A Study of Atlantic Basin LNG Market Dynamics as they pertain to

A Study of Atlantic Basin LNG Market Dynamics as they pertain to the Possibility for Intra-basin Price Convergence Submitted by: BELLMAN Christopher Candidate for MA Managerial Energy Economics December 2007 The University of Oklahoma Mewbourne College of Earth and Energy Sarkeys Energy Center Institute for Energy Economics and Policy A Study of Atlantic Basin LNG Market Dynamics as they pertain to the Possibility for Intra-basin Price Convergence A non-thesis report approved for the Managerial Energy Economics program and overseen by: ________________________ Prof. Robert HUBBARD (advising) ____________________________ Prof. Gustavo INCIARTE ________________________ Dr. Shaun LEDGERWOOD 2 Acknowledgements I would like to acknowledge the review committee, Prof. Robert Hubbard, Prof. Gustavo Inciarte and Dr. Shaun Ledgerwood and extend my gratitude to each of them for their guidance and assistance in the research and composition of this work. Their years of academic and industry experience were invaluable in guiding and shaping my work in this project and I am thankful for their having agreed to take part in the process. I would like to acknowledge and thank also my parents, Dennis and Diane, who have supported me throughout my academic career in more ways than I can describe. Their love and support have made possible all of my successes from primary school through graduate studies. 3 TABLE OF CONTENTS Committee Acceptance Acknowledgements List of Figures and Tables Abstract Chapter I: Introduction Chapter II: Historical Framework Chapter III: Current Natural Gas Market Environment Chapter IV: The Case for Natural Gas Price Convergence in the Atlantic Basin Chapter V: A Special Look at Qatar Chapter VI: A Special Look at Nigeria Chapter VII: A Note on South American Potential Chapter VIII: Conclusion Appendix A Appendix B Appendix C References 2 3 5 6 7 10 19 37 48 55 62 65 67 68 69 70 4 List of Figures and Tables Chapter I Figure 1.1: Projected Energy Demand Growth (EIA) Figure 1.2: Projected North American Growth in Natural Gas (ElPaso) Chapter II Figure 2.1: Henry Hub Schematic (Sabine Pipe Line) Figure 2.2: NBP/NTS Schematic (Total) Figure 2.3: Henry Hub vs. National Balancing Point Prices (Petrobras) Figure 2.4: US Supply and Production 1973-2007 (Univ of Oklahoma) Figure 2.5: Western European Production (Univ of Oklahoma) Figure 2.6: Projected Natural Gas Demand Sector Growth (EIA) Chapter III Figure 3.1: Map of Atlantic and Pacific Basins (Oil & Gas Journal) Table 3.1: World’s Largest Natural Gas Producers/Consumers (BPSR) Figure 3.2: LNG Value Chain Costs (Univ of Texas) Figure 3.3: Projected US Natural Imports (EIA) Figure 3.4: Projected US Natural Gas Supply/Demand Balance (EIA) Figure 3.5: Projected US Regasification Capacity (Univ of Oklahoma) Figure 3.6: Projected EU25 Natural Gas Supply/Demand Balance (EIA) Figure 3.7: Projected EU25 Regasification Capacity (Univ of Oklahoma) Figure 3.8: Worldwide LNG Capacity (Petroleum Economist) Figure 3.9: Projected Worldwide LNG Liquefaction Capacity (Cedigaz) Figure 3.10: Opportunity for Arbitrage (ConocoPhillips) Chapter IV Figure 4.1: LNG Growth 1970-2005 (Jensen Associates) Figure 4.2: Worldwide LNG Trade 1999-2005 (Univ of Oklahoma) Figure 4.3: US Natural Gas Production History (EOG Resources) Figure 4.4: World LNG Price Indexes (LNG Express) Figure 4.5: Short Term vs. Contracted LNG Volumes 1999-2004 (Jensen Associates) Figure 4.6: International Natural Gas Trade (BPSR) Chapter V Figure 5.1: Qatar Expansion Plan (Qatargas) Figure 5.2: LNG’s Role in Rising Demand (ExxonMobil) Figure 5.3: Projected LNG Exports: (ExxonMobil) Figure 5.4: Increasing LNG Train Capacities (Univ of Oklahoma) Figure 5.5: Qmax Tanker (Nakilat) Figure 5.6: Qatar LNG Export Routes (ExxonMobil) Chapter VI Figure 6.1: Nigeria LNG Production Increases (NLNG) Figure 6.2: Nigeria LNG Export Routes (NLNG) Figure 6.3: Bonny Island (NLNG) Chapter VII Figure 7.1: Summary of South American LNG Projects (HIS) Figure 7.2: Venezuelan Offshore Gas Resources (PDVSA) Page 7 8 10 11 12 15 16 18 20 21 23 26 27 28 29 30 31 32 34 38 39 40 42 44 46 48 50 51 52 53 54 56 58 60 62 63 5 Abstract Liquefied Natural Gas has recently been the recipient of much increased attention in international natural gas markets. As worldwide natural gas demand increases and the traditional sources of supply in North America and Europe are unable to keep up, LNG is presenting itself as a potential source for supplemental supply. Growth in the Atlantic Basin has surged in recent years, growing at nearly 13% in 2006, but looks to have some constraints for continued growth in the coming 5-7 years. As liquefaction capacity struggles to catch up with regasification, the effects that LNG can bring about in Atlantic Basin market dynamics will be stunted. A group of potential suppliers to the Atlantic Basin, including Nigeria, South America and Qatar, hold the key to unlocking the true potential of LNG. Dramatically rising costs of liquefaction projects threaten to slow their development as well. The desperately needed increases in liquefaction capacity could be delayed further if projects are delayed or cancelled in the face of cost increases. If potential suppliers are in fact able to overcome their production and economic challenges to supply sufficient quantities of LNG, it could bring about a convergence of prices in the Atlantic Basin as a result of heightened competition and shortening contract terms. However, in the near to medium term, price convergence seems unlikely as the LNG market simply faces too many challenges. 6 I. Introduction Few people would argue that the global economy could function in its present state, or continue to grow and provide prosperity in established and developing economies alike, without the continued supply of abundant and accessible energy. The forms in which that energy are delivered and utilized are changing however. Whether it be oil, coal, nuclear, natural gas (hereafter, NG), or renewables, we need energy to fuel the world we live in. Questions surrounding the sustainability of energy supplies are on the mind of consumers everywhere. Some would argue that traditional fossil fuels are fast disappearing and that the global economy will be devastated in short time when the resources we were blessed with, and squandered, dry up. Others maintain that this alarmist position is greatly exaggerated. The undisputable element of this discussion is that the world’s demand for energy has been steadily rising and will continue to rise for generations. The figure below is a demand forecast from the Energy Information Agency (EIA) in Washington DC. While their forecasts may not always be proven true, there is little argument concerning the overall picture presented in Figure 1.11: Figure 1.1 1 EIA Annual Energy Outlook 2007 7 As energy needs increase, we must consider where growth will come from. Natural gas has seen its sector share grow in recent years. With developments in gas-to-liquids processing and natural gas fired power generation, gas is being looked at as a more universal fuel than ever before. Perhaps the most significant advances in the natural gas industry however, are being made in liquefied natural gas (LNG). LNG provides an effective transport option for gas reserves which exist displaced from their consumer markets. This stranded gas was previously trapped and unable to reach the consumers who demand it for lack of transportability. LNG makes it possible to deliver gas at any port where regasification facilities are in place. The growth in the natural gas demand will be secular, as represented in Figure 1.22 which pertains to the United States specifically: Figure 1.2 The role played by LNG will be significant, if not assured. It is how the growing role of LNG may affect international gas price convergence that is the focus of this study. SAWYER, Kyle. “Effect of LNG imports on infrastructure.” Presented to IAEE Conference Houston, TX 2007. ElPaso Corp. 8 2 We will look first at the historical framework of overall natural gas markets and LNG. By understanding the market structure we can hope to comprehend the possibilities of how the market dynamics may change given sector growth in LNG. The third chapter focuses on the existing market. It is there that we will attempt to outline current market conditions and explain what has lead to the current situation and equilibrium. Chapter III also will attempt to delineate growth potential and restrictions of international LNG trade. The fourth chapter will consider specifically the possibility of LNG’s ability to affect a basin-wide price convergence between the EU25 and North America. The potential will be weighed against specific constraints facing the industry and future development. After establishing the scenario, Chapters V & VI examine two of LNG’s biggest future players pertaining to the Atlantic Basin, Qatar and Nigeria. As will be established, the LNG industry will be restricted primarily by its low capacity in the short to medium term. Potential suppliers, like Qatar and Nigeria, hold much promise however for worldwide LNG growth. Chapter VII touches on the potential of South America as a future LNG producer. Examining the situations of future and current suppliers specifically may give us a better understanding of the larger LNG supply base which as of 2006 consisted of thirteen countries on five continents. 9 II. Historical Framework Difficulties in transporting natural gas over long distances have historically made markets regionally based. Natural gas markets are centered at regional ‘hubs’ where marketers buy and sell gas for storage, distribution and consumption. Perhaps most importantly the hub is where a regional base price is established. For the purpose of this study, we will look specifically at the North American hub, the Henry Hub, and the United Kingdom hub, the National Balancing Point. Henry Hub (hereafter, HH) is located in Erath, LA at the intersection of thirteen pipelines, nine interstate and four intrastate. The facility is maintained and operated by Sabine Pipe Line Co. which currently has the ability to move 1.8 Bcf/d across the hub3. The schematic for HH can be seen in Figure 2.1: Figure 2.1 Prices across the US and North America (NA) are strongly linked to prices at HH and are usually calculated by taking the price at HH plus a basis margin that accounts for further regionality including the availability of further transportation and its associated costs. 