progress in the Face of Adversity. "The industry will probably double in six or seven years relative to 2004," he added.

More than 25 million tons (mt) of new liquefaction capacity has been commissioned since October, adding 18% to global capacity, according to Stoppard. For 2006, even under the most conservative scenario, LNG trade is projected to grow to 159 mt, up 12%, compared with 2005, with U.S. imports rising by almost 25%.

CERA's research counters the view that global LNG growth is stalling. Based on projects currently under construction alone, global LNG supply capacity will rise 60% by 2012 or earlier, CERA reported, with almost half the global construction occurring in one country and on a single site: Ras Laffan in Qatar.

The combined capacity of Qatari LNG investments focused just on the Unites States is broadly equivalent to the proposed capacity of the Alaskan pipeline, the report said. The LNG industry is now focusing on the next generation of supply beyond Qatar where the challenges--technological, cost, and political--will be greater but not insurmountable.

Growth Strains

"The strain of growth globally is starting to show," says the CERA report. "Evidence is mounting of cost inflation and budget overruns, of project delays and operational hiccups, of shortages of specialized labor and expanding lead times for specialty parts--and all this within a broader context of more strained global geopolitics."

Nevertheless, the report contends that "The supply difficulties that projects face--and that will intensify--are not evidence of the inability of LNG to respond. Rather, they should be interpreted as the natural friction that comes from growing momentum and the pressures that are affecting the entire energy industry."

Rising Costs

The CERA report observed that LNG projects are facing rapidly escalating costs. "Much of the upward pressure on costs is linked to a more general inflationary trend across the oil and gas industry. Part of it is exacerbated by characteristics more specific to LNG, notably shortages of key specialty materials, and a select set of engineering, procurement, and construction companies with proven track records on large-scale LNG projects."

The result has been a reversal of the late 1990s reduction in liquefaction costs with the key capital cost benchmark moving back above $275 per ton of annual capacity for the lower cost developments; a rise in general exploration and production costs, with offshore project costs increasing 42% since 2000. However, economies of scale have generally moderated unit cost increases in shipping and regasification.

The overall result, according to CERA, has not increased the marginal cost of LNG into the U.S. or northwestern Europe as much as might be expected; supply from Trinidad and West Africa can still access markets within a $4 per MMBtu envelope; and for Middle Eastern suppliers cost inflation has been partially cushioned by the move to large ships.

"It should be borne in mind that once these capital-intensive projects are built regardless of their full cost their variable costs are minimal, at less than $2 per MMBtu," Stoppard noted. "Finally, although LNG costs have risen, LNG has remained competitive with pipelines, which are more sensitive to the rising price of steel."

In another recently released report, CELIA said global oil and liquids supply capacity could increase as much as 25% by 2015, with unconventional sources, including gas-related liquids and extra-heavy oils accounting for a major proportion of net capacity growth.

"This capacity growth would accommodate rising world oil demand so long as there are no major disruptions in the actual flow of oil, for political or other reasons," said CERA Chairman Daniel Yergin in releasing the study based on a benchmark field-by-field analysis of worldwide hydrocarbon liquids production capacity.

"The current worldwide aggregate disruption in production of 2.3 million bpd is about 2.6% of total world capacity. That disruption, along with geopolitical risk, has driven prices into the mid-$70s. In this very high oil price environment, companies are diversifying into unconventional assets. These unconventional liquids will loom increasingly large in the world's oil supply going from less than 25% today to almost 40% by 2015."

CERA's examination of actual activity and production data covered existing fields and 360 new projects--250 new non-OPEC and 110 new OPEC development projects--expected to start production by 2010. The analysis points to global productive capacity rising from 88.7 million bpd in 2006 to 110 million bpd in 2015. CERA's "reference case" analysis projects strong potential growth in both the OPEC million (7.6 mpd) and non-OPEC million (5.7 bpd) sectors to 2010, with continued expansion of OPEC capacity by 5.3 million bpd between 2010 and 2015. Non-OPEC growth is projected to be 2.7 million bpd in the 2010 to 2015 time frame, lower than recent high expansion rates.

