[BETA] Fortnightly

Will liquefied natural gas catalyze a global natural gas market?

Even as critics still debate whether liquefied natural gas (LNG) can be made economical to compete against regional gas sub-markets, the growth in LNG trade has many convinced that it has the potential to create the basis for a global gas market.

In fact, LNG trade has more than doubled in the past 15 years. Consumption of LNG is increasing [at a compounded annual growth rate (CAGR) of 4.9 percent] more rapidly than the consumption of pipeline gas (CAGR 3.6 percent). This growth is due to falling investment costs for liquefaction, shipping, and regasification. The cost of liquefaction has more than halved since the late 1960s. Compared to pipeline gas, where transport costs develop proportionally to the number of kilometers covered, LNG already shows a cost advantage upwards of a 2000-km transport route.

The future growth of the LNG market will be driven by four key factors:

• Diversification. Creating a balanced portfolio of procurement resources and supply routes is gaining significance for today's market areas. Japan, representing around 55 percent of the world's LNG consumption, reflects potential shortfalls from producing countries such as Indonesia, Malaysia, Brunei and the United Arab Emirates in its risk management strategies. The European Union (EU), already the world's largest energy importer, will increase its dependency on imports to around 71 percent by 2030. The case of Russia in particular, which currently provides 41 percent of EU gas imports and in the future will supply up to 60 percent, clearly highlights the need to diversify the country risk. In comparison, the EU oil and coal supply is more diversified.
• Purchasing cost optimization. The procurement portfolio of gas suppliers is shaped less by annual purchase volumes and more by availability along the various phases of the load curve. As part of market deregulation, the creation of a procurement portfolio offers the potential to considerably impact margins. This becomes particularly clear if we look at the increasing demand for storage capacity. Since LNG trade has become a lot more flexible in recent years and contracts have become shorter, LNG can play a key role in controlling peak loads on the spot market.
• Network bottlenecks. Despite their enormous supply areas, neither the United States nor Europe has a completely well-balanced network structure at its disposal. According to a GTE (Gas Transmission Europe) survey, 66 percent of the 55 border facilities in the EU lack sufficient capacity. Capital expenditure requirements for a physically integrated EU gas market have been forecast at more than $200 billion over the next 20 years. Additional LNG receiving terminals could at least partially compensate for these network-related market imperfections.
• Intercontinental arbitrage opportunities. New opportunities in intercontinental business are emerging due to enhanced tanker capacities and the availability of other financial instruments, thus enabling new trading strategies, as well as facilitating arbitrage operations. Tanker capacities can now be used for spot markets. LNG arbitrage will enable traders to realize earnings through price differences between market regions.

Due to variations in the initial positions of the three key sales