3 Sabine Pipe Line. Available at: http://www.sabinepipeline.com/public/henry.asp 10 The take-away capacity shortage has recently depressed wellhead prices in regions like the Rocky Mountains in the US and could impact prices in the Barnett Shale by the end of 2008. In theory, the National Balancing point (NBP) functions in much the same way and performs many of the same functions as HH. One main difference tells the story that separates the two; NBP is a virtual market and does not actually have a physical location like that of the HH in Louisiana. While it could be said that NBP is centered around the city of Bacton on the eastern English coast, it is not a physical location of the hub. The schematic seen in Figure 2.2 shows not only the NBP design, but also the National Transmission System4: Figure 2.2 Obviously, without a physical location or infrastructure, NBP is not responsible for transiting gas between pipelines or for storage of gas. Instead, it acts as a virtual market 4 Total. Website: www.total.com 11 for the sale and trade of gas. As HH is in the United States, NBP is the pricing and delivery point for natural gas futures contracts for the United Kingdom (UK). Unlike the NA or UK markets, Western Europe (continental) does not exhibit this transparency and thus, there is no market clearing price that we can take for the purposes of this study. For the purposes of pricing in the European Union, the BP Statistical Review of World Energy uses a figure they call CIF, meaning cost plus insurance plus freight. This figure represents only a best guess estimate however as the market doesn’t exhibit the level of transparency seen in the United States or United Kingdom. Without a regional hub like NBP or HH, we can’t possibly establish a transcendent pricing base. It is not abundantly clear how spot cargoes arriving in the continental market would be priced. The resulting prices from these market centers are regional. Comparing historical prices, a significant level of correlation can be seen in price movements, but there is often a significant gap in real price level. Figure 2.35 tracks the prices at HH and NBP from 2001: Figure 2.3 5 Data complied from NYMEX and IPE by Petrobras 12 It is worth noting also, that while prices at HH are set in US Dollar per million British Thermal Unit (MMBtu), also referred to as USD per dekatherm (Dt), prices at NBP in contrast are quoted in pence per 100,000Btu (therm). Further contributing to the locality of natural gas markets is the fact that for a long time, gas could only be transported significant distances via pipeline, which had to be constructed and interconnected with the transportation grid within a market. According to the US-based Energy Information Agency (EIA), in 2005 the thirty largest U.S. interstate natural gas pipelines had a capacity of approximately 115,000 MMcf/d and covered over 163,000 miles in total6. Such a system of pipelines, in combination with intrastate pipe, is what enables the efficient transport of natural gas across the United States. Similarly complex systems exist in the United Kingdom and in the European continent. The obvious shortcoming of such a system is that the gas in these systems cannot be moved to other markets where it may be able to fetch a higher price for its seller and fill an unmet demand. One article from 2006 which appeared in the Petroleum Economist detailed a situation in the UK where the inflexibility of markets lead to notable price spikes. Continental European gas was unable to reach the UK via the Interconnector pipeline where it could have taken advantage of increased demand7. This constraint, it could be argued, hinders the absolute efficiency of the market. According to the BP Statistical Review of World Energy 2007, only 26.1% of NG is traded internationally, by either pipeline or LNG. The preponderance of production is consumed within the domestic market where it is produced. In contrast, 62.7% of the 6 7 Energy Information Agency. Website: http://www.eia.doe.gov/ “Gas price woes.” Petroleum Economist. London: 02-2006. 13 world’s produced crude oil is traded internationally. This fact can be attributed largely to the inability to move the gas efficiently over long distances to far away markets. Of course, relying so heavily on our massive pipeline systems for delivery of natural gas is fine, as long as those pipelines are fed with a sufficient quantity of natural gas from their production sources. The problem is that if domestic and local production rates begin to drop off quickly, those pipelines will not have enough gas to move to meet demand across all sectors. As is discussed in subsequent chapters, decline rates of gas wells in the United States are increasing (steepening) rapidly. Producers have to increase activities just to maintain production. Such a situation cannot and will not subsist New methods of indefinitely before total levels of production will begin to fall. transporting natural will have to become more prominent in order to ensure demand is met in all markets in the future. In an effort to better understand the various sources of demand for natural gas and natural gas products, we can examine three distinct markets for natural gas. The first, and perhaps most obvious, source of demand is that of residential and commercial users. People and businesses around the world rely on natural gas to heat their homes and offices, dry their clothes, cook their food, and to heat their water, among other things. These consumers of natural gas are inelastic to price fluctuations. That is to say that even in the face of rapidly increasing prices for natural gas, their demand would be largely unaffected. In this sector, there is little capability for fuel switching in the short to medium term, leaving consumers more or less at the mercy of market forces and price fluctuations. In the long term, of course, consumers do have fuel switching capabilities. Additionally, the demand for natural gas in the residential and commercial sectors is 14 highly seasonal. Although this trait transcends the majority of global natural gas markets, it is much more acute in this particular segment of the market and warrants some examination. North American natural gas producers operate at a fairly constant production rate throughout the year by utilizing the superior storage facilities in place there. European producers on the other hand vary their production in line with the seasonality of demand because the available storage is minimal. Figures 2.48 and 2.59 plot the monthly gas production in the United States and Europe, respectively: Figure 2.4 US producers used to exhibit much higher seasonality in production prior to about 1993 due to the old style of depletion contracts which basically allowed the purchaser of the gas to dictate the rate of production. Since those contracts are largely a thing of the past, 8 9 HUBBARD, Bob. University of Oklahoma, 2007. HUBBARD, Bob. University of Oklahoma, 2007. 15 production levels remain almost flat throughout the year as producers employ the storage facilities in the US. In the lower demand months of summer, producers move excess production into storage and when demand increases in the winter, they draw from that storage to supplement monthly production. Two specific periods known as Apr-Oct and Nov-Mar (April to October and November to March) are used to refer to the fill and draw storage periods respectively. Of course, mild weather can mean that producers are still filling storage well into November sometimes, but the terms remain unchanged. Figure 2.5 European producers, without the luxury of huge quantities of storage, are forced to vary their NG production to meet seasonal demand swings which result in large part to residential and commercial demand. The industrial demand sector is another major source of gas demand in both North America and Europe. Industrial demand is made up of fuel and power generation for industry (e.g. factories, chemical plants, steel mills) and plants that use natural gas as a 16 feedstock (e.g. ammonia and methanol). They are generally more sensitive to price fluctuation, exhibiting a higher level of elasticity. While they also have limited fuel switching capability, a higher cost of natural gas means a higher overhead. Industrial users are only willing to pay a price for gas up to a point where it eats into earnings until revenue is no longer enough to cover all of their variable costs. Economically this is referred to as the shut down point for a company in the short to medium run. The firm loses less money by shutting down, than by operating. A third, smaller, but fast growing demand sector is that of power generation. Natural gas power generation is gaining favour and feasibility as coal emissions becomes a more prevalent issue. Proposals for construction of new coal plants are being met with staunch opposition. As fewer coal plants are built to replace aging and decrepit ones going offline, power will have to be generated in other ways. One of the most viable and promising is natural gas power generation. At the start of this decade however, the technology for constructing gas fired power plants was severely backordered and slowing growth in the sector. Even now, construction of new gas fired power plants is being slowed significantly by equipment backorder. In addition to these types of plants, a process utilizing gas turbine electric generators can quickly and efficiently generate electricity to fill in at high electricity demand periods during the day. This is known as ‘peak shaving’ generation. Because the generated electricity is being used to bridge a gap in supply for a pre-existing demand for electricity, the inelasticity of demand for natural gas in power generation is significant. Electricity can be generated in a number of ways and there is some fuel switching ability in the power generation sector. The demand from this sector also exhibits some seasonality, but it is opposite to the 17 seasonality seen in residential and commercial demand because it is being used to generate power for air conditioning units in the summer as opposed to heating needs in the winter as is the case for residential consumers. The EIA published their forecast for natural gas demand in each market sector in their Annual Energy Outlook 2007. Their projections are represented in Figure 2.610: Figure 2.6 As can be seen clearly in the graph, the most significant demand growth is expected in the electricity sector. Of course, the actual growth will depend on the viability of other power sources including nuclear, renewables and clean coal technology with carbon capture and sequestration, as well as availability of technology. Having established a relevant historical framework for the natural gas industry, we can examine now the current market conditions. By doing so, we will establish the main producers and consumers of natural gas as well as look at the value chain for LNG and general