"These levels of growth depend on continuing high rates of investment," wrote CERA Director of Oil Industry Activity Peter M. Jackson and CERA Director of Global Oil and Gas Resources Robert W. Esser in Expansion Set to Continue, Global Liquids Capacity to 2015. "The reference case includes assessments of the 10-year consequences of current disruptions, and assumes that disruptions over the next 10 years will average more or less the same magnitude as the current level with a similar impact. Our focus is on physical capacity, not actual production which can fluctuate for political, economic, or technical reasons," they explain.

Despite the "aggregate disruption" of 2.3 million bpd of production because of disruptions in the Gulf of Mexico, Nigeria, Venezuela, Iraq and on the North Slope of Alaska, total productive capacity continues to grow, according to the report.

"The ability of E&P companies to collectively grow global production capacity at a rate allowing a comfortable supply-demand buffer that will absorb supply disruptions and manage these risks will be a critical factor in ensuring global energy security," Jackson and Esser observe.

The aggregate disruption and its impact on capacity as well as production - has been factored into the current CERA projections, as along with the more rapid capacity increases registered in for example, Angola, China and Equatorial Guinea, and new gas-to-liquids (GTL) capacity. Updated activity and investment tracking indicates the some capacity additions shifted out of 2005 will move to a 2006-2008 timeframe, according to Jackson and Esser.

Productive Capacity

Jackson and Esser's 2006 analysis found that productive capacity is still rising globally, with expectations for strong continued growth and a gradual improvement in the supply-demand balance. They identified five primary factors affecting strong capacity growth:

* High oil prices and strong competition for access to reserves and pressures on the service sector

* The search for new sources of conventional crude and non-traditional supply

* Increasing global gas productive capacity driving up the volumes of associated liquids

* The pace and scale of deepwater discoveries and development, and

* E&P company diversification

"During 2000, unconventional liquids represented 16% of global capacity, and by 2006 this had grown to 24% of the total," they said. "We expect this strong growth to continue to over one-third of total global capacity (38%) by 2015, especially if E&P companies believe that the oil price will remain high."

The report also anticipates a geographic shift in the distribution of liquids capacity by 2015. "By 2015 approximately 66% of global productive capacity will be sourced from only 15 countries that are largely outside the traditional markets of North America and northwest Europe, and in some cases distant from the rapidly expanding markets in India and China. This compares to 59% today."

CERA's 2006 update projects a short-term rate of capacity growth in 2005/2006 which is slightly lower than its May 2005 report as a result of slower Canadian oil sands expansion, a lack of capacity growth in Iraq, new project delays in Iran, political difficulties in Venezuela, lower growth in Russia, lower North Sea performance levels and hurricane-related difficulties and project delays in the Gulf of Mexico. These were partially offset by faster capacity growth in Africa and Asia.

"We see much of the lost ground being made up by 2010, along with an increase of about 4 million bpd in our global estimate by 2015, with the inclusion of GTLs in the outlook along with new discoveries and existing field reserve upgrades in non-OPEC areas," Jackson and Esser observe.

Major Projects

The 2006 report, drawing on CERA databases and those maintained by CERA's parent company IHS, identifies 250 non-OPEC and 110 OPEC projects expected to start producing in the next five years with plateau rates in excess of 10,000 bpd.

CERA projects potential capacity growth of 13.3 million bpd in the five years from 20062010, followed by 8 million bpd in capacity growth from 2010-2015, producing a total of up to 21.3 million mpd in new capacity over the next 10 years. These are projects which are either approved and under development or very likely to be approved, according to Jackson and Esser. Just over 60% of the additions are expected to occur in OPEC countries.

Based on the report's extensive field-by-field analysis, Jackson and Esser conclude that the data reinforce CERA's view that the specter of "peak oil" is not imminent, nor is the start of an "undulating plateau" pattern of supply capacity.

Light vs. Heavy Crude

Contrary to what seems to be a common belief, the overall proportion of lighter liquids is expanding faster than heavy and extra-heavy crudes, says the report. Although the market seems to be very focused on heavy and extra-heavy crudes, there is a strong trend toward an expanding stream of light crude, condensates and natural gas liquids (NGLs).

The analysis indicates that extra-heavy oil productive capacity will more than double from approximately 1.9 million bpd in 2006 to 4.7 million bpd in 2015. However, this increase in dwarfed by a four-times-larger rise in gas-related liquids capacity, from 15 million to 26 million bpd in the same time frame.