While other commodity prices have recovered from their 2008 collapse,
Liquefied Natural Gas (LNG) has not. The current price of LNG is only just over
a third of the peak it hit in July 2008 of US$13.69 per million British thermal
units (but). The weakness of the gas market has tilted the balance of power in
the region's energy markets towards buyers and big users of gas (such as Chile
and Brazil) and away from sellers (such as Bolivia and Venezuela).
Around the world, rising supplies of LNG have created a glut of gas,
according to the International Energy Agency. Qatar, the world's biggest
exporter of LNG, is the main reason for the glut and it reckons that it may last
until 2012. Qatar boasts that it can produced gas at a cost of just US$0.15 per
million British thermal units (but), though turning the gas into LNG costs
another US$2.85 per but.
The financial markets, and energy policymakers, have yet to wake up to the
consequences of this over supply. The futures market is forecasting average gas
prices of US$6 per but in 2010, but this looks ambitious. Some gas market
watchers, such as the Schork Group Inc, forecast that the price will edge down
to US$4 per mbtu. The current LNG spot price is US$5 per mbtu.
The reason the market may have failed to realise that there is a glut is that
US demand for gas is surging. In 2009, US imports of LNG increased by a third
(34%) to 470bn cubic feet. And that was despite the economic slowdown. The US
Energy Department is forecasting that US demand for gas will rise by another 40%
in 2010.
The glut is good news for end users. Supply is more than keeping pace with
demand as more LNG projects, from Qatar to Peru, come on stream. The dash for
gas was powered by fears about global warming. Gas emits about half the carbon
dioxide of oil when it is burnt. LNG is the easiest way to ship gas from
production centres to places where it is needed.
Qatar has the world's third-largest gas reserves and is a major global LNG
player. As gas prices tripled between 2002 and 2008, Qatar increased investments
but failed to fix long term prices for about half its output, gambling that
prices would continue to rise. Instead the price tanked. Some gas analysts
reckon that Qatar is now shipping gas for little or no return.
Qatar's gamble is that it can continue to increase its annual LNG production
so that when prices recover it will dominate the market. It plans to increase
its output of LNG to 77m t by the end of 2010. Qatar guesses that demand will
start to recover in 2012 or 2013. “By 2013, 2012, the world will see more demand
than supply", Qatar's energy minister, Abdullah al-Attiyah said at a conference
in Doha at the beginning of November.
The danger for producers like Qatar is that the the rising demand (and
prices) for gas in the US has prompted companies to investigate new technologies
for extracting gas from shale, among other efforts.
Qatar is not the only country with a big stake in the global gas market.
Russia and Iran are equally important. In early December 2009, Qatar hosted a
meeting of the Gas Exporting Countries Forum (GECF) of 11 nations to discuss the
sagging world market for gas.
The members of the GECF, including three from Latin America and the
Caribbean, are: Algeria, Bolivia, Egypt, Equatorial Guinea, Iran, Libya,
Nigeria, Qatar, Russia, Trinidad & Tobago and Venezuela. Essentially, the
GECF controls the majority of the world's reserves of gas but is a marginal
player in the global gas trade.
Russia and Iran, which have the world's largest gas reserves, competed to
name the first secretary-general of the group, which may come to rival the
price-setting clout that the Organization of Petroleum Exporting Countries
(Opec) has in crude oil markets. Russia won the race for the secretary general's
position, which went to Leonid Bokhanovsky. Russia's energy minister expects the
Gaspec to start to flex its muscles in 2010.
The GECF holds nearly 70% of the world's 6,254 trillion cubic feet of proven
gas reserves in 2009. BP, an international energy company, calculated that at
the end of 2008 the world's proven reserves would allow production to continue
at its current level for 63 more years.
Venezuela has by far the biggest gas reserves in Latin America: 170.9
trillion cubic feet (4.84 trillion cubic metres). Bolivia comes next with 25.1
trillion cubic feet, followed by Mexico with 17.6 trillion cubic feet. Trinidad
& Tobago has 17 trillion cubic feet, while Argentina has 15.6 trillion cubic
feet.