market trends for LNG. 10 Annual Energy Outlook 2007. Energy Information Agency: Washington DC, USA. 18 III. Current Natural Gas Market Environment On a worldwide scale, the natural gas (hereafter, NG) market has reached a level of maturity that sees fairly slow and steady growth year on year. The most recent figures, published in the BP Statistical Review of World Energy 2007, are of world production at 2865.3 Bcm, up 3.0% from the previous year, and world consumption of 2850.8 Bcm, up 2.5%. While the overall level of natural gas production and consumption are rising at a manageable level, and have been for some years, specific market sectors are seeing more significant changes. This study must consider the growth in market share of LNG specifically. So much attention is being paid to LNG and its ability to play a major role in global NG markets because it has been identified as one of the best options for monetizing stranded gas around the world. If NG is to reach a status of the world’s dominant energy of the future, the effective monetization of stranded gas is necessary as conventional means of production simply will not allow it to reach such levels of prominence. Part of the reason that oil is so dominant in fossil fuels is because it is so easily transportable. Uncomplicated transport and disbursement makes the lean value chain of oil delivery attractive to consumers and producers alike. Operators along the NG value chain must achieve similar characteristics if NG is to compete with oil as the world’s primary fossil fuel. LNG offers a viable option for long distance transport and hence has drawn the attention of global energy markets. 19 Fundamental to understanding LNG markets is understanding the relevance of the Atlantic and Pacific Basins as they relate to LNG trade. Figure 3.111 illustrates the two basins and highlights the major existing suppliers in each: Figure 3.1 The Pacific Basin (PB) demand is dominated by the world’s two largest consumers of LNG, Japan and South Korea. Demand in the Atlantic Basin (AB) is predominantly made up of Western Europe and the United States. As can be seen in Figure 3.1, there is some overlap in the basins. In that overlap exist several LNG producers whose cargoes could feasibly reach consumers in either basin. For the purpose of this study, we focus primarily on AB conditions and market dynamics, but it should be remembered that the PB market is far larger, more mature and competes for at least some of the same cargoes that the AB hopes to secure in the future. As will be discussed at length throughout this study, the LNG market will be constrained well into the next decade by tight supply and liquefaction capacity. The suppliers looking to make significant increases in capacity range in degree of feasibility. ROGERS, Daniel and WEEMS, Philip. Oil & Gas Journal. “Atlantic Basin LNG sees rapid growth; Mideast capacity plays major role” April 2, 200:. pA3 20 11 Chapters V and VI examine specifically two of the AB’s best hopes for substantial LNG supply increases in Qatar and Nigeria. While they are certainly not to be the only sources for new capacity, they are the most noteworthy and deserve special consideration. Also, Chapter VII takes a cursory look at the potential for South American LNG. To better understand the possibility of a market and price convergence in the Atlantic Basin, we need first to take a view of specific dynamics defining the market today. The natural gas market is dominated by several key producers and consumers. Table 3.112 outlines the major players and their corresponding quantities of production and consumption: Producers Russian Federation USA Canada Consumers USA Russian Federation Iran Table 3.1 BCM 612.1 524.1 187.0 619.7 423.1 105.1 It should be noted that while Iran is the holder of great quantities of natural gas, and has a very high level of consumption, it does not play a tangible role, for the time being, in the international gas markets. According to the BP Statistical Review of World Energy 2007, their exports make up less than 1% of their production and they are actually a net importer of NG as they receive a small amount of gas from Turkmenistan via pipeline as well. Russia’s production levels outweigh their domestic demand for gas by some 30% and they pipe a great quantity of gas into continental Europe, providing the majority of EU imports. According to the BP Statistical Review of World Energy 2007, Europe’s pipeline imports totaled 375.05 BCM in 2006, 40% of which (151.46 BCM) came from 12 Data compiled from the BP Statistical Review of World Energy 2007 21 the Russian Federation. Russia’s continued supply to the European market has in fact been an issue of much debate in the past few years. Well publicized disputes with former Soviet States (e.g. Belarus, Ukraine) have caused supply disruptions and led to great speculation as to whether the Kremlin may see European reliance on Russian gas as a possibility for exploitation and use gas supply as a political weapon13. This possibility makes leaders in the EU25 very nervous because Europe is so reliant on imports from Russia. European production is in a precarious state currently as UK production in the North Sea continues its steady decline and Dutch gas production is held constant. The only growth in European production in recent times has come from Norway’s activity in the North Sea. This market insecurity will be the subject of further analysis in following pages. Historically, the natural gas market has been subject to a strong link to the market for oil. Recent years however, have seen that trend fade. In the November 2007 edition of the AAPG Explorer, an article explained: “…escalation of oil prices, coupled with the fall of natural gas prices for the second year in a row, must finally put to rest notions of a law of parity between oil and natural gas prices whose schism has grown throughout the year14.” The divergence of oil and gas prices opens up room for the study of natural gas market specifics, as they are no longer overwhelmingly tied to oil dynamics. Perhaps only in Japan, where contracted LNG is written for a price tied to the Japan Crude Cocktail (JCC) is this not true. 13 WEBB, Tim. “Gas: Russia’s secret agenda energy supply is a ‘political weapon’”. Independent. January 8, 2006. 14 PLATT, Jeremy. AAPG Explorer. “Price Beyond Supply and Demand” November 2007. p62 22 At least as important as who’s producing and consuming what and at what rate, is the issue of costs facing producers. The petroleum industry as a whole has seen rapidly increasing costs for some years now. As economies heat up, so usually, do costs. An entire study could be dedicated to examining how exactly escalating costs have affected different sectors of the oil and gas industries, but for the purpose of this investigation, we are concerned specifically with the costs facing the LNG value chain. A breakdown of costs along the chain can be seen in Figure 3.215 as composed by the Center for Energy Economics for The University of Texas at Austin: Figure 3.2 Liquefaction represents by far the most significant cost along the value chain. Figure 3.2 estimates costs for liquefaction ranging between $0.8-$1.20/MMBtu, but those figures correspond to existing plants, those which have already come online or are in advanced stages of construction. The reality facing new plant proposals approaching final investment decision is of costs which will likely have risen by a factor of two. Introduction to LNG: An overview on liquefied natural gas (LNG), properties, organization of the LNG industry and safety considerations. Center for Energy Economics at the Bureau of Economic Geology for the University of Texas at Austin. January 2007. 23 15 Liquefaction costs will likely range from $1.50-$2.50/MMBtu and total costs will approach the $3.50-$5.00/MMBtu range for the entire chain16. International oil companies (IOCs) and financial institutions looking to make major investments in LNG liquefaction projects will surely have to weigh not only the rapidly increasing capital costs that these increases will spur, but consider also the uncertainty of geographic political stability present in so many of the new project sites (i.e. Middle East, West Africa, Russia, South America etc.). Risk management specialists will necessarily consider the changing risk/reward scenario when making final investment decisions and unfavourable cost escalation may hinder continued investment in liquefaction projects. Longer shipping routes will correspond to higher costs as well, even with achieved economies of scale. A cargo headed to the US Gulf Coast from Qatar for example would likely add $1.50-$1.60/MMBtu. Looking five years down the line, total value chain costs will likely run over $5/MMBtu. Such escalating cost levels certainly compel developers to closely examine any investment decision as it concerns the manufacturing of new liquefaction capacity. Costs have risen so dramatically that in numerous producing countries, unanticipated cost escalations have altogether scrapped some projects for liquefaction. The questions for those supplying the financial capital are whether or not the market price will remain at a level which will allow sufficient recuperation of outlaid funds and whether geopolitical factors will remain favourable. Naturally, the costs along the chain are independent of cargo destination except in the case of shipping. Intuitively, the further a cargo has to travel, the more expensive the product in terms of $/Btu. It is worth noting however, that the LNG shipping process is beginning to see the positive effects realized from economies of scale. LNG tankers are 16 HUBBARD, Bob. University of Oklahoma, 2007. 24 fast growing to record capacities. Samsung Heavy Industries is currently constructing the world’s largest LNG tanker to date. With a projected capacity of some 266,000 m3, the new ship will be about twice the size of the average tanker17. The majority of these new mega-tankers (called Qmax and Qflex) will be dedicated to moving the enormous LNG trains coming online in Qatar (see Chapter V) in the coming months and years. Dramatically increased shipping capacities will undoubtedly play a role in overall market dynamics as far as their ability to yield positive economies of scale and will be an interesting and developing factor in LNG markets. Regasification capacity by contrast is much cheaper to develop. As will be discussed shortly (and is displayed in Figures 3.5 and 3.7) consuming countries are building regasification facilities at a pace which wouldn’t seem to match up to increases in liquefaction. Consumers can do this because the costs of developing regasification are not prohibitive. They would rather have excess capacity than find themselves locked out of the market for a shortage of capacity. According to Cedigaz of Paris, worldwide LNG imports rose some 7.7% annually for the period 1996-2006. Both the US-based EIA and the Paris-based International Energy Agency (IEA) predict substantial continued growth in LNG trade, but there is much debate concerning the various estimates as continued accelerated growth in the next few years will not be possible because of liquefaction constraints. Questions surround which markets will be most favourable for LNG imports. Some analysts see vast SETHURAMAN, Dinakar. International Herald Tribune. “Samsung to start building giant LNG tanker” April 3, 2007. 