Gas liquefaction and regasification plants require large-scale investments but gas companies such as Total SA (ADR) (NYSE:TOT) remain positive on gas prices and maintain a strong outlook for Liquified Natural Gas (LNG).

Total SA (ADR) (NYSE:TOT)’s CEO Christophe de Margerie says that his company is planning to add more LNG capacity after reaching its goal of 17 million metric tons a year in 2017. In the earnings presentation of Total SA for the year 2013, Christophe claimed that the global demand for LNG will outpace the speed at which new capacity can be constructed and brought online.

Figure 1: Supply and Demand of LNG as per Total SA

LNG
Source: Total Earnings Presentation 2012

Total forecasts LNG demand

The company forecasts global LNG demand climbing to double existing and sanctioned liquefaction capacity by 2030, which would ensure continued need for new LNG projects.

Recent down slide in gas prices and changes in global demand patterns due to the euro zone crisis has created an ironic situation. Weak European energy demand has pursued and the prices of pipeline gas have been on the decline. Furthermore, ventures into new transnational pipeline projects especially for import from Russia are on the rise.

All these factors have meant that European net importers of LNG can re-export redundant LNG and sell it at a reasonable profit to Latin American and Asian countries.  ‘This turns them into competitors of their own LNG suppliers in Qatar, Nigeria and Algeria, as was particularly the case in 2012,’ explains Philipp Chladek. An increase in these so-called EU LNG reloads creates incentives for companies to increase spot trading of LNG and renounce long-term contracts.

Figure 2: LNG Exports by Source, 1994-2012

Source: Bloomberg
Source: Bloomberg

Shifts in demand and supply of LNG

While the exports of LNG from the Middle Eastern nations were declining during 2012, following global demand stagnation, the exports from European nations like Belgium, Norway and Spain rose during the same period.

On the Eastern side of Europe, Russia displays massive potential. Recent Russian contracts with China have meant that Russia may become one of the largest LNG suppliers in the future.

China National Petroleum Corporation (CNPC) has bought a stake in Novatek’s Yamal project, which aims to export LNG from the Russian Arctic. Yamal project also includes the construction of an LNG terminal in the Russian Arctic, enabling exports from Russia to Asia through the Northern Sea.

Rosneft and Novatek are also challenging Gazprom’s export monopoly for pipeline gas to profit from greater flexibility and surging demand development in Asia.

US is also emerging as a prominent exporter of LNG. Given the significant reserves of US plus the large reserves in shale formations, US could outpace the Middle East for top exporter position in LNG. However, lack of LNG terminals is the issue in the current scenario. Further DOE approvals for terminal operators, including Cheniere and Energy Transfer Equity, could increase total capacity to as much as 5 trillion cubic feet (from 2.6 trillion), 32 percent more than the current capacity of Qatar.

It is expected that future prices of gas will stay low due to the presence of copious shale reserves. Despite the oversupply in this arena, LNG will continue to have a demand-supply gap.

Figure 3: Gas Prices in the UK, US and Russia (USD/MCM)

Source: Bloomberg
Source: Bloomberg

This gap will be exploited by gas firms in Russia and in the US. European firms will also benefit temporarily as they can use mismatches between imports and local demand to resell gas at high rates in a market which is always gas-deficient. In the long-run, Russia can be expected to emerge as a significant leader in the gas market with its humongous unexploited reserves.