Friday, April 3, 2009

The LNG Problem

There were a couple of interesting articles on Marketwatch.com this week discussing the price of natural gas and the LNG industry and their relationship going forward (article 1 - natural gas price; article 2- LNG). The discussion of the LNG industry, in particular, is eye opening.

There has been a huge amount of capital invested in LNG infrastructure to facilitate the import of liquefied natural gas (it arrives in a frozen state and is reheated to a liquid state and then put in pipelines for delivery or storage). The U.S. has an enormous amount of LNG receipt infrastructure and the largest storage capacity in the world. Several long-term projects have recently been completed or will be completed soon. While demand has been low lately, many nations that are drilling for gas and loading it in ships are desperate to sell it to anyone. This could lead to LNG flooding the market. This expectation is probably one of the main reasons the price of natural gas in the U.S. has stayed so low.

The big LNG producers are Algeria, Australia, Indonesia, Nigeria, Oman, Qatar and Russia, as well as Trinidad and Tobago. Some of these are developing third world countries that desperately need the cash. As a result, they will produce it and ship it no matter how low the price is.

The three largest buyers of LNG in the world, Korea, Japan and Spain, currently have plenty of supply on hand because of a mild winter, lower demand and a new natural-gas pipeline in Europe tapping natural-gas fields in Algeria. The excess supply is likely to end up in the U.S. because we have so much supply infrastructure. And it's not just a bunch of foreign companies dumping LNG on our shores. Most of the big integrated oil and gas companies have a presence in the industry. Exxon, most notably, has a very large operation in Qatar.

LNG can have a frightening impact on the price and supply of natural gas for years to come.

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