25 17 underutilization in US and EU LNG terminals. As can be seen in Figure 3.318, the EIA has a rather ambitious view of the increasing role of LNG for US imported gas supply: Figure 3.3 Figure 3.3 is based on the assumption that the US will have to find new sources of imports for natural gas as their own domestic production remains relatively flat and Canada drops their exports to the US as a result of increased domestic demand resulting from the energy intensive process of producing oil from the tar sands in Alberta. While most experts would not argue with the general idea presented in Figure 3.3, significant debate surrounds the magnitude of the rise of LNG. The growth line for LNG imports estimates US imports above 2 Tcf, or approximately 6 bscf/d, which is nearly three times the 2006 level. Such monumental growth seems unlikely as worldwide liquefaction capacity simply cannot support it. While growth in LNG imports seems assured to come, it will be slow to materialize as liquefaction capacities increase little by little. It should be noted also that while the EIA is a readily available source of market forecasts in the US, their predictions are far from infallible. Primarily, there are differing opinions on 18 EIA Annual Energy Outlook 2007 26 whether or not LNG cargoes will arrive at US terminals. It has been pointed out by those subscribing to such a theory, that building capacity does not guarantee supply. Examining Figures 3.4 - 3.7, we gain a sense of the bigger supply/demand picture in North America and the EU25+: Figure 3.4 In the US scenario (seen if Figure 3.419), rising demand must be met in the face of a relatively constant level of lower 48 production. Decline rates are increasing dramatically (see Figure 4.3) meaning producers must drill more wells just to maintain current levels of deliverability. As this trend continues, there will be an inevitable decline in total production as drillers are ultimately unable to keep up with the increased declines. Additionally, the aforementioned declining Canadian imports due to increased energy intensive industry activity there along with the delays in Alaskan gas deliverability will challenge the North American gas equilibrium. The obvious answer seems to be that LNG will fill any potential gap. The debate surrounds how significant a part LNG will actually play. It is fairly certain that the US shall not be in want for 19 EIA Annual Energy Outlook 2007 27 regasification capacity. Figure 3.520 illustrates just how far regasification capacity is set to outpace LNG imports in North America: Figure 3.5 It is certain that not every facility outlined in Figure 3.5 will reach completion. Already cancelled projects include ‘Corpus Christi-Ch’ and ‘Bear Head’. That said, there will almost certainly be significant overcapacity in the US. But again, the existence of regasification capacity does not mean that cargoes will be lining up at the port. The reality facing NA LNG importers is that they will have to play by international pricing rules if they hope to win shipments in what will be an increasingly competitive AB. While some producers are geographically predisposed for exporting to certain markets, there is certainly plenty of cross basin trading and the price competition will dictate final destination for uncontracted cargoes. Remember, producers are out for themselves, they are looking for revenue maximization, and if that means Trinidad sends a shipment across 20 HUBBARD, Bob. University of Oklahoma, 2007. 28 the Atlantic Ocean to Spain as opposed to just north across the Gulf of Mexico, then that is what they will do. Figure 3.6 As is shown in Figure 3.621, the EU25 is facing similar challenges in their supply of natural gas. The UK sector of the North Sea has been on decline for years. European gas supply is greatly dependent on piped gas from Russia and on LNG shipments and pipeline gas from North Africa. While domestic European production still accounts for more than 50% of total NG consumption, every European gas producer save Norway saw a decline in production from 2005 to 2006 according to the BP Statistical Review of World Energy 2007. Further detracting from the European gas equilibrium is the fact that according to the Petroleum Economist, the Norwegian Parliament did not approve expansion of Troll gas sales which would have increased European indigenous 21 EIA Annual Energy Outlook 2007 29 production levels22. Europe received 151.46 Bcm of imported gas from the Russian federation and 43.31 Bcm of pipeline imports from North African countries. As mentioned, the reality in Europe is that the supply from Russia is not entirely reliable. Russia’s willingness to cut supplies in a political falling-out could be detrimental to the continent, especially during the cold winter months. Because of the inability of European countries to rely on Russia completely, the EU25 is increasingly looking to step up their LNG imports from non-Russian sources, namely the Middle East and Africa. Like importers in North America, the Europeans are building their regasification capacity in anticipation of LNG trade growth, seen in Figure 3.723: Figure 3.7 As the established player in the AB, with more than three times the LNG imports of NA, Europe would seem to be in the driver’s seat moving forward in securing new LNG 22 23 Petroleum Economist. London: 12-2007. HUBBARD, Bob. University of Oklahoma, 2007. 30 cargos. Furthermore, Europe has a significant transport advantage, especially in cargoes coming from Qatar, where LNG volumes are growing substantially. Still, European LNG importers will fight the same tight supply market in the AB through at least the middle of the next decade and struggle to run regasification facilities at capacity. The worldwide LNG industry is inarguably still in a growth stage, and capacity numbers are ever changing. At current however, the bottle neck of the industry lies clearly with liquefaction. As reported by the Petroleum Economist in March 2007, represented in Figure 3.8, regasification capacity is a little less than twice that of liquefaction24: Worldwide LNG Capacity 400 350 300 Mt/y 250 200 150 100 50 0 Export Import Figure 3.8 As mentioned previously, it is this disparity in the market coupled with the need for countries to increase their LNG imports to maintain the supply/demand balance that will lead to increased competition for cargoes and could force market convergence. At least for the foreseeable future, LNG producers will enjoy stiff competition for their product and receive favourable contract conditions wherever they finally send a 24 “Dawn of a global market.” Petroleum Economist. London: 03-2007. 31 contracted quantity. The picture certainly also begs the question of why there are still so many regasification project proposals. The answer, simply, is that energy firms are looking to LNG as the future of the petroleum industry and believe that building regasification plants ahead of liquefaction may in fact, put them in a better position to secure the cargoes early. Additionally, as discussed previously, the relatively low costs of building regasification capacity entices consumers to add facilities as a type of insurance that they will not be locked out of the market when LNG export capacity does catch up. It will be interesting to observe utilization levels in regasification facilities in the coming years. Cedigaz of France has compiled data on potential global liquefaction capacity growth seen below in Figure 3.925: Figure 3.9 25 Cedigaz. Website: www.cedigaz.com 32 Of course, the growth projected by Cedigaz must be considered with regard to growth in regasification as well. Should world supply of LNG in fact reach these projected levels, a much more balanced market will prevail. Until such time however, short supply will define the market. The incremental increases in supply will all come from a group of potential suppliers, some of which are covered in Chapters V, VI and VII, on whom the balance of the LNG scenario depends. Recent years have seen smooth and largely uninterrupted growth which one can only hope will continue. Geopolitical risk factors abound however. The instability of producing nations could potentially lead to project delays, nationalization or cancellations. The much discussed possibility of the emergence of a gas cartel modeled after OPEC has perked the ears of gas consumers everywhere. Lead by strong rhetoric from the likes of Iran, Russia, Venezuela, Nigeria, and to some degree, even Qatar has been feverishly covered in international media. The gas cartel is most notably championed by Vladimir Putin who it is feared wants to use the power such a cartel could wield to undesirable political ends. In reality, the likelihood of such an alliance between the world’s gas giants is low. Gas lacks the global market platform which oil enjoys and OPEC exploits. OPEC attempts to control production among the world’s most prolific oil producers in order to exercise control over world oil prices. Natural gas, as we know, does not have a global pricing platform. The regionality of gas markets would make the efforts of a gas cartel ineffective. For the time being, the dreams of Putin’s Russia and his allies are largely just that, dreams. While the vast majority of LNG is bought and sold under the pretext of long term contracts, the spot market will act as a buffer between actual production and contracted 33 production. Because it is directly related to the possibility of market convergence, this study will focus on the environment of the LNG spot market. Traditionally, LNG was produced with the presence of a long term contract, usually 20 years. The contract outlined an Annual Contract Quantity (ACQ) and assured not only the consumer of secured supply, but gave the producer the assurance that their investments in the capital intensive LNG chain would be recouped at a set rate. Not surprisingly, it was the liquefaction operators that were most insistent on long term contracts in the past as it is they who bear the most significant capital risk. However, as