The world's future development of the LNG industry will be subject to the following risks:
1. Facing new competition in power generation
Gas-fired power generation has become the main driver of the natural gas industry's development in recent decades. Natural gas has also become the preferred choice for fuel switching in new power plants, as well as in existing oil and coal-fired plants, due to the environmental benefits of improved fuel switching efficiencies and methods. However, concerns about the high price of natural gas and the availability of adequate gas supplies have forced many governments and power producers to reconsider plans to build new gas-fired generation capacity. Significant investments are being made in research into clean coal technologies, which will make coal more competitive. In addition, the renewed emphasis on nuclear power poses a threat to gas-fired generation.
2. Industrial Demand May Decline
In the United States, there are many large industries that have been built using low-cost natural gas. Some of these could be converted to alternative fuels, while others are afraid that existing facilities using high-priced natural gas would lose their economics and would be better off building new facilities overseas where cheap natural gas is available.
3. Facing competition from pipeline gas
Rising gas prices will undoubtedly boost construction of gas pipelines on the North Slope of Alaska in the U.S. and in Canada's Mackenzie Delta, where economically unrecoverable natural gas reserves that were previously unavailable at a time of low prices are beginning to come back into favor. In Europe, particularly in Northwest Europe and the UK, gas pipelines can bring large volumes of gas to market, and Norway and Russia are looking to expand their pipeline gas supplies to Europe to compete with LNG. In the Mediterranean, Libya is emerging as a significant supplier of pipeline gas; Algeria is seeking to expand pipeline gas supplies to southern Europe in order to export LNG to other regions. In the longer term, Central Asia and the Middle East will also supply pipeline gas to Europe. Pipeline gas will also compete with LNG in emerging Asian markets such as China and India. In China, the West-to-East pipeline has already begun supplying gas to compete with imported LNG in Shanghai. China initially signed LNG contracts with Australia and Indonesia at low prices, but it is difficult to say later. Also Russian pipeline gas will enter the Chinese market. India has discovered new gas reserves offshore in its east, but the more important factor preventing LNG from entering the Indian market is price. Iran may be willing to supply India with lower-priced LNG.
4. Liquefaction line costs no longer trending down
The LNG industry's unit liquefaction costs have been declining over the past 10 years due to improved design, larger line sizes, economies of scale, and increased competition among contractors and equipment suppliers. However, as steel and aluminum prices continue to rise, this downward cost trend will likely come to a halt. The number and size of LNG production lines already planned for construction have increased in recent years. The construction of more than five LNG production lines per year (some with a size of 7.8 million tons per year) will require significant engineering and construction resources. At the same time, Qatar's planned 7.8 million tons/year production line may be approaching the limits of economies of scale. While declining unit costs favor the expansion of the LNG industry, the total cost of the LNG supply chain is high. For example, a typical LNG project exporting Middle Eastern LNG to the U.S. with two production lines could cost between $10 billion and $12 billion.
5. Financing Risks
International banks, export credit agencies and multinational institutions are willing to lend to LNG projects because of their better track record, long term pay-as-you-go contracts, and creditworthy buyers. However, LNG projects in countries where bank lending is prohibited are often denied loans. In recent years, some LNG projects have signed long-term contracts for only a portion of their production, and some purchasers lack creditworthiness, making lenders even more hesitant. In addition, financial institutions are unfamiliar with lending to LNG projects, and it is important for lenders to understand that these projects should sell LNG to partners and marketers, not to gas distribution companies or distributors.
6. Increased cost of LNG carrier construction
One of the factors that has contributed to the rapid growth of the LNG industry over the last decade is the dramatic reduction in the cost of LNG carriers. The price of an average-sized LNG carrier has dropped from $220 million to $250 million in the early 1990s to about $160 million in 2000. Whereas LNG carriers were previously owned or leased for long periods of time by joint venturers or purchasers of LNG projects, lower transportation costs are now stimulating short-term leasing of LNG carriers, thereby expanding spot and short-term trade in LNG. This has created a surplus of LNG shipping capacity that will continue for several years. However, the cost of building new LNG carriers has risen to $200 million due to higher prices for steel and other raw materials, higher labor costs, and a larger number of ships in demand.
7. Construction of LNG import and regasification facilities encountering difficulties
LNG import terminals are simpler, safer and more reliable than natural gas liquefaction plants. However, in some countries, it is difficult to build LNG terminals due to local opposition. For example, in the U.S., there is no guarantee that an LNG terminal facility can be built even if it receives approval from the relevant federal authorities.6-10 LNG import terminals need to be constructed in the U.S. between 2005 and 2015, and several more and at least eight new LNG terminals will be constructed in Europe