April 2008

Issue #38

Overview of LNG Spot Market

Although there is currently a lot of gas around the world, one of the major challenges is transporting it to market efficiently and in a cost-effective manner, particularly in the light of the growing distance between many of the major sources of production and consumption as reserves are depleted in Europe and North America.  A key technology for meeting this challenge is the use of liquefied natural gas (LNG). It is a product that allows large quantities of gas to be transported efficiently over long distances to isolated markets (e.g. Japan). In practice this requires the gas to be transported via pipelines from the upstream gas-fields to liquefaction plants, then shipped in LNG tankers to the re-gasification plants for onward transmission and distribution to local markets. Commercially LNG is currently traded under two main types of contracts, long term contracts, and short term contracts. The purpose of this article is to examine the development of the short-term LNG market sometimes referred to as the LNG spot market.

The LNG spot market consists of both short-term deals of less than one year down to trades involving only one cargo. The LNG spot market is gradually beginning to take a growing share of the overall LNG trading market and is expected to grow to around 15-30% of all trades before it levels out, it is assumed that despite growth in short term trades, long term contracts will dominate the market for the foreseeable future as it is these contracts that finance the required infrastructure.

The LNG spot market began to develop in the mid-1990s, when due to some spare production capacity mainly caused by the start up of new projects and expiry of old contracts at existing facilities, cargoes became available for purchase on a short-term basis. This was boosted by the collapse of the Asian Tiger economies following the Kobe earthquake and the re-emergence of the USA as a significant LNG importer in the late 90’s. Spot sales reached 11.44 bcm in 2002, although at this time short term trades still only accounted for 8% of all LNG trade. Another factor contributing to the drive of LNG spot demand came from countries such as Spain & Korea, using LNG spot cargos to meet seasonal demand. Due to the character of the product that LNG is and the flexibility it provides, the history of its growth in the spot market has been affected by many things - price surges, plant shutdowns, natural disasters (for example, Hurricane Katrina caused a price surge in European gas, as LNG was diverted to USA and earthquakes in Japan causing nuclear plants to shutdown have also caused cargos to be diverted). LNG spot trading takes place when there are two main occurrences, spare capacity in the infrastructure (liquefefaction, LNG tankers and regasification facilities) combined with a large number of players buying on the market, for example in the late 1990s the construction of new liquefaction plants in the Middle East, Nigeria and Trinidad, and a build up of long term contracts, caused their to be spare capacity available to sell on the spot market.

LNG Terminal Capacity 

The World’s LNG Receiving/Regasification Terminal capacities is led by Japan which has 27 operating Terminals and has a further three or more planned. Japan is one of the biggest markets for LNG spot trades and consumes something like 60-70 mtpa out of a total world LNG demand of approximately 160 mtpa. The regional share of LNG demand splits up into Europe using up to 27.1% of LNG demand (2006), USA taking 8.4%, and Asia dominating the market with a massive 64.5%. It is worth noting that while import of LNG is dominated by a few big players; export is spread pretty far and wide among countries which along with having the gas reserves available have the facilities in place to liquefy LNG and export it The major exporters being Malaysia, Qatar, Indonesia, but many other countries are involved in the exporting of LNG. Large importing countries are Japan, Korea, USA and Europe as a whole (Spain being a country particularly dependent on LNG). The main reason for countries importing LNG will be due to exhaustion of their own gas reserves or a general lack of natural gas reserves. Other reasons may be to create a diversity of supply, and therefore a security of supply, and obviously in some places they can’t pipeline gas as easily. In most of Europe or North America there is a demand for alternative source of supply, one being LNG imports. 

 LNG Supplies

Currently Asia-Pacific provides the majority of the World’s LNG supply sources, operating at a production capacity of 74 mtpa. The Atlantic Basin produces 75 mtpa, although this is planned to go up significantly to 122 mtpa in the future. The rest of the World’s LNG supply is produced from the Middle East which is currently operating at 47 mtpa production capacity. So in total the world’s current LNG supply sources are operating at a production capacity of 196 mtpa and the future production capacity is estimated to reach up to 536.9 mtpa by 2020, there is no doubt that LNG is a significantly growing market.

LNG Shipping

Liquefaction is an essential process for shipping the gas in LNG form via large purpose made ships. The liquefaction process consists of cooling the natural gas to a temperature of approximately -161°C, this reduces its volume hugely and means that LNG in comparison to natural gas at room temperature and atmospheric pressure takes up 1/600^th of the space. There are currently 15 ships of size 18,900 to 50,000 cubic metres in operation, 17 ships of 65,000 to 87,600 cubic metres, and 207 ships of 122,000 to 155,200 cubic metres, and another 127 ships on order of various sizes.

It is worth noting that LNG shipping has a good safety record. There have been recorded in excess of 50,000 safe voyages world-wide, and as yet there have been no incidents involving breached cargo tanks.

Markets for LNG spot trades

The main markets where LNG is traded over the spot market are the UK and North-West Europe (NBP & Zeebrugge), North America (Henry Hub), Japan, and other European countries who trade over oil-based gas prices.

Review Growth of the LNG Spot Market

There is no doubt over the last decade there has been large growth in LNG spot sales. In 1992 LNG spot sales accounted for just 1%  of all LNG sales and in 2005 spot sales accounted for 10%, so it is clear that the amount of short term & spot trades is definitely increasing. How long that will continue for before it begins to level out is open to debate, however, many commentators believe it will begin to level out between in the region of 15-30% of overall LNG trade It seems likely that spot sales will never fully dominate the LNG market due to the fact that the market is primarily financed by long term contracts. Although costs have been cut significantly since the start of the LNG market, making it more and more  competitive, LNG still remains a capital intensive market and often requires third parties to help fund projects. Whilst customers continue to require the security of longer term contracts, spot sales will continue to be dominated by the long term contracts. In the mean time LNG demand is expected to continue growing as importers seek clean natural gas, and value the flexibility that LNG terminals provide.

Future of LNG spot traders

The LNG spot market is growing and will continue to thrive for a while yet, it is predicated that in the European LNG market alone, import capacity will double over the next 10 years, and competition for supply will continue to grow. The short term market has come a very long way in very little time, growing from near 0% in 1990 to accounting for 8% of trade in the LNG market in 2002 and in 2004 it was up at 10.7%. There are several conditions that could lead to the LNG spot market continued growth. The liberalization of markets in process across Europe, and further a field will increase a need for flexibility, and with market volatility a possibility in some markets the need for security of supply could continue to be a demand. So what of the future of the LNG spot market, how much further will it grow? Will a global LNG price be introduced as we currently have in the Oil market? Only time will tell.

For a more detailed overview of the Global LNG markets, please take note of our LNG course taking place on the 15^th of May in Templeton, Oxford, presented by our two expert lecturers David Ledsema and Andy Flower.

Researched and written by Tim Madden 

APPENDIX I – COUNTRIES ACTIVE IN LNG SPOT MARKETS

 Source: Sited in ‘The future of the LNG spot market, Boyoung Kim

Source: Sited in ‘The future of the LNG spot market, Boyoung Kim

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