the market heats up and competition is increasing, producers are less worried about security of demand and are looking more and more to keep a certain level of their production open to arbitrage for entry into the spot market where it will go to the highest bidder. Arbitrage markets develop only if a certain set of conditions are met. The diagram in Figure 3.1026 outlines the necessary conditions and how they contribute to the existence of an arbitrage opportunity: Figure 3.10 26 LESNIK, Robert. Commercial Aspects of LNG. ConocoPhillips: 2007 34 The diagram displays the need for surplus in regasification, rights of diversion, surplus in shipping, and surplus in LNG supply. If these elements are present, an opportunity for arbitrage is present. An analysis of current conditions as they relate to these elements may provide an understanding of chances for arbitrage in today’s market. As discussed, surplus capacity in regasification will not to be a problem in the near to medium term. Likewise, tankers are being added to the world fleet at a fast pace and it is unlikely that shipping will be a bottleneck in LNG. Diversion rights are being written into new contracts as a way for producers and consumers to hedge their commitments and are becoming much more the norm than in years passed. The most significant constraint then will be the supply of LNG, liquefaction capacity. New trains are coming online, slowly but surely, but the reality is that those new trains are still moving towards closing the preexisting gap between regasification and liquefaction. Any significant surplus in supply is many years off. Not only do these conditions need to exist in the market, but they must coincide within an approximately 48 hour period for an arbitrage opportunity to be feasible27. Seeing how these conditions can form opportunity for arbitrage, makes it clear just how difficult it will be to see the spot market expand quickly and appreciably. The potential revenues for producers in such a market are enormous. This attitude is displayed by LNG producers the world over. In Perth, Australia, the Woodside Energy LNG Project is forecasting global shortfalls in LNG supply at least through the year 2015. As a Petroleum Economist article from April 2007 reports: “Woodside is already keeping back a percentage of its LNG production for trading purposes. A third of the output of Pluto LNG’s first train, for example, is being retained for short term and spot trade. Voelte (Woodside CEO) says 27 LESNIK, Robert. Commercial Aspects of LNG. ConocoPhillips: 2007 35 the firm will probably do the same with its share of the Greater Sunrise LNG project.28” The Chief Executive went on to explain that while the PB is the natural market for Australian LNG, his company was looking to increase its AB supply capability and play a more active role on the spot and short term markets by purchasing and selling cargoes and perhaps even taking equity positions in LNG terminals in other regions. It should be noted however, that both the Pluto and Greater Sunrise projects have yet to even reach final investment decision. They are more than five years from coming online. Still, these Australian interests reinforce the idea that LNG is globalizing the natural gas industry like never before. Before LNG, countries like Australia had very few options for monetizing their natural gas resources. Only now can they begin to contemplate entering markets that before seemed a whole world away. The following sections of this study will examine exactly how the increased global nature of the market might bring about some market convergence. convergence within the AB. Specifically we will consider the possibility of a price 28 “They’re all after one thing.” Petroleum Economist. April 2007: London. 36 IV. The Case for Natural Gas Price Convergence in the Atlantic Basin Traditionally, the AB has been defined as ‘all land masses that lie adjacent to or within the Atlantic Ocean and its marginal waters29’ (i.e. Baltic Sea, North Sea, Black Sea, Mediterranean Sea, Gulf of Mexico, etc). We must consider, in this the age of globalizing LNG markets, that the AB actually be defined as ‘the segment of the world LNG market capable of commercially producing or consuming LNG in or adjacent to the AB30.’ AB LNG started in 1964 with the first shipment arriving in the UK at Canvey Island, followed some four years later by the first shipment to the US at Massachusetts from Algeria in 1968. What followed was a period of relatively quick growth for LNG in the AB that slowed before it seemed to really get going. The LNG market in the United States collapsed in the 1980s and European demand slowed significantly31 as reserves in the North Sea were exploited, leaving the LNG exporters to focus primarily on the flourishing market in the PB. However, some thirty years after it began, the AB LNG markets started to heat up again. For reasons discussed in Chapter III, both European and North American demand for LNG have seen significant increases and seem to be sustainable. Figure 4.1 shows the growth of LNG imports in the AB from their start in the mid 1960s through 2003 as they compare to that of the PB. What is immediately noticeable is the dominance in volume traded of the PB over that of the AB: ROGERS, Daniel and WEEMS, Philip. Oil & Gas Journal. “Atlantic Basin LNG sees rapid growth; Mideast capacity plays major role” April 2, 200:. pA3 30 ROGERS, Daniel and WEEMS, Philip. Oil & Gas Journal. “Atlantic Basin LNG sees rapid growth; Mideast capacity plays major role” April 2, 2007: pA3 31 JENSEN, James. The Globalization of LNG Trade. Presentation to the IEA. May 2005. Available at http://www.iea.org/Textbase/work/2005/LNGGasMarkets/session_3/1_James_T._Jensen.pdf 29 37 Figure 4.1 In addition to general growth trends through 2005, Figure 4.132 points out the ‘false start’, or rapid rise, in US imports before they slowed dramatically. Recent growth in North American LNG imports is widely regarded not as another anomaly or ‘false start’, but rather a persistent trend and indication of things to come. The EIA explains the growth of LNG imports in the AB: “In the 1980s and early 1990s, indigenous natural gas supplies were abundant for most countries in the Atlantic Basin, and pipeline gas readily available. It was difficult for LNG to compete and, as a result, LNG imports into the Atlantic Basin grew very slowly.33” As discussed in previous sections, neither the EU nor the US has sufficient domestic production or pipeline supplies to fill their growing demand for natural gas any longer. Perhaps until some of the unconventional gas sources are made more commercial, LNG will be the most relevant option. JENSEN, James. The Globalization of LNG Trade. Presentation to the IEA. May 2005. Available at http://www.iea.org/Textbase/work/2005/LNGGasMarkets/session_3/1_James_T._Jensen.pdf 33 EIA. World LNG Market Structure. 2004. Available at http://www.eia.doe.gov/oiaf/analysispaper/global/lngmarket.html 38 32 Figure 4.234 displays clearly the relationship in volumes and growth between the PB and AB. Again, it is plain to see that the growth of LNG trade in the AB has caught up to and surpassed that of the PB: Figure 4.2 Supplemental to Figure 4.2, data for 2006 has come available. According to the BP Statistical Review of World Energy 2007, the PB trade level rose to 99.7 mtpa in 2006, growing at over 5%, and the AB saw nearly 13% growth to 55.4 mtpa. While the AB sees only 56% of the trade as that of the PB, it is experiencing growth at more than twice the rate of the PB. This trend is forecast to remain for years to come as it is believed the PB market has reached a maturation stage. The quick growth being seen in the AB is leading many to believe that new trains being brought online in the Middle East will be more than can be soaked up in the PB and instead will be moved into the AB. The competition between markets will be the primary driver behind a potential convergence of prices for LNG within the AB and globally. Both North American and 34 HUBBARD, Bob. The University of Oklahoma: 2007 39 European consumers face similar scenarios for filling their natural gas demand. In the US, domestic production has remained fairly constant, but this is in the face of quickly increasing decline rates. Figure 4.335 illustrates the decline rate increase in the steepening of the progressive curves. In simple terms, producers must work a lot harder to keep their constant production levels. It remains to be seen just how long this can go on before the inevitable drop in domestic production occurs. When the absolute production numbers do begin their decline, demand will almost assuredly not trend downwards in synch. Instead, the US will be forced to source even more imports to fill the gap. Figure 4.3 Europe faces a similar dilemma with the supply currently coming from the UK. EU demand will be propped up by increasing Norwegian production and constant Dutch production, if it can be maintained, but it is not possible for the entire market to be supported by gas from Norway’s increases especially considering the aforementioned 35 EOG Resources, Inc. Website: www.eogresources.com 40 Norwegian Parliament’s decision to curb Troll gas sales expansion. As previously discussed, Russian pipeline imports will continue to be a main source of natural gas for the Euro Zone, but the lack of reliability forces the EU to source supply from more reliable producers, specifically LNG imports. Many suppliers around the globe, even outside of traditional AB suppliers, are looking to the AB as an attractive market for their product. Woodside, the Australian LNG project, is looking to play a bigger role in the AB and become active in the spot market specifically, by buying and redirecting cargoes36. As Woodside looks to bring additional capacity online, they must consider that the PB may not be able or willing to soak up the entire increase. By becoming active in the AB spot market, nontraditional AB suppliers will look to step in as AB consumers try to secure supply for their LNG imports. The AB has a mix of divergent points of import and pricing indexes. In North America, most LNG and natural gas contracts are formulated with respect to the trading price at the Henry Hub (HH). In the UK, the National Balancing Point (NBP) is often the point of price indexing. Traditionally, little correlation has existed between these two pricing hubs, but as discussed, competition for short term and spot cargoes could force these index prices to fall in line with one another. The gap in the pricing structure environment leads to price competition in which LNG volumes find their way to their ultimate markets based solely upon comparative seasonal price fluctuations. In the US, great storage capacity allows summer cargoes of LNG to be brought in when demand is deflated and prices are softer. The LNG can be regassified and put into storage for use in the winter. Europe however, which doesn’t have the luxury of ample storage ability, 36 “They’re all after one thing.” Petroleum Economist. April 2007: London 41 must arrange shipments with expected demand swings. In the most recent years, inflated EU prices have stunted US LNG import growth. Spanish drought coupled with harsh UK winters, have meant a sustained high demand for LNG in Europe. It is not likely that demand will sustain their recent levels however37. As European demand recedes to normal levels, NA will step up their competition for cargoes. In past years, Europe has enjoyed a relatively lower price of LNG than the US. Although prices on the NYMEX, where US prices can be tracked in the futures market, and those on the ICE, where international prices are tracked, generally move in stride with each other, the NYMEX is consistently above the ICE as can be seen in Figure 4.438: Figure 4.4 Over the last 15+ years, prices have undergone limited convergence during certain periods of time. Of course there will always be the occurrence of anomalies in the market and price departures for short periods of time in response to specific market and ROGERS, Daniel and WEEMS, Philip. Oil & Gas Journal. “Atlantic Basin LNG sees rapid growth; Mideast capacity plays major role” April 2, 2007. pA3 38 LNG Express. Vol XVII, No. 22. Houston, TX: November 17, 2007. 