Global liquefied natural gas demand was up 8.5% year on year in the first half of 2011 and is expected to grow by 12% for the whole year, driven by incremental demand from Japan, the United Kingdom and India, and continued growth from traditional buyer South Korea, Bernstein Research said Monday.
Japanese demand rose strongly in the second quarter of 2011 as LNG was the major substitute for the lost nuclear power following the March 11 quake and tsunami, the Bernstein analysts said in a report. Future demand is likely to remain supported, they said, as "long term viability of nuclear power continues to put stress on the power sector in Japan."
Japan's LNG imports were up 8% year on year in H1 2011, or equivalent to 2.64 million mt/year of additional demand compared with H2 2010.
Korea also recorded a 8% year on year increase in imports for the same period, or equivalent to 1.33 million mt/year of additional demand compared with H2 2010.
Asian LNG demand growth, averaging 9% year on year in H1 2011, was the strongest in India and China, where LNG imports were up 26% and 10% year on year, respectively, the analysts said.
Europe saw a 15% increase in LNG imports in H1 2011 compared with the corresponding period of 2010, with the UK, in particular, registering a 76% jump, which was equivalent to 4.73 million mt/year of incremental demand.
"Europe continued to favor LNG over more expensive Russian gas imports. Russian import gas prices were $2-3/MMBtu higher than the domestic spot prices, making spot LNG imports more attractive in Europe," analysts said.
The UK, Japan, Korea, India, China and emerging markets in Latin America such as Brazil and Chile would support the near-term demand outlook, the Bernstein report said.
Longer term, analysts expect global LNG demand to grow from 218 million mt/year in 2010 to 310 million mt/year by 2015 and 410 million mt/year by 2020.
"Going forward, key regions that drive the global demand will be non-OECD Asia along with new LNG markets in the Middle East and South America," analysts said, adding that low investment in natural gas production in South America in the last decade would result in limited new domestic supply.
Europe will also show substantial buying interest as "indigenous supply declines and there is diversification in import supplies between pipeline gas and LNG."
INCREMENTAL LNG EXPORTS FROM MIDDLE EAST, WEST AFRICA
The increased demand in H1 2011 was primarily met by supply from Qatar, which was up by 9.37 million mt or 35% year on year during the period, supported by the startup of the Rasgas and Qatargas projects in 2009 and 2011, according to the Bernstein report.
Of the 9.37 million mt incremental exports from Qatar, 5.34 million mt went to Europe, due to higher prices in Europe compared with North America, coupled with the "startup of terminals in the UK and increased spot cargoes imports."
Qatari exports to Asia in the first half of 2011 increased 16% from a year ago, but accounted for only 2.07 million mt of the incremental supply from the Middle Eastern producer.
"Qatari exports have not been able to take advantage of the higher spot LNG prices in Asia due to the high dependence of contract supply in Asia," analysts said.
Nigeria and Yemen also recorded more exports this year as operations at Nigeria LNG Train 6 and Yemen LNG Train 1 and 2 were ramped up.
This also translated into higher capacity utilization for the producers, with plants in the Middle East seeing rates largely above 80% for H1 2011.
In contrast, Southeast Asian LNG exports from Indonesia, Malaysia and Brunei, to Asia only saw a 3% increase in H1 2011.
"With Arun and Bontang fields in Indonesia nearing the end of their economic lives, we should see a continued and sharper decline of LNG exports out of Southeast Asia," the Bernstein report said.
JAPAN: A CLOSER LOOK
Japan's imports of LNG increased as it was the major substitute for the country's lost nuclear power capacity, with analysts from Bernstein Research estimating that "1 GW of lost nuclear capacity will require an additional one million mt of LNG to replace it."
They added that Japan will require "an additional 10 million mt of LNG in 2011, 14 million mt in 2012 and 12 million mt 2013 onwards." As a result, Japan LNG demand is expected to grow from 70 million mt in 2010 to 89.3 million mt in 2015 and 97.4 million mt by 2020, they said.
The power sector in Japan has witnessed major restructuring after the Fukushima earthquake, which forced the shutdown of nuclear reactors, and following the incident, the number of nuclear power plants in operation continues to decline as reactors are brought down for maintenance and also to undergo stress tests which were introduced by the government this year.
Only 15 nuclear reactors with a total power generating capacity of 13.3 GW are in operation now, out of a total of 54 reactors with a total power capacity of 49.8 GW, analysts said.
This is expected to be further reduced to 7 GW by the end of the year with more reactors shutting down, the International Energy Agency has estimated.
"In the short term, power companies in West Japan that were unaffected by the earthquake have been supplying additional power to Tokyo Electric and Tohoku Electric in the east," the analysts said, but added that there was a limit to such transfer as East and West Japan operate on separate grids.
As such, oil and LNG will meet the power deficit due to the lost nuclear capacity in Japan in the ratio of 60:40 in 2011 and 50:50 in 2012, according to the IEA.
GLOBAL LNG SPARE CAPACITY
Meanwhile, the LNG supply-demand balance will tighten over the next three to four years due to stronger demand growth, limited liquefaction capacity growth, project delays and declines in Southeast Asian exports, the Bernstein analysts predicted.
Global spare capacity is likely to drop to 26 million mt/year in 2011 from 50 million mt/year in 2010, the analysts added.
"Spare capacity will bottom out in 2014 with the total LNG liquefaction output capacity just 0.6% above the demand," which will translate to about 2 million mt/year of spare capacity.
Market tightness will prevail till major capacity additions come online in 2015 and 2016, which includes the 15 million mt/year Gorgon LNG, 7.8 million mt/year Gladstone LNG and 9 million mt/year Asia Pacific LNG, the report said.
Currently, more than 60% of the global planned LNG liquefaction projects are located in Australia.
Prelude LNG, Asia Pacific LNG and Gladstone LNG have received final investment decision or FID approval this year, while Ichthys LNG and Wheatstone LNG are likely to reach FID by the end of this year.
Near-term tightening of the LNG market will be supportive of higher spot gas prices, which will benefit companies with spot LNG portfolio such as BG and other gas producers, the analysts said.
"LNG prices in Asia broadly remained below oil parity pricing but Chinese spot import prices for LNG did touch WTI-equivalent gas price in July 2011," analysts said.
"Japanese gas prices remain at a historically high level of premium versus the US or UK gas prices," they added.
Platts LNG assessments for delivered ex-ship Japan and Korea spot cargoes have been steadily climbing since the March 11 quake and tsunami in Japan.
Platts Japan Korea Marker averaged $10.01/MMBtu from the start of the year to March 11. It has averaged $13.43/MMBtu between March 12 and August 29.
The spot market assessment reached an year-to-date high of $15.95/MMBtu August 29.
JKM's premium to UK's benchmark gas futures National Balancing Point or NBP hit a record high of $6.579/MMBtu on August 12.
