Sunday, April 19, 2009

Natural Gas - Liquid from abroad

Most frequently these days questions about the likely price and supply of natural gas, focus on the production that is likely from the gas shale deposits around the county. Natural gas drilling rigs are being shut down in large numbers, the count is now over 50% down, at 790 rigs, over last summer and new well numbers reduced, in order to lower supply levels to that closer to demand. (In passing it is worth commenting that horizontal rigs have not dropped as much as vertical, so that the numbers are now approximately equal). The assumption is that as supply declines, and demand stays relatively robust (this not being one of the global warming years – at least so far) the two will come closer to parity, and prices can be restored. At the EIA meeting, most of the audience seemed to anticipate that this would occur this year, and the latest Natural Gas Weekly Update notes that prices do seem to have reached, at least temporarily, some sort of floor.

One of the questions, going forward, however, relates not to the availability of domestic supply, but rather the supply that might be available from abroad. In the past, with almost all gas being supplied by pipeline, that was not much of an issue, but at present there is a significant growth in the availability of liquefied natural gas (LNG) as both liquefaction facilities and available tanker numbers increase. There is the potential, as this supply increases, and if global demand does not match this increase, given the breadth of the economic turndown, that LNG will be available into the American market at a low enough price that it will keep domestic prices, and thus production, constrained.

LNG facilities are not something that can be put in overnight. As the most recent example in Poland shows current new agreements will lead to facility construction and production that appears in around 2014. The Polish facility is planned to handle 2.5 million tons of LNG, and the company has just contracted to get 1 million tons of that from Qatar. Of course, if the permits are turned down (as happened with the Broadwater application this week, after the Department of Commerce joined the governments of New York and Connecticut in rejecting the plan) then those deliveries become moot, and New England gas prices may continue to stay high. (Depending on what happens with the Marcellus – but we will save that discussion for another day). At least that is a decision – down in Australia there is still some uncertainty over plans for a new liquefaction facility in Western Australia, though given the state of world supply, delays might not be all bad.

There are three major facility costs involved in creating an LNG supply. First the gas has to be cleaned, separated and condensed. This is generally done in facilities geared to produce a set volume a year (defined as a train) so that, for example, the facility at Point Fortin, in Trinidad, is made up of three trains, each of which can produce 3.3 million tons/yr of LNG, and one train that produces 2.4 million tons/yr.

To give some idea of scale LNG imports into Europe in 2008 totalled 44.8 million metric tons, with a capacity of 78 mill tons/yr. Most of the supply has come from Algeria (16 mill), Egypt (4.4 mill) , Nigeria (12.5 mill) and Trinidad and Tobago (4.4 mill). (Source Oil & Gas J Apr. 13, 2009 pp 38 – 48 – sub reqd).

The largest facilities for producing LNG are in Ras Laffan in Qatar. The current facility is being doubled to produce 77 million tons/yr by 2010. At the moment supply from the second train (Qatargas2) is scheduled to go the United Kingdom at the South Hook Terminal at Millford Haven, where it will supply some 20% of the national need.

The LNG has to be transported to the receiving terminals by carrier. There are at present some 151 LNG carriers in service, with an additional 51 under construction. They have a total carrying capacity of some 635 million cu ft. (Natural gas is condensed by a factor of 600 when it is liquefied). There are several sizes of carriers that are available, but they are usually divided into three classes. The largest can carry over 4.2 mcf of LNG (125 carriers); the intermediate between 1.75 and 4.2 mcf (15 carriers); and the smallest below 1.75 mcf (15 carriers). Almost all the new carriers are at the 5 mcf size.

There are eight U.S. facilities that can import LNG and while there are 40 more under consideration, industry analysts predict that at best only 12 of these might be built.
They are located in:
Everett, Massachusetts
Cove Point, Maryland
Elba Island, Georgia
Lake Charles, Louisiana
Gulf Gateway Energy Bridge, Gulf of Mexico
Northeast Gateway, Offshore Boston
Freeport, Texas
Sabine, Louisiana
There is also an export facility in Kenai, Alaska.

The new production coming on line in Qatar is more than the current market can absorb, and the Qatar CEO notes
“For the shorter term, I don’t think the UK will be able to take 16 million tons,” al-Suwaidi said. “Anything the UK cannot absorb, we will have to find a market for.”

Since their supply will build over the next three years, while gas shale production remains relatively high, this suggests that American prices will remain lower.
The consumption of petroleum products in Japan, the world's biggest buyer of LNG, is projected to fall 4.7 per cent in the year starting this month, according to the Institute of Energy Economics Japan, a government-run think tank. The global recession has reduced electricity use in Japan.

LNG producers probably will ship excess supply to North America, which might prevent a recovery in US natural-gas prices next year, Law said

(Note that a metric ton of LNG is equivalent to 48,700 cu.ft. of NG. ) LNG is cooled to – 260 deg F ( - 160 deg C) reducing the volume by 600-fold as it turns liquid.

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