42 37 geopolitical factors, but what may occur, given the rise of sufficient market synergy, is a general reconciliation of the gap that has existed between the two. We can also note from Figure 4.4 that on the whole, global LNG prices have been trending upwards as a result of liquefaction bottlenecks. As previously mentioned, the constraint in the LNG market is at liquefaction. Because of the preponderance of LNG produced in the Middle East, which in theory can be directed either to the AB or PB, consumers in the AB will not have to compete only with themselves, but with demand sources in the PB, namely Japan and Korea who are hugely dependent on LNG. In a 2006 article which appeared in the Petroleum Economist, it was reported that Qatar made 6M tonnes of LNG initially intended for North America available to Asian consumers willing to pay a premium39. AB consumers will be forced to adapt to this tight supply market in the coming years at least through 2013, when analysts expect sufficient increases in production to start softening prices. This competition between markets will be the primary driver behind a potential convergence of prices for LNG within the AB and globally. The convergence of AB LNG prices will depend largely on the environment of competition which prevails. The final destination of cargoes which enter the short term market will depend on what market will bring the highest price to the seller. A bidding war will establish the price of a cargo. It is not hard to see how a convergence of prices will most certainly emerge in the arena of short term and spot market cargoes in the AB. As traditional 20 year contracts come to expiry in the coming years, it is likely that suppliers will move to preferring shorter terms to afford themselves the luxury of repricing more often. A five to ten year contract would ensure the supplier of not being trapped into selling LNG below actual market value. As it becomes clear that supply will 39 “US facing price pressure.” Petroleum Economist. November 2006: London 43 be short at least into the near future, suppliers would be best served to avoid traditional long term contracts. The reality however, is that as spot and short term transactions make up only about 10% of LNG trade movements40, the pricing activities within it will not be significant enough to affect overall LNG prices, which will likely continue to operate on a longer (even if shortening) term basis. Figure 4.541 shows just how little LNG is traded on a short term basis on a global scale: Figure 4.5 In order for a converged price resulting from short term transactions to have an overreaching affect on the LNG market, short term volumes will have to increase dramatically. A sufficient level of short term transactions is a long way off, and in fact, may never be reached if either suppliers or consumers push stubbornly for the preservation of longer term contracts. LNG is still in the growing stages as a fuel source and market, and thus it is impossible to predict how it will evolve, but for now, spot “Dawn of a global market.” Petroleum Economist. March 2007: London JENSEN, James. The Globalization of LNG Trade. Presentation to the IEA. May 2005. Available at http://www.iea.org/Textbase/work/2005/LNGGasMarkets/session_3/1_James_T._Jensen.pdf 41 40 44 market transactions appear to be destined to play a small, albeit growing, role in the overall LNG market. In the interest of market efficiency, the predominance of short term contracts would be ideal. To allow a fluctuating price based on market demand and supply would be to in essence allow market forces to take over. From a point of view in economics, a pure market driven equilibrium is the most efficient solution. When dealing in such capital intensive, and hence risky, ventures though, that is not what best serves the interests of concerned parties. Investors (producers) need assurance of capital recovery and will continue to design the market to fill this need. In the same way, consumers (importers) are so reliant on filling their demand for NG by any means necessary, and their price elasticity is so steep that they are willing to accept an altered equilibrium to assure delivery of the product. Although both these needs would be fulfilled in a dream world, perfect competition, market equilibrium, long term contracts and market manipulation are a way for those involved to lower their risk exposure. It is not unreasonable to consider also whether or not LNG could become the price setter for the overall natural gas market. Market conditions ultimately will dictate whether LNG drives the overall NG market, but it is worth considering how this reality may come about and what market dynamics would have to change. In the same way that spot transactions will have to gain market share to affect the LNG price, LNG will have to gain market share in natural gas trade if it is to affect overall NG prices. As LNG currently makes up just 28% of global natural gas trade42, it is not currently the price driver in NG markets. Only if LNG capacities are greatly increased in coming years will it be the dominant factor in determination of NG prices. As long as the dominant source 42 BP Statistical Review of World Energy 2007 45 of worldwide natural gas is made up of domestic production and pipeline imports, LNG will remain a secondary market and its pricing will not govern global NG prices. Figure 4.643 shows the dominance of pipeline imports in international NG trade: Figure 4.6 It is important to keep in mind that price convergence will occur only when markets are synched. LNG has an inarguable ability to bring markets together. As the current situation evolves and the forces of globalization take hold, it is easy to see how markets which exist in all corners of the globe will come into coexistence and function in harmony. The reality is that although the markets are geographically and structurally diverse, they are all driven by the same thing, the need to source natural gas. Eventually, that underlying need will bring the markets together as gas becomes more transportable and the options for suppliers grow. All the same, substantial growth is needed to affect these global or basin-wide changes in the fundamentals of pricing. At least in the short to medium term, price convergence is improbable. The short supply of LNG forecasted through at least the middle of the next decade will hinder the growth of the LNG spot markets, leaving the pricing mechanism driven by the prevailing 43 Data compiled from the BP Statistical Review of World Energy 2007 46 longer term contracts. Until ample supply allows the spot market to grow sufficiently, basin price convergence will be impossible. 47 V. A Special Look at Qatar The small Emirate State of Qatar lies in the shadow of the world’s oil giant, Saudi Arabia, on the Persian Gulf. Only recently has Qatar begun to emerge as an energy giant like its neighbor. As the world’s third largest possessor of natural gas, and keepers of the world’s largest unassociated gas field, the North Field, Qatar is enjoying increased stature as it pertains to the energy world. As a relatively stable and low risk environment for petroleum production, it is fast becoming a favourite place for IOCs to bid for contracts in development of the gas sector. In 2006, Qatar surpassed Indonesia to become the world’s single biggest exporter of LNG, shipping some 31.09 Bcm44. According to a report given in 2006 at the 23rd World Gas Conference in Amsterdam by an executive from Qatargas, Qatar is poised to increase its production three fold to 102 Bcm by 2010. The expansion projects which will take Qatar to this level are summarized in Figure 5.145: Figure 5.1 44 45 BP Statistical Review of World Energy 2007 ABUJBARA, Alaa. “LNG Supply with Emphasis on Qatar’s Role in Global LNG Market.” Presented at 23rd World Gas Conference, Amsterdam. QATARGAS Operating Company, Ltd. 2006. 48 The completion of each successive train continues to bridge the gap between LNG liquefaction and regasification that was highlighted in previous chapters. For the time being, Qatar has ceased further exploration and production (hereafter, E&P) projects in the North Field, but by no means is it believed that these trains represent a production maximum for the tiny Emirate. The rulers of Qatar however, believe that they must pursue further E&P projects responsibly with regard to preserving their precious resource for future generations of Qatari people. Still, their incredible pace of projected production growth has thrust Qatar into the front and center of the discussion concerning global LNG. ExxonMobil (XOM) is one IOC that is heavily involved with bringing online new capacity in LNG liquefaction in Qatar and has presented their view of the role Qatar will play in meeting the growing need for LNG in a report published in September 2007. The contents of that report paint a picture of an emerging Qatar which will hold significant weight in the future evolution of LNG markets, both in the PB and AB. XOM’s assertions are predicated on their forecast of a need for some 90 bscf/d of new supplies by 2030 globally. Figure 5.246 outlines that vision and extrapolates the relative roles of traditional supplies versus LNG supply in filling said demand gap: 46 DODDS, Alex. “ExxonMobil in Qatar.” Presentation published September 2007. ExxonMobil Qatar, Inc. Doha, Qatar. 