Qatar is to be congratulated on the 10th anniversary of liquefied natural gas exports (LNG), which coincided with the commissioning of the 6th LNG train, often described as "mega train", being the largest gas processing train in the world at 7.8 million tonnes a year of LNG product.

The train went into production successfully at the end of July 2009. There are three similar trains under construction and all expected to be commissioned in 2010 that will give Qatar a total capacity of about 77 million tonnes a year and make it the largest LNG exporter in the world.

All these projects were decided many years ago at a time when the outlook for natural gas demand was so bright.

However, the financial and economic crisis since the middle of 2008 has impacted that outlook negatively as it impacted oil and all other energy sources.

World demand in 2007 was about 2.5 billion tonnes of oil equivalent and is projected by Organisation of Petroleum Exporting Countries (Opec) to reach 3.8 billion tonnes of oil equivalent in 2030 or a growth rate of 1.9 per cent per year.

Before the crisis natural gas demand growth rates for the same period were foreseen to be 2.1 per cent or even more by some estimates.

The impact of course may be worse in the short to medium term as judged by the evolution of prices in various consuming regions.

For example, in the US market prices reached $12.65 (Dh46.46) per million British Thermal Units (mbtu) in July 2008 when oil prices were about $140 per barrel, but persistently fell faster and in line with the fall of crude oil prices to about $3.67/mbtu in May 2009.

Even the appreciation of crude oil prices in the last few months to around $80 per barrel was not sufficient to pull gas prices equally and the price in the US market is now around $4.59/mbtu.

Other regions display similar price trends amid increasing world production capacity and weak demand.

Global trade in LNG was close to 171 million tonnes in 2008 which was 0.4 per cent less than in 2007 due to a large drop in US imports and 2009 is expected to be worse while all these large-scale projects in the Middle East and other regions are coming on stream over a short period of time. By 2010 world LNG capacity could reach 240 million tonnes a year as compared to only 197 million in 2007.

Qatar projects are all tied to long-term sales contracts and there is no fear of them operating at a high rate of utilisation.

But there is no escape from the price impact on the revenue and profits of these projects, especially as they were all contracted at a time of high costs of engineering projects in general and oil and gas projects in particular.

Capital cost of LNG projects was estimated at $400 per tonne of capacity in 2004 only to rise to $1,000 in 2008 and thereby decreasing the profitability of such projects.

Capital costs have gone down in the last year or so but not to previous levels. The coming capacity increase, decline in demand and capital costs may impact the smaller projects that some producers were targeting in offshore or stranded locations more.

But the qualities of natural gas may attract more countries to import LNG over and above the few countries that do so now (13 countries in 2003).

The impact of climate change policies may also influence more fuel switching and restore higher growth rates of demand for natural gas.

The flexibility in the LNG market is increasing slowly but surely. The spot market has increased from 1 per cent of traded tonnage in 1992 to 10 per cent in 2005 as consumers and producers saw a common advantage in allowing such development.

Dubai is considering an LNG storage project to prepare itself for these developments and opportunities. LNG shipping is 50 years old and its safety record is excellent.

All these factors could eventually lead to an international natural gas market similar to oil and shipments can be redirected to where the demand is and where returns are higher.

At the end of the day and when the world is again in a state of good rates of economic growth, natural gas fortunes will brighten even more than those of oil. But in the meantime producers have to contend with the rough ride ahead.

 

The author is the former head of Energy Studies Department in Opec Secretariat in Vienna.