Rising Gas Demand Pinching LNG Shipments

Business

Rising gas demand abroad pinching LNG shipments

Bloomberg News

Russia is forcing Exxon Mobil to abandon plans to export natural gas to China. Nigeria is requiring explorers to share output with its citizens. Indonesia will cut sales to Japan.
Countries holding almost half the world's gas are curbing shipments to meet growing domestic use, hurting importers from the U.S. to Japan. Prices for the heating fuel may rise 50 percent within five years on the New York Mercantile Exchange as a result, said Chris Jarvis, president of Caprock Risk Management in Hampton Falls, N.H. He anticipated the rally in gas prices during the past month.
While raising energy costs, the policies will limit opportunities for Exxon Mobil and Royal Dutch Shell Plc, who are struggling to reverse a five-year production decline of 23 percent in the U.K. North Sea and 42 percent in the U.S. Gulf of Mexico. Natural-gas use is rising 2.5 percent a year, three times the rate for oil, according to BP Plc statistics.
"All the gas is concentrated in places where you don't have access," said Frank Harris, co-head of the natural gas practice at the Edinburgh-based Wood Mackenzie Consultants Ltd., an adviser to 24 of the world's 25 biggest oil and gas companies. It's "a major concern for oil majors," he said.
In Russia, the energy ministry told Exxon Mobil in August that gas from the $17 billion Sakhalin-1 project off the nation's eastern coast should be sold into the domestic market, not exported. Russian President Vladimir Putin wants the gas to feed an economy that's growing 7.6 percent annually. Putin two days ago said his successor, Dmitry Medvedev, will also be a "nationalist."
Exxon planned to build a pipeline to China, where the 10 billion cubic meters a year of Sakhalin gas could meet 18 percent of China's needs, based on 2006 consumption.
Changing export policies in Nigeria and Egypt threaten projects that would ship 45 million metric tons of liquefied natural gas to the world market annually, equal to about 33 percent current supply, Wood Mackenzie's Harris estimates. The 45 million tons are almost fourfold larger than the U.S.'s LNG imports in 2006, according to the Energy Department.
Nigerian President Umaru Yar'Adua said last month that a new state-run company would start requiring explorers to sell a portion of output locally. Nigeria, Africa's most-populous nation, holds the continent's largest gas reserves, yet only about 40 percent of its population of about 140 million citizens have access to electricity, according to the World Bank.
Total SA, Chevron Corp., Shell and ConocoPhillips have put on hold two LNG projects, at Brass and Olokola, until the government sets its policy on supplies to the domestic market. The gas would have been more than enough to meet India's annual consumption, based on BP's statistics.
Caprock Risk's Jarvis said restrictions on liquefied natural gas exports will tighten global energy markets.
Demand for LNG, or gas chilled for shipment in tankers, is the industry's fastest-growing business, with growth of about 10 percent a year, Shell and Total estimate.
Compared with fuel oil, natural gas costs 18 percent less, based on the amount of energy in each fuel. Crude prices have tripled since 2002, pushing governments to seek more of the industry's record profits and limit access to regions that typically harbor natural gas too.
"The correlations between gas and crude oil will become tighter as the LNG market becomes more important on a global scale," Jarvis said in an interview. Natural gas in New York may rise to $15 per million British thermal units by 2013, he said.
"When you are in a supply-constrained situation, prices will rise," said Darren Jones, president of global gas for Houston-based ConocoPhillips, the third-largest U.S. oil company.
Wood Mackenzie's Harris said he expects oil and natural gas prices will converge. If that happens, a $10 million investment in natural gas on the Nymex would return 22 percent, or $2.2 million.
Indonesia lost its top ranking as an LNG exporter to Qatar in 2006 as Southeast Asia's most populous nation diverted exports to meet soaring domestic needs. The economy grew 6.2 percent in the three months ended Dec. 31, near the fastest pace in 10 years. State oil company PT Pertamina will lower supplies to a Japanese buying group by 75 percent after the current contract expires in 2010, Vice President Iin Arifin Takhyan said in October.
"By 2011 we see a very tight global natural gas market," said Stacy Nieuwoudt, an analyst at energy investment bank Tudor, Pickering, Holt & Co. Securities Inc. in Houston.
Chevron, which is seeking to expand an LNG venture in Angola, respects governments' desires to direct supplies to domestic markets, said John Gass, president of Chevron's global gas business.
"At the same time host countries also see the value of exporting their gas on world markets," Gass told reporters today in Bangkok. "The companies that are going to be successful in the future are the ones that are going to be able to balance I would say those complementary priorities that resource holders have."
Natural gas provides 22 percent of the world's energy, behind coal's 23 percent and oil's 40 percent, according to BP. The world's known gas reserves may last about 63 years, compared with 41 for oil, the BP statistics show.
Increasing demand and a lack of supplies meant that Japan and South Korea this winter paid more than double the U.S. benchmark gas price to attain cargoes from as far away as Trinidad, the biggest LNG supplier to the U.S.
U.S. natural gas futures for delivery at the Henry Hub in Louisiana have risen 29 percent so far this year on the New York Mercantile Exchange, outpacing a 9 percent gain in benchmark U.S. crude prices. Nymex gas for April delivery was trading at $9.682 per million British thermal units at 9:59 a.m. London time today.
"We have seen this year a situation where there was strong appetite for LNG, forcing buyers to pay oil prices or even a premium," said Philippe Sauquet, senior vice-president of Total Gas & Power Ltd., a unit of Paris-based Total.
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