49 Figure 5.2 As it relates to Qatar, it should be noted that XOM forecasts about half of the 90 bscf/d to be filled in the form of new LNG. It is this ‘built in’ demand for their product that puts Qatar in a dominant position with massive expansions coming online. It does not appear as though Qatar will ever find themselves peddling LNG to the un-wanting. Followed by Nigeria (covered in subsequent section) and Australia, Qatar has positioned itself to be the world’s largest LNG provider for many years to come. The following table shows the projected LNG exports for ten of what will be the world’s premier LNG producers in the coming years47: 47 DODDS, Alex. “ExxonMobil in Qatar.” Presentation published September 2007. ExxonMobil Qatar, Inc. Doha, Qatar. 50 Figure 5.3 Qatar is afforded a number of favourable conditions, both of their own doing and from nature. They are summarized in the following paragraphs. First, as we’ve noted, Qatar is blessed with massive resources. With reserves of some 900 Tcf, Qatar is positioned to be a player in the petroleum markets of the world for generations to come. Qatar has also cultivated a stable, supportive government which realizes the potential of its resources and acts not only in the best interest of its citizens, but acts fairly and amicably with IOCs and consumer nations and has not been known to use their position as an energy rich country as a political weapon. In an age of supply uncertainty, an ally such as Qatar is invaluable to any energy dependent nation or economy. The strong IOC partnerships that Qatar has forged, such as that with XOM, bring unparalleled technical expertise as well as sound management to their national infrastructure. With such cooperation, Qatar has ensured the efficient progress of its ambitious ramp up in production. The state run companies Qatar Petroleum, Qatargas 51 and Rasgas have multiple partnerships including those with ExxonMobil, ConocoPhilips and Shell. Qatar also brings in service companies like Schlumberger to lend exceptional skill to exceptional challenges. Many oil and gas companies around the globe are looking to Qatar and trying to forge new relationships there in an effort to increase their presence on the worldwide energy scene. Qatar has also been the beneficiary of steady investment flows into their LNG industry. Investments into infrastructure, upstream, midstream and downstream have yielded higher achieved efficiency, highlighted by the massive train sizes being brought online in Qatar and around the world. Figure 5.448 plots the trend of train sizes in LNG exporting countries: Figure 5.4 Furthermore, new mega-tankers have been designed and built to service these huge trains of LNG. The Q-max and Q-flex vessels are two of the world’s largest tankers 48 HUBBARD, Bob. The University of Oklahoma: 2007 52 and are both dedicated to moving Qatari LNG. The picture in Figure 5.549 is an example of one of the newest Q-Max vessels: Figure 5.5 It is the economies of scale which mega-tankers can provide that make new ultra-long haul LNG shipments possible and economical. These developments contribute to the focus on economies of scale that Qatar is working to achieve. A study by ConocoPhillips estimates that as capacity increases, costs increase by a power of 0.6550. As long as Qatar can continue to add capacity to train size with such profitable economies of scale, the limits of magnitude will be purely technical. Of course, if costs escalate out of control, the positive effects of economies of scale can be eroded. Perhaps the most significant advantage that Qatar has, beyond its natural resources, is its geographic location. Strategically positioned almost mid-way between the PB and AB, Qatar has the ability to send cargoes to ports ranging from the US Gulf 49 50 Nakilat, Qatar. Website: www.qgtc.com.qa AVIDAN, Amos and MARTINEZ, Bobby and VARNELL, Wayne. “Natural gas liquefaction process designers look for larger, more efficient liquefaction plants.” ConocoPhillips – Bechtel Joint Study Publication. 2003 53 Coast to Korea. Figure 5.651 shows available export paths. This globally advantageous positioning will allow Qatar to pit PB and AB consumers against one another and fetch globally superior pricing for their shipments. Of course, demand restraints vary between the basins, but the underlying needs are the same regardless of the way contracts are priced and what they are tied to. Competition will breed synergy and Qatar is in the ideal location to exploit the emerging market. Figure 5.6 What these advantages add up to for Qatar is a particularly bright future in the international LNG market. As they ramp up production, they will be the world’s premier player in the fast expanding LNG market. Even though they are unable to move much of their gas to market via pipeline, their investments in LNG have provided them the opportunity to monetize gas that not so long ago, would have been classified as stranded. 51 DODDS, Alex. “ExxonMobil in Qatar.” Presentation published September 2007. ExxonMobil Qatar, Inc. Doha, Qatar. 54 VI. A Special Look at Nigeria Like many petroleum rich countries, Nigeria relies heavily on its oil and gas sectors as a source of GDP. As reported in the BP Statistical Review of World Energy 2007, Nigeria has the world’s seventh largest reserve volume of natural gas at 183.91 TCF52. It is also worth noting that of the six countries above them on that list only Qatar currently also exports LNG (see Chapter V). Russia, by far the world’s largest holder of natural gas reserves, is developing LNG export capacity as well however. To direct the development of the LNG industry in Nigeria, the government formed a joint venture between its state-run national oil company, Nigerian National Petroleum Corporation (hereafter, NNPC), Shell, Total and Eni. The joint venture formed Nigeria LNG Limited (NLNG) whose first shipment of LNG left the Bonny Island Terminal in 1999. NLNG has been slated with the task of efficiently building the LNG industry in the country and exploiting the potential for the industry. All liquefaction trains in Nigeria are run by NLNG. The task is enormous considering just how much potential Nigeria holds as an AB supplier and the global importance such stature holds. As natural gas is concerned overall, Nigeria is looking to generate as much revenue from gas related activities as from its existing oil businesses53. In this aim, power generation facilities and LNG have been given priority. NNPC has identified LNG as the largest growth and earning potential available to the country moving forward. Their commitment to increasing the role of NLNG is indication of their beliefs that LNG will continue to grow as a market sector in the energy world. 52 53 BP Statistical Review of World Energy 2007 Nigerian National Petroleum Corporation. Website: www.nnpcgroup.com 55 Nigeria’s current LNG industry produced some 17.58 Bcm in 200654, making them the third largest supplier realistically capable of moving shipments into the AB behind Qatar and Algeria. Of course the AB is also supplied by Trinidad & Tobago, but their production is near its maximum already. The ambitious growth in production which NLNG has outlined includes a total of ten trains. Train 6 is due to come online in the fourth quarter of 2007, whereas Trains 7-10 are hoping for completion before the end of the decade according to NNPC. Realistically however, Trains 7-10 have not yet reached final investment decision and will require another four years for construction beyond that. NLNG likely won’t see additional capacity beyond Train 6 before 2012. Figure 6.155 shows the increased production brought by each train through Train 6 measured in MTPA: Figure 6.1 54 55 BP Statistical Review of World Energy 2007. AHMED, Abdul-Kadir. “Nigeria LNG: Keys to Investment & Project Development” NIGERIA LNG, LTD. Presented to the IEA: 2007. 56 The achieved 22 Mtpa that Train 6 will bring is equal to approximately 29 Bcm annually56. Referring to Figure 5.3, Nigeria is expected by 2015 to reach a production level near 65 Mtpa. In 2006, Nigeria’s LNG exports grew at the second fastest rate globally. As we have emphasized throughout, the production increases are not entering a saturated market. Both Europe and the United States are eager to increase levels of imported Nigerian gas. NLNG expects 12 Bcm to be shipped to EU in 2007 and 10 Bcm to the US in 2008. While their expectations may be lofty, they have certainly identified potential markets for their product and are ambitiously pursuing expansion. The North American import expectations represent a significant increase from just over 2 Bcm in 2006. Through August of this year, the US had imported only 2.6 Bcm of LNG from Nigeria57. Nigeria will have to compete with growing LNG producers in Norway and Qatar as well as established producers Algeria and Egypt to move cargoes to US terminals. Trinidad & Tobago, who currently supplies the majority of US LNG, is unable to add capacity to their LNG production and thus will be unable to compete for new demand sources. By spreading exports throughout the AB, Nigeria is able to secure a more stable demand source. In the unlikely event of softened demand in one of their markets, Nigeria would be able to shift focus easily, having already established themselves in other markets. NLNG is also building impressive transport ability, with a mix of ships under charter and those which are wholly owned. By 2008, NLNG expects to have a shipping capacity of near 3,300,000m3, about half of which would be fully owned58. 56 57 1 Mtpa = 1.32 Bcm/y Energy Information Agency. Website: http://www.eia.doe.gov/ 58 AHMED, Abdul-Kadir. “Nigeria LNG: Keys to Investment & Project Development” NIGERIA LNG, LTD. Presented to the IEA: 2007. 57 Nigeria has a number of advantages in their development of LNG exports. First, and perhaps most importantly, is their geographic location. Where Qatar is ideally located to swing supplies between the PB and AB, Nigeria can more economically move cargoes to either Europe or North America. Because Nigeria can more easily move cargoes to the regasification facilities in the United States and Mexico, their gas will be relatively cheaper than that of Qatar in North America as the transport costs are reduced. As seen if Figure 6.259, NLNG tankers have straight shot delivery routes to the Gulf of Mexico, US Northeast as well as ports in Western Europe: Figure 6.2 While Nigeria has some strategic advantage to Qatar in the supply of AB consumers, it seems unlikely that a Nigerian LNG cargo would ever reach the PB, where until now demand for LNG has been much more significant. Regardless of lesser demand in the 59 AHMED, Abdul-Kadir. “Nigeria LNG: Keys to Investment & Project Development” NIGERIA LNG, LTD. Presented to the IEA: 2007. 