The winter of 2013-14 offered up a perfect storm of natural gas price spikes and threats to electric reliability. Expect more of the same.
Evolving Risks in the LNG Supply Chain
Some supplies may not make it to U.S. ports.
of these ships range from $250 million to $300 million (U.S.). Gas utilities, LNG terminal companies, oil majors, national gas companies—all are working together in the value chain for the first time. The terms and nature of LNG trades may change in response to increased volumes and flexibility of trades.
In North America alone, there are up to 50 new plans for LNG import terminals, of which around 10, at the time of writing, have received suitable FERC approvals. A handful of significant new LNG revaporization investors with substantial LNG tolling agreements have signed with new market entrants to the United States, where existing LNG terminals are being expanded to take into account the economies of scale and benefits of existing infrastructure.
The Supply and Demand Imbalance
In a period of such rapid growth, the greatest difficulty is ensuring that all the key elements in the supply chain expand at the same pace. At the moment there is more than enough shipping capacity available, as witnessed by idle LNG carriers awaiting orders. While allowing for one or two bottlenecks, there also is adequate reception terminal capacity available. Unfortunately, the same cannot be said for LNG liquefaction facilities. Recent difficulties with two or three existing production trains and traditional teething problems associated with the start-up of new trains have highlighted the tightness of the LNG supply side of the equation.
Looking to the future, the lack of adequate export terminal capacity will continue to be the major constraint in the upward spiral of LNG trade growth. Currently, approximately 100 million tonnes (mta) annually of new LNG production capacity is scheduled for completion by 2010, boosting global output potential to 270 mta. Approximately 20 mta is due to come onstream in 2006.
For the industry, this capacity cannot come quickly enough. Yet many are concerned that the big surge in LNG projects means there could be a shortage of experienced contracting, commissioning, and operational staff for LNG facilities. Furthermore, engineering procurement and construction (EPC) contracts and rig costs have increased dramatically in 2005, as have costs of materials and fabrication. Will these factors lead to delays in projects? A current project in Norway has missed its scheduled startup date, and other projects are suffering from very high cost overruns.
Meanwhile, although the industry continues to have an excellent safety record, mechanical incidents at a number of LNG liquefaction sites in 2005 led to the cancellation of approximately 30 LNG shipments in 2005. None of these incidents has been catastrophic in nature but remind us of the tight constraints in the overall supply chain.
Qualifications of LNG Value Chain Risk
Contractual, supply chain, operational, and insurable risks are interlinked and must be understood for an overall effective risk-management strategy.
It is important to quantify ultimate business interruption risks in all the above scenarios and match these with suitable contractual, insurance, and continuity management strategies. In some cases, widening of insurance capacity and availability may be necessary. The growth of the LNG trade will mean growing dependence on LNG for the gas utility companies. A full