The LNG Solution

Natural gas, a premium fuel for both its energy value and environmental friendliness, has suffered in the past because it’s difficult to transport. Liquid natural gas (LNG) at -162?C accounts for about 32 percent of the transnational trade in natural gas. The rest is carried by pipelines, dominated by Russia.  

LNG is not an automatic answer to natural gas as a transportation fuel. It requires large economies of scale, very large investments, and the loss of as much as 30 percent of wellhead gas in the manufacturing process. Therefore only very large producing nations and very large consuming nations/companies can participate in LNG production or use. This will not change. Smaller needs and shorter distances will be met by other forms of transportation, namely compressed natural gas (CNG). Gas-to-liquids (GTL), the chemical conversion of natural gas to other liquid products, may also play a larger role in the future, especially at sustained high oil prices. 

Nonetheless, LNG is a game-changer in the global natural gas scenario, enabling it to be transported vast distances inaccessible by pipeline.  

Supply & Demand 

According to the International Energy Agency, global natural gas demand will increase by 1.8 percent per year over the next 20 years, about double the rate of overall energy demand. While developed countries’ growth is expected to be just 0.9 percent per year, developing nations (led by China at seven percent and India at 4.7 percent) will likely be over 2.5 percent per year.  

The good news is there is plenty of natural gas around the world. According to BP, the world’s total proven gas reserves stand at 6,611 trillion cubic feet (Tcf). The Middle East is the leading region with 2,842 Tcf of gas, followed by Europe and Eurasia with 2,062, Asia Pacific with 545, Africa with 512, North America with 383 and South and Central America with 268 Tcf of gas.  

On the production side, the Former Soviet Union and North America are the leading regions. As shown in Figure 1, the U.S. is both the number-one natural gas producer (24.0 Tcf) and consumer (25.4 Tcf in 2012). Russia produced more natural gas (20.9 Tcf) than it consumed (14.7 Tcf) and is a major exporter to Europe. Many other countries, including China, Japan, Mexico, the U.K. and Germany, consume much more gas than they produce. That leads to the key challenge of transportation.         

Importers 

Japan, the world’s biggest LNG consumer, has no major oil or natural gas resources. Nuclear power and LNG became alternatives to oil for power generation for decades. After the 2011 Fukushima accident the Japanese government shut down all nuclear reactors under domestic pressure. That took away 30 percent of Japan’s power supply, forcing it to import more LNG.  

Japan’s LNG imports rose from an average of 5.8 Mt/month prior to the earthquake to 7.3 Mt/month in 2012. Japan’s LNG import price was about $550/t in 2010 and jumped by more than $300/t in 2012. Unlike other countries, Japan’s utilities can pass along price increases to consumers. But the higher prices along with shrinking export markets overseas contributed to a record trade deficit in 2012.  

China, which derives only five percent of its energy from natural gas, has to find new sources as well. In the past eight years its average annual growth in gas output was 11.8 percent versus a 17.5 percent increase in consumption. It will likely have to quadruple its natural gas supply by 2020. A very large part of this incremental increase, which could be as much as 9 Tcf of gas, will have to come from LNG imports. Recently both the Chinese government and IEA announced that China had more than 1,000 Tcf of natural gas in the form of shale gas deposits. However, China, like most other nations other than the U.S., has no drilling experience in shale gas. Therefore the transition from shale gas as resource to fuel could be very long.  

The question is: If Chinese consumption continues at this pace, where will it get the gas? 

Exporters 

Australia is poised to become the largest LNG exporter in the next two to three years. Currently Australia is number thirteen in natural gas reserves and the third largest exporter of LNG after Qatar and Malaysia with exports of 25 MMt/yr from its three LNG plants. But there are six new LNG plants coming online, which would treble the country’s annual production. Australia has a huge advantage because of its geographic proximity to major LNG buyers like Japan, China and South Korea. 

Qatar has been the world’s largest LNG exporter since 2006, supplying Asia, Europe, and North and South America. Qatar also utilizes GTL facilities for some of its excess gas production and has two world-class GTL facilities, Oryx and Pearl. The latter is the largest in the world. Qatar is one of only three countries, along with South Africa and Malaysia, with operational GTL facilities.   

Today, Qatar produces 5.5Tcf/yr natural gas and exports about 4.0 Tcf/yr.  

Qatar is home to two of the world’s largest natural gas companies, Qatargas and Rasgas. The two companies currently have fourteen LNG trains online with total liquefaction capacity of 77 MTPA. They include six “mega-trains” utilizing APX processing technology with liquefaction capacity of 7.8 MTPA, the largest operating capacity in the world. The six trains were added between 2009 and 2011. Qatar decided not to build any new LNG facilities in the near future, relying instead on expansion of existing facilities to satisfy future demand increases. 

New Players  

The U.S. has always played a major role in world energy markets. Now the development of shale gas has boosted production dramatically. In addition, proved reserves of natural gas in the U.S. leaped to 300 Tcf by the end of 2012. By 2040, according to the EIA, shale gas will account for 50 percent of total U.S. natural gas production.  

Surging shale gas production has also led to extremely low prices. Average natural gas prices in the U.S. (Henry Hub) in 2012 were $2.76/MMBtu, compared with $11.03/MMBtu in Germany and $16.75/MMBtu in Japan. Consequently, purchasing natural gas from the U.S. is becoming an attractive proposition in world markets. According to the EIA, the U.S. will become a net natural gas exporter by 2020. The U.S. already has four approved LNG export terminals. By 2025 U.S. LNG exports are expected to peak at 68.7 MTPA, accounting for 5-15 percent of total U.S. gas production. There remains, however, a hot debate in the U.S. over the merits of exporting LNG.  

Recent discoveries in Israel and Cyprus in the Eastern Mediterranean (Figure 3) will potentially give Europe sources other than Russian gas. The size of the ultimate recoverable reserves, according to the USGS, is on the order of 200 Tcf of natural gas and 3.7 billion barrels of oil. A dozen new Cypriot blocks, currently in the process of being offered to international bidders, will almost certainly add 50 to perhaps 75 Tcf of gas to the total.  

However, two important factors may turn good news into not-so-good if the countries are unprepared. First, the finds are buried under 6,000 feet of water and another 14,000 feet below the seabed for a total of 20,000 feet. Drilling and completing such deepwater gas wells will be costly.

Second is transportation. Offshore pipelines from the area of discovery to Europe are highly unlikely because of the water depth and underwater terrain. This means LNG and, in the early stages, perhaps CNG. 

Surprisingly, Mozambique in southeast Africa had four of the five largest oil and gas discoveries in the world in 2012. The total discovered gas is about 68 Tcf. These discoveries mean Mozambique could be exporting LNG in the next five to ten years. 

Rosy Outlook  

Natural gas is poised to become the premier fuel of the world. Global demand for gas over the next 20 years will increase by at least double the rate for total energy. In the developing world, led by China, the increase will be at least 2.5 percent per year with China itself logging an increase of more than seven percent. This will stimulate a large and rapid run-up in LNG production, especially from traditional suppliers like Qatar, Australia and Indonesia. The situation in China is such that it will easily absorb any incremental production, irrespective of temporary “hiccups” in the supply/demand balance or price fluctuations. 

This is good news for potential new suppliers like the U.S., whose exports will likely transit through a widened Panama Canal but also from the West Coast. In a world decidedly moving towards natural gas, emerging players such as the U.S., Mozambique, Israel and Cyprus gain new importance from both an economic and geopolitical perspective.