According to Tudor, Pickering, Holt & Co., Qatar will be the dominant exporter of LNG due to projects such as this one from Qatargas (photo courtesy Qatargas)

U.S. gas markets will benefit from higher crude oil prices, as European and Asian markets will offer more attractive pricing for liquefied natural gas (LNG) than the U.S., according to a new report from Tudor, Pickering, Holt & Co. (TPH).

In the report, LNG and the Developing Global Gas Market, the company also lowered its U.S. LNG import estimates for 2010 from 2.5 billion cubic feet per day (Bcf/d) to 1.8 Bcf/d with second quarter and third quarter import levels increasing due to off-peak demands, but fourth quarter levels will fall back to first quarter levels.

The report estimated that much of the excess LNG production, about 3 Bcf/d, will find a home in the Pacific basin, specifically Asia and Europe because Pacific basin pricing is tied to oil. This will help to ensure that the U.S. “will not become a dumping ground for LNG.” This has been the case in other times of excess supply when the U.S., which has the baseline market price for LNG in addition to larger storage capacities than either Asia or Europe, has become the destination for excess LNG cargoes. However, when premium prices are offered elsewhere in the world, those cargoes are diverted to those markets.

The company recommended that investors increase their focus on LNG as it makes up about 10% of the global gas supply, which is estimated at 300 Bcf/d. “Driven by Asia and Europe, global LNG demand is growing more than twice as fast as overall gas demand and approximately six times that of oil. Not surprisingly – since rapid demand growth is only possible if supply is available – LNG supply growth substantially outpaces growth in non-LNG gas supply,” according to the report.

The report stated that global gas demand is estimated to grow at about 2.6% per year through 2015, which would mean that there could be a 9 Bcf/d shortage of LNG by 2015. “This suggests that demand growth will have to moderate (via price) or more LNG liquefaction will be built at the end of the forecast period,” the authors stated.

Part of this demand growth is because more countries are moving away from coal and oil on a relative basis because of environmental and economic purposes as crude prices continue to rise, while gas prices remain lower due to abundant supplies.

TPH noted that the markets are “sloppy” with the global gas market estimated to be oversupplied by 3 Bcf/d in 2010 and 1.5 Bcf/d in 2011. “This sounds like a large number – and it is if all 3 Bcf/d lands in the U.S. – but 3 Bcf/d is only 1% of global gas production,” the report’s authors, David Pursell and Jon Mellberg, said. They noted that global LNG export capacity is expected to average 35 Bcf/d in 2010 with demand averaging 29 Bcf/d.

Although gas prices remain low and the cost to build liquefaction facilities are growing, TPH stated that Greenfield liquefaction economics remain reasonable for facilities backed by long-term contracts with oil indexation. Such contracts have assured that several projects in Australia and elsewhere continue to be developed, while contracts indexed to gas prices will be difficult to support new liquefaction projects.

While prices remain low, the authors stated that the market is beginning to correct itself with low prices stimulating demand for LNG in Europe and Asia. Demand should also be supported by several project delays totaling 10 Bcf/d.

The biggest change to earlier estimates for U.S. LNG imports was the advent of shale plays. “Shale production has made a mockery of previous estimates of U.S. LNG import forecasts,” the authors said. While U.S. demand for LNG did not increase as previously expected, the expectation of this increased demand did result in a significant increase in the number of markets actively involved in LNG marketing and trading.

While TPH anticipates others around the world to follow the U.S.’s lead in developing natural gas shale plays, the company doesn’t anticipate these shales to approach U.S. production figures. Thus LNG exporters shouldn’t be harmed by global shales as much as they are harmed by U.S. gas shale plays. However, it is a sector of the global gas market to be marked for future growth.

“Even if we assume a similarly friendly market environment [for global producers that was experienced by U.S. producers] and stable global tax and regulatory regimes, it is hard to imagine that non-North American shales will threaten the LNG business prior to 2015. In that light, we are not surprised to see large LNG-oriented companies invest in North American shale projects as a way to gain valuable know-how and, perhaps, to hedge exposure to long-term global shale risk,” the authors said.

The biggest player in the global LNG market will be Qatar, which by the end of this year will have the capacity to supply over 10 Bcf/d – roughly 30% of the global LNG market –

into the Atlantic and Pacific basins.

TPH noted that Australia is also set to become a force in the global market due to two liquefaction projects currently under construction and another four in development. In total these projects could add roughly 6 Bcf/d to the country’s current baseline production of 3 Bcf/d.

Combined, Australia and Qatar represent 33% of all liquefaction under construction and planned. The company anticipates these two countries competing to be the dominant supplier of LNG to the Pacific basin with Qatar, several years ahead in development, holding the advantage. Australia’s big years for liquefaction capacity are expected to be 2014, 2015 and 2016 with projects set to come online in those years, but TPH anticipates there being delays since three 1.5 Bcf/d projects are set to come online in 2015-2016.

One country that was expected to be a major player in the Atlantic basin, Russia, may be facing a reverse of fortunes that will benefit LNG exporters into the region. TPH noted that in 2009, Russia exported 13.6 Bcf/d of natural gas into Europe, which was 11% lower than its 2008 figure. This figure is expected to increase to about 15.5 Bcf/d in 2010, but European officials are seeking to move away from Russian pipeline gas for both financial and strategic purposes.

Relying less on one single country for its gas provides European countries with more flexibility as well as lower costs since Russian gas is sold under long-term contracts indexed to oil. The report’s authors said that because of these reasons, northwest Europe will favor LNG over Russian gas until prices converge or minimum contract quantities come into play. – Frank Nieto