Top economies face fuel price spike as LNG supply drops

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.