Top economies face fuel price spike as LNG sup­ply drops

The Pak Banker - - 6BUSINESS -

Global prices for liq­ue­fied nat­u­ral gas are ris­ing to­ward record highs this year as in­creas­ing de­mand runs up against stut­ter­ing sup­ply, threat­en­ing to drive up fuel costs in some of the world's big­gest economies.

After a record, un­ex­pected drop in LNG out­put in 2012, pro­duc­tion is ex­pected to grow only marginally this year. De­mand, mean­while, con­tin­ues to march higher, driven by en­ergy-hun­gry Asia's rapid eco­nomic growth, Ja­pan's near to­tal shut­down of its nu­clear in­dus­try and a drought in Brazil that has forced the South Amer­i­can na­tion to buy emer­gency fuel sup­plies at high prices.

With 80 per­cent of global LNG sup­plies locked up un­der long-term con­tracts, it is coun­tries such as Brazil, Ar­gentina, num­ber two econ­omy China and In­dia that rely on short term deals who could face the big­gest hit.

LNG helps bridge fuel sup­ply gaps in coun­tries where do­mes­tic out­put fails to keep up with de­mand. The in­tri­cate process of liq­ue­fy­ing gas, shipping and re­gasi­fy­ing the fuel can also make it more ex­pen­sive than pipe­line sup­plies.

Spot prices of liq­ue­fied nat­u­ral gas are cur­rently about $18 per mil­lion Bri­tish ther­mal units (mmBtu), up about $2 from the same time last year, but still lower than record deals above $20 in 2008.

"The sup­ply sit­u­a­tion is worse than we thought it would be," said in­de­pen­dent LNG an­a­lyst Andy Flower, who tracks global ex­port and im­port vol­umes. "LNG pro­duc­tion de­clined last year and it doesn't look as though it will in­crease by much this year."

He added that LNG out­put has fallen just three other times in the 50 years it has been pro­duced: In 2008 when the global econ­omy was in free fall and in 1980 and 1981 when Al­ge­ria halted LNG ex­ports to the United States over a price dis­pute

More­over, the tighter mar­ket means that any un­fore­seen events, such as Ja­pan's Fuk­ishima nu­clear dis­as­ter, big weather events or sud­den plant shut­downs, could push prices even higher. In the wake of Fukushima in March 2011, im­ports by the world's top con­sumer of LNG rock­eted to meet power needs, push­ing Asian prices up 70 per­cent in the fol­low­ing seven months.

Only two of Ja­pan's 50 nu­clear plants are back on­line nearly two years later. LNG ex­porters are brac­ing for a sup­ply glut in the sec­ond half of this decade as new sup­plies ar­rives from Aus­tralia, Africa and the United States. But in the mean­time a short­age looms.

After pro­duc­tion dou­bled be­tween 2000 and 2011 as a raft of new projects were com­pleted, out­put fell by a record amount last year be­cause of un­fore­seen events. Main­te­nance slowed out­put in the world's top ex­porter, Qatar, while ris­ing do­mes­tic en­ergy de­mand in Egypt and In­done­sia, once stal­warts of the LNG ex­port mar­ket, took sup­plies off the open mar­ket.

Un­rest and mil­i­tant at­tacks in Ye­men also halted out­put from that coun­try's trou­bled ex­port project, which be­gan pro­duc­ing in 2009. Mean­while, only one ma­jor project, in An­gola, with a ca­pac­ity to pro­duce 5.2 mil­lion tonnes per year (mtpa) of LNG, is sched­uled to start up this year.

"If over­all de­mand is grow­ing and sup­ply is not, and you are re­ly­ing on the spot mar­ket, you are go­ing to have a harder time ac­cess­ing sup­ply and will have to pay higher prices," said Charles Martin, an an­a­lyst of Asian LNG mar­kets for Wa­ter­borne En­ergy in Hous­ton.

Global sup­ply fell about 1.6 per­cent to 238 mil­lion tonnes in 2012, ac­cord­ing to Flower's es­ti­mates. This year does not look much bet­ter. The se­cu­rity sit­u­a­tion in Ye­men re­mains a con­cern and a source said in De­cem­ber that In­done­sian pro­duc­tion will drop nearly 14 per­cent in 2013 be­cause of de­clines in do­mes­tic gas pro­duc­tion.

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