EN­ER­GY RE­PORTER

The al­most free-fall of nat­ur­al gas prices at the Hen­ry Hub in the Unit­ed States and the emer­gence of shale gas do not mean the glob­al out­look for liq­ue­fied nat­ur­al gas (LNG) prices is de­pressed, ac­cord­ing to British Gas Group chief op­er­at­ing of­fi­cer Mar­tin Hous­ton.

Speak­ing at the an­nu­al BG/First Cit­i­zens lun­cheon at the Hy­att Re­gency Trinidad ho­tel, Port-of-Spain, on Mon­day, Hous­ton point­ed out that while he ex­pect­ed prices in the US to re­main soft and for the US to be­come a net ex­porter of LNG, he felt the glob­al mar­ket will re­main seg­ment­ed.

Hous­ton told the au­di­ence: "First­ly, al­though we ex­pect to see a sub­stan­tial vol­ume of US LNG ex­ports, giv­en ex­pec­ta­tions of in­creas­ing gas de­mand, the im­pact will not be over­whelm­ing. Glob­al mar­kets will re­quire sub­stan­tial vol­umes from new non-US sources as well. That means, in turn, that US do­mes­tic gas prices can­not be the ul­ti­mate de­ter­mi­nant of gas prices in oth­er glob­al mar­kets."

He con­tin­ued: "US ex­ports, un­doubt­ed­ly, have the po­ten­tial to in­ject ad­di­tion­al ben­e­fi­cial flex­i­bil­i­ty in the LNG sys­tem, but we do not ex­pect to see this dri­ve a full con­ver­gence of Hen­ry Hub and Asian term prices. In fact, we ex­pect gas prices to re­main high­ly re­gion­alised for the fore­see­able fu­ture."

If Hous­ton's analy­sis is cor­rect, this could mean good news for T&T, which has sig­nif­i­cant­ly re­duced its ex­ports of LNG to the US due to low prices.

En­er­gy Min­is­ter Kevin Ram­nar­ine on Mon­day told the Sen­ate that T&T now sup­plies on­ly 20 per cent of that coun­try's LNG de­mand, down from 70 per cent five years ago.

Low­er LNG prices have re­sult­ed to a large mea­sure in gov­ern­ment's en­er­gy rev­enues be­ing low­er than should have been ex­pect­ed in a time of sus­tained high oil prices.

Hous­ton said his analy­sis was based on the fact that the cost of turn­ing gas in­to LNG in the US and ship­ping this LNG to Asia ex­ceeds the cur­rent US gas price. In ad­di­tion, con­ver­sion and trans­porta­tion are very cap­i­tal in­ten­sive and knowl­edge and time-in­ten­sive.

Then there is the is­sue of ge­og­ra­phy.

"Yoko­hama is on the oth­er side of the world from the Gulf of Mex­i­co and cus­tomers there sim­ply won't be able to en­joy Hen­ry Hub lev­el pric­ing. Al­so, LNG man­u­fac­tur­ers and traders will need fair re­ward to in­vest and take sub­stan­tial ven­ture risks.

"And it will take time be­fore US ex­ports be­gin to have any in­flu­ence. On­ly one US ex­port project is pro­ceed­ing, mean­ing the first ship­ment of LNG out of the US is still three years away. The US gov­ern­ment has yet to take a de­ci­sion on ex­ports be­yond this first project."

In this con­text, Hous­ton is ar­gu­ing that LNG prices will be in­dexed by oil prices. He is pre­dict­ing that by the end of this decade, 2,400 bil­lion cu­bic me­tres per an­num (bc­ma) of new sup­ply will be re­quired at a growth rate of more than nine per cent per an­num, re­quir­ing some $2 tril­lion of in­vest­ment.

He ex­plained: "So, with or with­out US LNG, meet­ing fu­ture gas de­mand will be a huge chal­lenge that will test the in­dus­try to its lim­its."

Hous­ton said there were two things that had changed the LNG busi­ness for good.

The first was un­con­ven­tion­al gas which is giv­ing the US new in­dus­tri­al com­pet­i­tive ad­van­tage in terms of low-cost en­er­gy sup­ply and, in Aus­tralia, the de­vel­op­ment of un­con­ven­tion­al gas is tak­ing place on a scale that is set to make the coun­try the world's largest LNG ex­porter.

He said the trends are ir­re­versible, yet the evo­lu­tion­ary path is nev­er en­tire­ly pre­dictable.

Hous­ton not­ed while the eco­nom­ic slow­down con­tin­ues to af­fect in­dus­tri­alised coun­tries, emerg­ing mar­kets are still do­ing well. Both Chi­na and In­dia are pre­dict­ed to grow at en­vi­able rates.

Hous­ton said there will con­tin­ue to be growth in the emerg­ing mar­kets for LNG, with Chi­na and In­dia to lead the way.

"Be­tween now and 2025, Chi­na and In­dia alone are pro­ject­ed to add 60 per cent more in terms of gross do­mes­tic prod­uct than the com­bined to­tal of the US, the Eu­ro­pean Union and Japan."

He added: "Look­ing for­ward, Chi­na and In­dia will more than dou­ble their share of glob­al en­er­gy de­mand by 2025. Their to­tal will rise from 16 per cent to 37 per cent of all en­er­gy con­sumed, dri­ven pri­mar­i­ly by growth in pow­er gen­er­a­tion. To meet all this ex­pan­sion in en­er­gy de­mand, gas will in­crease its mar­ket share, and LNG will play an in­creas­ing­ly im­por­tant role."

Hous­ton point­ed out that the Asian Rim al­ready en­joyed long-term ben­e­fits from se­cu­ri­ty of sup­ply and a di­ver­si­ty of sup­ply. Hous­ton said he ex­pect­ed by 2015, Japan, with its move away from nu­clear en­er­gy, will lead the way in LNG im­ports, fol­lowed by Chi­na and In­dia.

He said that LNG has grown as a fu­el and, to this ex­tent, it is al­ready ten per cent of glob­al gas us­age. BG's chief op­er­at­ing of­fi­cer said: "That share is ex­pect­ed to grow to 14 per cent by 2025. This means that the LNG mar­ket would grow from 240 mil­lion tonnes per an­num to­day to around 450 mil­lion tonnes by 2025."

Hous­ton said the LNG busi­ness will be­come a tru­ly fun­gi­ble mar­ket sim­i­lar to that of oil. He not­ed such a mar­ket is still some way off since it will re­quire more short-term sup­plies, more short-term sup­pli­ers, more des­ti­na­tions, dis­ag­gre­ga­tion of the gas val­ue chain and ac­cess to the end cus­tomer.

"Oil, of course, has all of these things in most mar­kets. Build­ing the same mod­el with gas will take time, but I be­lieve that fun­gi­ble glob­al gas mar­kets will even­tu­al­ly come, but I think this will take sev­er­al decades yet to per­fect. But there is no doubt an ir­re­versible trend is un­der­way that will change glob­al en­er­gy dy­nam­ics for good."

Hous­ton pre­dict­ed nat­ur­al gas will be a fu­el of choice even as the world tries to re­duce its car­bon foot­print.

"It is not, in my view, just a tran­si­tion fu­el on the path to­wards a less car­bon-in­ten­sive fu­ture. Rather I see it as a des­ti­na­tion fu­el, a per­ma­nent fea­ture of the en­er­gy mix and an ex­cel­lent long-term part­ner for more cost­ly, in­ter­mit­tent sources of re­new­able en­er­gy."