FINANCIAL TIMES: Market Insight: Liquefied Natural Gas (ShellNews.net) 1 Feb 05

By Tom Braithwaite

Liquefied natural gas is a commodity on the move, attracting the largest ever energy project-finance deal and exciting producers that used only to care for oil.

Last week Egypt joined the growing club of LNG exporters when its first cargo arrived in Spain. And Kogas of South Korea, the biggest LNG buyer in the world, said surging demand from its power generating customers had boosted profit by almost 10 per cent.

The US and Britain will become increasingly dependent on the shipped super-cooled gas as reserves closer to home decline. So will more tankers plying the seas cause regional gas prices to converge and lead to a global, liquid, oil-aping spot market?

“Probably never,” says Andy Flower, a consultant who worked on LNG at BP. “Not for 10 to 15 years,” believes Gavin Law, head of global LNG at Wood Mackenzie, the consultancy. Stalling LNG's progress have been politics, security of supply fears and huge capital costs.

“In the short to medium term we don't see a truly spot LNG market,” says Mr Law. “It continues to be underpinned by long-term contracts. Securing supply at the right price is quite difficult. And the prospect of somebody, even the Qataris, saying ‘I'm going to build an LNG terminal and don't need buyers' is remote.”

This is borne out by Sempra Energy, the US utility, which has a federal permit - and has appointed contractors - for a terminal in Louisiana. Spadework is delayed though. “We don't start construction until the contracts are in hand,” Sempra says. “We want to be sure that the agreements are in place before we invest the capital.”

Sempra has at least jumped through the permit hoop - others have not been so lucky. Frustrated oil and gas majors say US and European citizens are no longer “nimby” (not in my backyard) but “banana” (build absolutely nothing anywhere near anybody). Terminals have been delayed by environmental and terrorism fears. In the south of France, residents of Fos-sur-Mer have protested that a new Gaz de France terminal will hurt the local mussel population.

Qatar Petroleum and Exxon Mobil have got the regulatory go-ahead for a terminal in Wales. The pair have raised $7.6bn, the most ever for an energy project, to ship LNG from Qatar to Britain using the biggest LNG production trains and, at up to 216,000 cubic metres, the biggest LNG tankers.

Although such tankers bring efficiency gains, their size could prevent them turning around in the middle of the ocean and sailing to the highest priced market - they are too big for many ports and so the ability to trade on a spot basis is constrained.

Contracts themselves are becoming less restrictive on where LNG ends up as buyers and regulators press for flexibility and an end to destination clauses.

One supplier, though, said demand was so high that the secondary market was not likely to grow soon: “A Japanese customer is buying its LNG for a power plant or its customers. They are not in the business of pushing it around the world.”

But Mr Law said such suppliers are worried that their customers could start selling on surplus volumes. “Tokyo Gas and its counterparts with their own shipping capacity will be able to say, ‘I'll ship additional cargoes to the US West Coast.'”

Spot trading will grow from the current 5 to 10 per cent of the total LNG market as more capacity comes on stream, analysts and gas companies agree. But few think it will attract very liquid trading in the near future.

Free market advocates should not despair though, says Roland Kupers, vice-president of LNG at Shell, the biggest western LNG seller. “Often there is an implied contradiction between long-term contracts and the benefits you would get from spot markets - it is a bit more complicated than that.”

The liberalised market in the US and arbitrage between regions should narrow the difference in prices. “Prices available in the US cast a shadow around the world. You don't actually need the physical spot market on a very large scale, the current limited one drives and influences the next batch of long-term contracts.”