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Atlantic Basin: Trends and Discontinuities LNG Trade-flows in the Atlantic Basin: Trends and Discontinuities Howard V Rogers NG 41 March 2010 i The contents of this paper are the author‟s sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its members. Copyright © 2010 Oxford Institute for Energy Studies (Registered Charity, No. 286084) This publication may be reproduced in part for educational or non-profit purposes without special permission from the copyright holder, provided acknowledgment of the source is made. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from the Oxford Institute for Energy Studies. ISBN 978-1-907555-08-4 ii PREFACE In the late 2000s, LNG became one of the hottest energy issues around with a surge of new supplies coming on to global markets. Hailed as the catalyst for creating a “global gas market” (despite confusion as to what that might mean), LNG turned from being a minority to a mainstream gas interest, with countries in different parts of the world opening up regasification terminals which will allow them imports from diversified sources. In the midst of these projects coming on stream, the 2008 global recession saw markets swing from severe shortage to surplus and prices falling accordingly. While many studies have charted the progress of liquefaction and regasification projects at various stages of development in different countries and geographical regions, this one attempts something more complex: to explain the supply, demand and price dynamics of the three major regional gas markets in North America, Europe and Asia in order to demonstrate how these markets have become connected through LNG, and how those connections may develop as business and energy/natural gas cycles unfold. This is the first study of LNG supply and demand from the Natural Gas Programme since our first major publication back in 2004. It is also the first time that one of our authors has developed a model in order to illuminate the operation and interaction between different gas markets. There is a tendency for academic energy models to be “black boxes” where the data and results are very difficult to verify. The model developed in this study explains the methodology behind the estimation of the interaction of LNG and natural gas flows with prices. The model is updated monthly with public domain data allowing projections to be validated on an ongoing basis. The arrival of Howard Rogers has added enormously valuable industry-based knowledge and perspective to the research of the Gas Programme. It would have been extremely difficult for anybody without his long experience of gas analysis to devise such a powerful modelling methodology within such a relatively short time. We are very fortunate that he joined the Programme at a pivotal moment in the evolution of global LNG trade, and his ongoing analysis of the different regional markets informs all of our work on gas supply, demand and pricing. Jonathan Stern iii Contents Introduction ............................................................................................................................ 1 1. Atlantic Basin Gas Markets and the Growth of LNG Trade .......................................... 3 What is LNG? ........................................................................................................................ 3 North America Gas Market Structure and Developments ..................................................... 4 European Gas Market Structure and Developments ............................................................ 14 Asia LNG Market Structure and Developments .................................................................. 26 The Renaissance of LNG ..................................................................................................... 33 The Mechanics of LNG Arbitrage and Activity to Date...................................................... 37 Market Developments in 2008 and 2009 - The Perfect Storm ............................................ 41 2. The Framework for Future Market Interaction through LNG and Pipeline Arbitrage . 42 Introduction .......................................................................................................................... 42 The Global LNG Analysis Conceptual Framework ............................................................. 43 Step by Step Description of the Conceptual Framework ..................................................... 45 Simplifying Assumptions..................................................................................................... 52 3. Future Assumptions, Trends and Discontinuities Emerging ........................................ 60 Introduction .......................................................................................................................... 60 Future Assumptions: Natural Gas Supply and Demand Fundamentals and LNG Import Requirements ....................................................................................................................... 60 Future Trends and Discontinuities Emerging from Modelling Framework ........................ 60 The „Current Momentum‟ Case ........................................................................................... 60 The Producer Response Case ............................................................................................... 65 The European Contract Flexibility Case .............................................................................. 69 The Longer Term ................................................................................................................. 73 4. Conclusions .................................................................................................................. 77 5. Appendix 1 : Models of LNG Arbitrage ..................................................................... 82 6. Appendix 2: Natural Gas Supply and Demand Fundamentals and LNG Import Requirements - Key future assumptions ............................................................................. 88 Bibliography ...................................................................................................................... 125 Glossary ............................................................................................................................. 130 Figures Figure 1. US In-Place Generation Capacity 1996 – 2007 ...................................................... 4 Figure 2. Comparison of US Installed New Generation Capacity ......................................... 5 Figure 3. US Lower 48 Dry Gas Productive Capacity and Production. ................................ 5 Figure 4. US Lower 48 Wet Gas Production by „Vintage Year‟ of Gas Well Production Start ........................................................................................................................................ 6 Figure 5. US Dry Gas Production and Gas Rig Count 1997 - 2005 ...................................... 6 Figure 6. US Natural Gas Demand by Sector 1990 - 2008 .................................................... 7 Figure 7. US Lower 48 Regional Wet Gas Capacity 2000 – 2008 ........................................ 8 Figure 8. Cross Border Natural Gas flows (monthly) between US and Canada and Mexico 9 Figure 9. US Henry Hub Natural Gas Price vs. end month Storage Deficit/Surplus compared with Rolling 5 year average for the month.......................................................... 10 Figure 10. US Gas and Oil Operating Rig Count 1987 - 2009 ............................................ 11 Figure 11. US Power Generation Produced from Natural Gas and Oil Products ................ 12 iv Figure 12. Henry Hub Natural Gas Price and Competing Oil Products Prices 2000 – 2009 .............................................................................................................................................. 12 Figure 13. Gas and Oil Products Consumption in US Power Sector vs. Relative Prices 2004 - 2008 ................................................................................................................................... 13 Figure 14. European Natural Gas Supply 1970 – 2008 ....................................................... 14 Figure 15. European Pipeline and LNG Import Flows 2008 (bcma) ................................... 15 Figure 16. IEA Europe demand by sector 1995 - 2007 ....................................................... 15 Figure 17. European Domestic Production 2000 - 2008...................................................... 16 Figure 18. AGIP and Brent 2000 – 2005 ............................................................................. 17 Figure 19. Oil Indexed Gas Prices in Europe 1997 - 2009 .................................................. 19 Figure 20. Bacton-Zeebrugge Interconnector Daily Pipeline Flows 1998 - 2009 ............... 21 Figure 21. UK NBP Spot Price and German Average Import Gas Price (AGIP) January 1997 – November 2009 ........................................................................................................ 22 Figure 22. North West Europe Trading Hub Dynamics ...................................................... 23 Figure 23. Dynamics of North West Europe Trading Hubs ................................................ 24 Figure 24. North West Europe Hub Prices January2008 – March 2009 ............................. 25 Figure 25. Global LNG Imports by Country
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