What is interesting is that only Venezuela (with over 100 years of potential
production) and Peru (with 99 years) have reserves to production ratios above
the global average of 63 years. Russia's reserve-to-production ratio is 71.8
years, but Saudi Arabia, Qatar, Iran and Iraq all have ratios of over 100 years.
The GECF members' exports of gas amount to less than 44% of the world total.
The three largest reserve holders are Russia, Iran and Qatar. Russia's
state-owned gas monopoly, Gazprom, is the world's largest gas exporter. Qatar is
the world's largest exporter of LNG, which is gas chilled or compressed into a
liquid for transporting on ships. Iran is still a net gas importer, but has
ambitious plans to become a LNG exporter.
Russia expects the GECF to play a key role in coordinating activity in the
LNG market, as GECF members dominate LNG production: the big absentees are
Australia, Canada, and Indonesia, Kazakhstan and Norway. Bokhanovsky said that
Canada and Australia could become members of the GECF, while Norway and
Kazakhstan, currently observers, could be upgraded. It is not clear how the
world's other big gas exporters, such as Brunei, Indonesia, Malaysia and the
United Arab Emirates, relate to the GECF.
Russia is providing most of the GECF's secretariat, at least in the initial
stage. Bokhanovsky said that once the organization was up and running its
secretariat would become more internationalised.
Gas is a key export commodity for several Latin American countries, notably
Bolivia and Trinidad & Tobago. Venezuela, too is aiming to become a major
gas exporter. Trinidad & Tobago is the only major LNG exporter in the
region, though Peru is just beginning to become a player in the market.
What is particularly interesting about Latin America is that it is starting
to become a player on both sides of the LNG market. July 2009 saw a discreet,
almost ignored race between Chile and Brazil to become the first country in
South America to receive a shipment of LNG. Both countries were rushing to put
the finishing touches to re-gasification plants, which allow them to import LNG
from anywhere in the world and them pump the gas around their conventional
pipeline systems.
Brazil probably just won the race, but the Brazilian energy company,
Petrobras, then paid a huge complement to the Chilean importer by declaring that
it would like to use the Chilean terminals, although initially only to meet its
needs in the domestic Chilean market.
Chile is building two re-gasification plants: the first is at Quintero, which
will serve central Chile. The other one, at Mejillones in northern Chile, will
provide gas to fuel the power stations for the country's mines and smelters
which are mostly in the north.
Chile's gas pipeline network is built to take gas from Argentina.
Theoretically reversible valves could pump the gas the other way and so on to
Brazil's big urban centres on the eastern side of the continent. Vilson
Reichemback, the country manager for Petrobras in Chile, said that Petrobras was
initially interested in finding out whether the two Chilean terminals
could supply Petrobras's recently acquired 230 petrol stations in Chile (brought
from ExxonMobil for US$400m) with gas for vehicles.
Why are Brazil and Chile so convinced that they should build the capacity to
import LNG rather than tap into the region's huge deposits of gas in Bolivia,
Peru, Argentina and Venezuela? Both Brazil and Chile have learnt the hard way
that over-reliance on a single supplier is a sign of economic vulnerability.
Chile had depended on Argentina and Brazil invested heavily in Bolivia. Both
countries have proved themselves to be unreliable suppliers.
What is not clear is whether the new LNG plants are intended to be prime
energy sources or back-up energy sources. For historic reasons, neither Bolivia
nor Chile wants to rely too much on the other. The Bolivians believe that if
there was to be a problem with gas supplies to Chile, as there inevitably will
be, Chile would use the difficulty as an excuse to bully Bolivia. The wilder
fear, on the Bolivian side, that Chile would march in and seize the gas is
highly unlikely: Tarija, where Bolivia's gas is located, is a long way from
Chile and in a part of Bolivia that has been claimed by Argentina. The
Argentines would be unlikely to stand idly by if Chile tried to seize such a
strategic asset on Argentina's borders.
On the Chile side, the experience of depending on Argentina has prompted
policy markers to say that they will never do something similar again.
