Gas prices could reach record highs

Global liquefied natural gas (LNG) prices could reach record levels this year as demand rises and supply falls, potentially leading the world’s major economies to face increasing energy costs.

Following a record, unexpected drop in LNG production in 2012, it is expected that production may only slightly increase this year. At the same time, demand will continue to grow significantly, influenced by the rapid economic growth of Asian countries, the closure of nuclear plants in Japan, and drought in Brazil.

Approximately 80 percent of global LNG deliveries are contracted under long-term agreements, meaning countries like Brazil, Argentina, China, and India rely on short-term (spot) contracts that are subject to significant price fluctuations.

LNG helps bridge the gaps in gas supply in countries where domestic production fails to meet demand. However, the process of liquefying gas, transporting it, and converting it back to gaseous state makes it more expensive than supply via pipelines.

The spot price of LNG is currently $18 per million British thermal units (mmBtu), which is about $2 higher than at the same time last year, but slightly lower than the record level in 2008, when the price was $20.

– The supply situation is much worse than it should be. LNG production decreased last year, and it does not seem that it will increase this year – says independent analyst Andy Flower.

Flower estimates that production decreased by 1.6 percent last year, to 238 million tons, primarily due to unpredictable events. Specifically, production from the world’s leading LNG exporter, Qatar, was reduced due to maintenance, while exports from Egypt and Indonesia also fell due to rising domestic consumption, and unrest in Yemen halted its production and exports.

LNG production has only fallen three times in the last 50 years, in 2008 when the global economy was in free fall due to the crisis, and in 1980 and 1981, when Algeria halted LNG exports to the U.S. due to price disputes. This year, the production situation does not look promising either. The security situation in Yemen remains concerning, and Indonesia expects a nearly 14 percent drop in LNG production.

At the same time, new projects in Asia – five import gas terminals in India, China, and Singapore, with an annual capacity of nearly 18 million tons, which accounts for almost 8 percent of the total global supply last year – will absorb any potential new LNG supply from the global market.

Qatar’s decision, crucial in recent years for establishing a balance between supply and demand in the LNG market, to focus on long-term delivery contracts for this energy source, is also putting pressure on the spot market. The Qatari central bank predicts that as a result, Qatari LNG sales on the spot market could be reduced by 40 percent from 2012 to 2014.

The result will be a smaller supply on the spot market, where buyers are usually willing to pay the highest price, while others, if they do not have enough money, leave empty-handed. LNG exporters expect a larger supply only in the second half of this decade, as an increase in deliveries from Australia, Africa, and the U.S. is anticipated. Until then, the global market faces a potential LNG shortage and possible further price increases for this energy source should unpredictable events occur, such as the nuclear disaster in Japan’s Fukushima, or if significant weather disasters happen.