Gas liquefaction and regasification plants require large-scale investments but gas companies such as Total SA (ADR) (NYSE:TOT) remain positive on gas prices and maintain a strong outlook for Liquified Natural Gas (LNG).
Total SA (ADR) (NYSE:TOT)’s
CEO Christophe de Margerie says that his company is planning to add
more LNG capacity after reaching its goal of 17 million metric tons a
year in 2017. In the earnings presentation
of Total SA for the year 2013, Christophe claimed that the global
demand for LNG will outpace the speed at which new capacity can be
constructed and brought online.
Figure 1: Supply and Demand of LNG as per Total SA
Source: Total Earnings Presentation 2012
Total forecasts LNG demand
The company forecasts global LNG demand
climbing to double existing and sanctioned liquefaction capacity by
2030, which would ensure continued need for new LNG projects.
Recent down slide in gas prices and
changes in global demand patterns due to the euro zone crisis has
created an ironic situation. Weak European energy demand has pursued and
the prices of pipeline gas have been on the decline. Furthermore,
ventures into new transnational pipeline projects especially for import
from Russia are on the rise.
All these factors have meant that
European net importers of LNG can re-export redundant LNG and sell it at
a reasonable profit to Latin American and Asian countries. ‘This turns
them into competitors of their own LNG suppliers in Qatar, Nigeria and
Algeria, as was particularly the case in 2012,’ explains Philipp
Chladek. An increase in these so-called EU LNG reloads creates
incentives for companies to increase spot trading of LNG and renounce
long-term contracts.
Figure 2: LNG Exports by Source, 1994-2012
Source: Bloomberg
Shifts in demand and supply of LNG
While the exports of LNG from the Middle Eastern nations were declining during 2012, following global demand stagnation, the exports from European nations like Belgium, Norway and Spain rose during the same period.
On the Eastern side of Europe, Russia
displays massive potential. Recent Russian contracts with China have
meant that Russia may become one of the largest LNG suppliers in the future.
China National Petroleum Corporation
(CNPC) has bought a stake in Novatek’s Yamal project, which aims to
export LNG from the Russian Arctic. Yamal project also includes the
construction of an LNG terminal in the Russian Arctic, enabling exports
from Russia to Asia through the Northern Sea.
Rosneft and Novatek are also challenging
Gazprom’s export monopoly for pipeline gas to profit from greater
flexibility and surging demand development in Asia.
US is also emerging as a prominent
exporter of LNG. Given the significant reserves of US plus the large
reserves in shale formations, US could outpace the Middle East for top
exporter position in LNG. However, lack of LNG terminals is the issue in
the current scenario. Further DOE approvals for terminal operators,
including Cheniere and Energy Transfer Equity, could increase total
capacity to as much as 5 trillion cubic feet (from 2.6 trillion), 32
percent more than the current capacity of Qatar.
It is expected that future prices of gas
will stay low due to the presence of copious shale reserves. Despite
the oversupply in this arena, LNG will continue to have a demand-supply
gap.
Figure 3: Gas Prices in the UK, US and Russia (USD/MCM)
Source: Bloomberg
This gap will be exploited by gas firms
in Russia and in the US. European firms will also benefit temporarily as
they can use mismatches between imports and local demand to resell gas
at high rates in a market which is always gas-deficient. In the
long-run, Russia can be expected to emerge as a significant leader in
the gas market with its humongous unexploited reserves.
Post to be found at:
http://www.valuewalk.com/2013/07/lng-demand-production-russia/
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