Chile's key re-gasification facility is GNL Quintero in central Chile. The
plant is coming on stream a year ahead of schedule. The actual re-gasification
facility is offshore and feeds the gas to 150,000 cubic metre storage tanks. GNL
Quintero opened for an initial delivery in mid-July. Its first vessel brought
145,000 cubic metres of LNG from Trinidad & Tobago. Other supplies will come
from Russia, Nigeria and Indonesia. The Chilean terminal is scheduled to be
fully operational in August.
The Quintero terminal uses a ship as an offshore terminal and therefore gets
around local construction permit problems, though there will be two onshore
storage tanks that will allow the terminal to supply up to 6.5m cubic metres a
day. The gas will be used in central Chile. British Gas has a 40% stake in the
Quintero terminal and a 21 year contract to supply the terminal with up to 1.7m
t of gas a year.
Brazil's first re-gasification plant is at Pecem port terminal in the
northeastern state of Ceará. The facility is operated by Petrobras and it took
delivery of the gas from Royal Dutch Shell. The Shell delivery was of 135,000
cubic metres. Shell said that the delivery was the first to South America. The
delivery is part of an agreement between Shell and Petrobras signed in 2008,
aimed at raising Petrobras' gas importing capacity as well as supplying power
plants.
Chile and Brazil's move into LNG poses a major problem for Bolivia. The
country's hardline policies over gas, espoused by President Evo Morales, have
transformed the economy's position and the national accounts, but they have also
infuriated foreign investors. Petrobras is one of Bolivia's biggest foreign
investors.
Brazil's heavy investment in its own oil and gas reserves and now its
commissioning of LNG re-gasification facilities has clearly signaled that it
does not want to increase its dependence on Bolivian natural gas. This strategic
change, and the slowdown in the Brazilian economy, has meant that Brazil is
cutting back on its imports of gas from Bolivia. It is now importing only the
minimum 24m cubic metres specified in its contract. When it can, Brazil imports
less.
The Brazilian and Chilean thumbs down for Bolivian gas means that Bolivia
will either have to increase exports to Argentina or it will have to consider
shipping gas out to Peru's gas-liquefaction plant in Lima. The problem with this
is that Bolivia will once again be left as a commodity supplier and the gas
liquefaction plant owners will pick up the main benefits of the trade.
Amid a stuttering economy, Argentina has also cut back on its imports of gas
from Bolivia. The pipeline can handle 7m cubic metres a day (cmpd) but currently
Argentina is taking only about 6m cmpd.
Prices
Currently Bolivia is charging Brazil US$7.8 per
1,000 cubic feet of gas shipped to Brazil. Bolivia's price for gas shipped to
Argentina is US$5.7 per 1,000 cubic feet. Chile is apparently going to pay
US$8.23 per 1,000 cubic feet for the LNG it imports at Quintero. This is half
the price it had been paying for the gas it imported from Argentina.
In North America, gas prices vary. The benchmark is the Henry Hub, but this
is the price of gas close to the production areas in the southern US. In the
consuming markets in the north of the country, the prices tend to be
significantly higher. Currently, the Henry Hub price is US$5.9 per 1,000 cubic
feet.
Some stats
Oilmen and traders reckon that the
relationship in price between oil and gas should be 6:1. This is because a
barrel of crude oil produces 5.8m British Thermal Units (BTUs) of energy. The
burning of 1,000 cubic feet of natural produces just over 1m BTUs.
Some traders believe that the relationship also holds on a value basis. So
if oil gets over the 6:1 ratio, then the prices must be about to turn. The
problem with this reasoning is that energy systems cannot easily switch between
the two fuels so they cannot arbitrage the prices. In the US, only about 10% of
energy users can do this and in Latin America the proportion is even lower.
The general assumption now in the global market is that world gas prices are
going to stay comparatively low for some time. The problem for gas producers is
that the expansion of LNG facilities has come just at a time when demand for all
sorts of energy, apart from in China, is falling. This means, traders say, that
there is now a race to the bottom. The assumption is that a lot of the builders
of these LNG facilities to liquefy the gas may find it hard to find markets.