LNG supply crunch no longer given as demand hit

SINGAPORE: The deepening financialcrisis and collapse in oil prices is all but certain to delay a number of LNGprojects, but consumers need not fear a shortage since an economic recession maystifle demand growth. Somewhere between three and just short of a dozenliquefied natural gas projects may be delayed or even scrapped as the financialcrisis dries up access to credit, industry participants say, tighteningsupply.

However, while considered conventional LNG wisdom up to a fewmonths ago, shortages early in the next decade are no longer a given, thanks toa recession and to gas alternatives in the United States that may free up supplyintended for that market. "The gas industry will not be spared from thiscrisis," Hassan Marican, chief executive of Malaysia's Petronas [PETR.UL] saidat a gas conference in Hanoi last week. Malaysia is the world's second largestexporter of LNG after Qatar. LNG trading on the Asian spot market has alreadyslowed to a trickle as many buyers hold off on uncertainty about future demand.Spot prices have fallen between $4 and $7 from above $20 per million Britishthermal unit (mmBtu) a few months ago, which still pales next to the 60 percentcollapse in crude oil over the same period to below $60 a barrel.Japan, the world's largest LNG importer, expects the downturn to slow gasdemand, according to the chairman of Osaka Gas .

And Toyota MotorCorp <7203.T>, the world's top car maker and a large power consumer, hascut its output forecast for the fiscal year to March 2009 by 6 percent to 7.92million units on the back of the crisis, signalling slowing end-user demand forelectricity and thereby gas. "In the car-building regions of Japan, demand hasdropped already," said a trader with a large North Asian buyer. "Major Asianbuyers are covered for the winter, unless the weather ends up colder thanexpected." Up to 173 million tonnes of LNG capacity could come onstream before2015, according to consultants Wood Mackenzie. Absorbing that would requireannual demand growth of more than 10 percent.

Consultants at FACTSare scrambling to revise their forecast for world LNG demand to grow by anaverage 11 percent annually, or 23 million tonnes per annum from now until 2012.For a graphic displaying new LNG supply potential according to Wood Mackenzie,Others agree that demand growth will slow. The International Energy Agencyexpects high prices that have made some consumers opt for cheaper, but dirtierfuels, to slow the pace of growth in the world's hunger for natural gas.

The move to cleaner fuels, such as gas, has been a strong driver forLNG growth in countries such as India and China in recent years. China has plansfor a slew of LNG import terminals. ADD SHALES To the economic worries can beadded a boom in unconventional gas production in the United States that may freeup volumes originally intended for that market. "The increase of unconventionalproduction could have a much more profound impact on LNG demand than theeconomic crisis," Frank Harris, head of global LNG consulting at Wood Mackenziein Edinburgh, said. "Some of the LNG capacity currently under construction thatwas earmarked for the U.S. market, where is it going to end up?" U.S. gasproduction is expanding to currently nearly 60 billion cubic feet per day, duemainly to shale gas, or gas trapped in sedimentary shale beds found across NorthAmerica.

While more difficult and costly to extract, shale hasbecome a big factor in growing gas supplies as conventional wells decline. Evenat around $7 per mmBtu, lower than global prices, U.S. natural gas prices arestill above a $2 average seen in the 1990s. For an analysis on U.S. shaleproduction, click on [ID:nN29296314]. Woodmac, too, is in the process ofrevising its demand and supply forecasts and Harris said unconventional gasproduction will shave a significant amount off of its current forecast for 10billion cubic feet a day of U.S.

LNG demand by 2020. SUPPLY DOWN Tobe sure, the supply bottleneck may still come in the second half of the nextdecade, depending on how long and how heavily demand suffers from the currentdownturn, two factors few are willing to hazard a guess on at this point.

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High construction costs and a decline in the number of projectapprovals, often due to environmental concerns, have long been reasons forproject delays and the anticipated crunch. "Will there be enough contractors andresources for all projects to develop, I doubt it. So there'll be some delaysand cancellations," independent consultant Andy Flower said at a recentconference in Singapore, speaking about the about 35 million tonnes per annum ofpossible Australian capacity by 2014.

And the financial crisis ismaking it harder for new supplies to get access to credit, especially for thoseprojects that are not backed by large multinational oil and gas majors. "Thecurrent financial crisis is going to have some effect," said Gerard Schuppert,manager of global LNG marketing and sales at ConocoPhillips at thesame conference. "But the real question is: can the industry develop newsupplies fast enough," Schuppert said.