With the increased trade of LNG or Liquefied Natural Gas, the whole scenario of the gas trade is changing. Natural gas used to be a commodity that could only be traded regionally via pipelines but with liquefaction and storage technologies, gas in the form of LNG can now move across the globe like other global commodities.
When natural gas is chilled to minus 260 degrees Fahrenheit, it converts to a liquid form which is one-six hundredth of its gaseous state volume. This makes it easier to transport via regular shipping. However, LNG requires specialized infrastructure to be handled at ports.
Glencore Xstrata PLC (LON:GLEN) (HKG:0805), one of the largest commodity traders in the world, has announced that it is to start trade in LNG starting September 2013. ‘LNG has more similarity with the oil market because it allows you to arbitrage between different markets, whereas land-based gas is much more of a financial derivative product,’ said Alex Beard, Head of Oil Division at Glencore.
This is a clear indication of how the scenario of gas trade will change in the coming years. Such moves will mean that the system of inter-regional hub-based pricing will deteriorate in LNG and natural gas prices will be more homogenous across the world.
However, the use of LNG is still limited. Eni SpA (ADR) (NYSE:E) (BIT:ENI) reported that only about 10 percent of global natural gas production was traded as LNG in 2011. British Petroleum Statistical Review of 2013 showed that natural gas trade via pipeline was 705.5 billion cubic meters (bcm) while the trade in LNG was 327.9 bcm during 2012. This means that trade via pipeline was 2.15 times the trade in LNG.
LNG trade grew 10 percent in 2011 but there was actually a reduction in LNG trade between 2011 and 2012 of 2.9 bcm. This declined to 20.8 bcm in the month of July 2013.
Figure 1: LNG Global Trade (billion cubic meters)
Discovery of shale gas reserves
The discovery of abundant shale gas reserves, especially in North America, means that LNG is more promising than ever. LNG is a profitable trade and gas price discrepancies across regions have made building and operating the expensive liquefaction plants economically feasible.
‘The economic viability of long-distance liquefied gas (LNG) shipping is improving, thanks to new technology that makes it easier to deal with boil-off gas (when LNG vaporizes during transport) in a commercial way. In the newest generation of ships, the boil-off rate is 0.1% a day (from 0.3% a few years ago). The gas is either used as ship propellant or reliquefied on board and piped back into the tanks,’ says Bloomberg.
As global trade expanded, Qatar has remained the largest exporter of LNG in July 2013 with nearly 35 percent of the worldwide exports coming from Qatar.
Figure 2: Exporters of LNG (billion cubic meters)
Qatar also has the largest liquefaction capacity in the world with capacity of processing 77.1 million metric ton per annum (mmtpa). Indonesia has the second largest capacity followed by Malaysia.
Table 1: LNG Processing Capacity by Country
The largest importers of LNG is Japan, importing 48.4 percent of the world’s LNG in July 2013.
Figure 3: Importers of LNG (billion cubic meters)
New LNG capacities are planned and 93.5 mmtpa of capacity is under construction, of which 61.2 mmtpa is planned in Australia and only 9 mmtpa is planned in the United States. However, 30.55 mmtpa worth of proposed offtakes have been signed by the United States and we can expect these to come online in the next decade.