58 AB, previous chapters have discussed at length the idea that in LNG, the constraint is in supply, not in demand, leaving Nigeria’s position as an enviable one. In addition to geographic factors, the decision to form a joint venture, NLNG, with Total, Eni and Shell, ensures that sufficient ‘above ground resources’ will be available for the efficient development of projects. Above ground resources include technical expertise, engineering skill, possession of proper equipment, technology and all other resources, beyond hydrocarbon reserves, that a firm needs to effectively and efficiently grow a country’s petroleum industry. To attempt LNG projects without proper expertise or guidance would likely lead to gross inefficiency and waste. The IOCs bring a level of know-how and management that would be hard to source locally in Nigeria. NLNG has virtually ensured a culture of best practices in their operations by involving their partners. Shell specifically, has vast experience in LNG industrial development which they are continuously building upon through their involvement in Qatar. Eni, based in Italy, and Total, based in France, are very familiar with the demand side of LNG, as their headquarters are in two of Europe’s significant importing countries, and bring that knowledge base to any project they undertake. These advantages, coupled with their resource base and prime geography make this an exciting time for the development of LNG in Nigeria. Even with their marked advantages, Nigeria is at risk of interruptions in development which stem from political unrest and regional instability. Nigerian rebels have in the past been known for attacks on petroleum infrastructure and interests in the country. Groups such as the ‘Movement for the Emancipation of the Niger Delta’ 59 (MEND) have threatened to attack facilities at NLNG’s Bonny Island terminal60. MEND and similar organizations force companies considering investment in Nigerian LNG projects to consider carefully the risks of doing business there. An article in LNG Express chronicles the actions taken by MEND and the further threats they have made. Their actions have included sabotage, attack and kidnapping against the oil and gas industry, damaged pipelines and attacks on supplies to power generation plants. Bonny Island, seen in Figure 6.361, is the heart of Nigeria’s LNG industry. It is there that an attack would inarguably do the most damage. An attack at Bonny Island would take offline a source of supply for the AB not easily replaced. Gas delivery systems across Europe, and the world, would be severely hampered if they were to lose NLNG imports. Figure 6.3 Moving forward, Nigeria is unlikely to have any issues with moving cargoes of LNG to buyers in the AB as demand is forecast to outpace supply into the next decade. Its biggest concerns, in fact, are internal. Attacks not only would cripple existing operations, but further foreign investment would likely think twice before committing to an environment where they felt their investments were at a larger than usual risk. The newly elected government of Umaru Musa Yar’Adua must work arduously against radical movements, like the MEND, within the country if they hope to stave off attacks 60 OREDEIN, Obafemi. “Nigerian militants Raise Stakes, Threaten to Destroy NLNG” LNG Express. May, 2006: p3 61 Nigeria LNG, Ltd. Website: www.nlng.com 60 aiming to cripple the industry that brings Nigeria so much of its economic growth and promise. 61 VII. A Note on South American Potential As this study concerns LNG as it pertains to the Atlantic Basin, the potential of South America as a future source of LNG should be noted in spite of their current relative absence form the scene. Most notably, Venezuela, Peru and Bolivia have considerable natural gas reserves which could, in time, be developed into sizeable LNG trains that would affect significant change in the AB market. The projects being proposed and those under construction across the continent as of 2006 are summarized in Figure 7.162: Figure 7.1 Trinidad & Tobago is currently the only LNG exporting nation in South America and sends the overwhelming majority of production to US regasification terminals. While Trinidad & Tobago has a relatively high level of production at current, their potential for future growth is negligible (refer to Figure 5.3). 62 STARK, Pete. “Latin America: Challenges and Opportunities” IHS: 2006. 62 The true potential for growth in South America lies in such nations as Venezuela, Bolivia and Peru. Peru has a one train liquefaction facility under construction currently due to come online in 2010 at a capacity of approximately 4.4 Mtpa63. While such a low capacity means that Peru will not surge onto the scene as one of the world’s most prevalent LNG producers, Peru has positioned itself to generate increased revenues from NG production well into the future. An amicable relationship with their landlocked neighbor Bolivia may mean that eventually Bolivian gas will reach LNG markets via a Peruvian facility as well. The potential for Venezuela to be a major player in AB LNG is inarguable. The graphic in Figure 7.264 outlines the massive offshore reserves under the control of PDVSA, the state-owned Venezuelan petroleum firm: Figure 7.2 63 64 Peru LNG. Website: www.perulng.com PDVSA. Provided by: INCIARTE, Gustavo. University of Oklahoma: 2007. 63 Venezuelan industry is under the staunch control of Hugo Chavez, who in recent years has been known to view the oil and gas reserves of his country as a political bargaining chip. His poor management of state-owned PDVSA has led to gross inefficiencies and by some opinions, considerably set back the country’s energy industry. While there are major accumulations of gas in offshore Venezuelan reservoirs that could be exploited as LNG, Venezuelan LNG exports remain unlikely in the near to medium term. While South American involvement is currently limited to LNG cargoes from Trinidad & Tobago, the potential for future involvement warrants some consideration. It is impossible to know how the markets and geopolitics will evolve over the years, but as LNG seems to be a sector of energy which will see monumental growth in the coming years and decades, we must take time to consider the possible arenas for growth. 64 VIII. Conclusion As the global economy continues to grow and evolve, the role of energy will become ever more crucial and as its importance is magnified, its deliverability will be vital. Growth within the three sectors of demand for natural gas will be steady, and most pronounced in power generation. As traditional sources of gas supply fail to meet rising demand, LNG will have an opportunity to experience momentous growth. North America and Europe will both need to supplement their existing gas supply sources with new shipments of LNG. LNG presents an opportunity for the monetization of plentiful stranded natural gas resources. The ability to move gas from displaced markets to high demand regions has revolutionized natural gas markets. It will be growth in international LNG trade that continues to globalize gas markets and eventually establishes synergy. Globalization of gas markets will mean market synchronization which given enough time could lead to an eventual convergence. Before LNG can accomplish that however, it has considerable obstacles to overcome in the years ahead. The single biggest challenge which is choking the progress of LNG markets is liquefaction. There simply is not enough LNG being produced on a global basis. In the AB specifically, where Europeans and North Americans alike are feverishly ramping up regasification capacity in anticipation of more LNG, the production is insufficient. In order for LNG to affect basin-wide changes in market dynamics, there must be a reconciliation in the value chain between liquefaction and regasification. As costs facing liquefaction projects escalate, seemingly out of control, investors will necessarily weigh revenue potentials against the massive required capital 65 outlay. Further complicating the investment scenario are the precarious geopolitical environments in which so much of the potential exists. Market and price convergence will be possible not only if LNG trade grows sufficiently, but also if the short term/spot market sees marked growth as well. If LNG cargoes continue to be traded overwhelmingly under the pretext of traditional long term contracts, the overriding price of LNG shipments will remain as divergent in North America and Europe as they have been in the past. While it may seem logical that more LNG begin to be traded under short term conditions in the interest of economic efficiency, the noted financial capital risk of investors may compel them to maintain longer terms in an effort to reduce their risk exposure. Ultimately, intra-basin price convergence will require massive growth in international LNG trade. The sources of said growth make up a continuum of suppliers who are actively seeking to grow their roles in LNG supply. Activities in Nigeria and Qatar promise to bring considerable increases in supply, but each face a set of challenges all their own. The Atlantic Basin is likely not going to see notable price convergence as a result of LNG growth in the next 7-10 years. Liquefaction constraints will hinder sufficient growth in overall LNG trade at least until 2013. Because the market is still relatively immature, the growth in the next several years will only move towards closing the preexisting gap in the market between liquefaction (supply) and regasification (demand). As the market normalizes however in the medium to longer term, staunch competition for LNG shipments will begin to be priced based on an international basis which will eventually bring about price convergence. 66 Appendix A – International LNG Trade (BP Statistical Review of World Energy 2007 67 Appendix B – International Pipeline Trade (BP Statistical Review of World Energy 2007) 68 Appendix C – World Natural Gas Production (BP Statistical Review of World Energy) 69 REFERENCES Books, Periodicals and Reports BP Statistical Review of World Energy June 2007. BP, London: 2007 CHABRELIE, Marie-Francoise. “LNG, A Commodity in the Making.” Panorama, Paris: 2006. Institut Francais du Petrol & Cedigaz CHANDRA, Vivek. Fundamentals of Natural Gas: An International Perspective. Oklahoma: PennWell, 2006. DAHL, Carol. International Energy Markets: Understanding Pricing, Policies and Profits. Oklahoma: PennWell, 2004. DUNKERLEY, Joy. “Lessons from the past thirty years.” Energy Policy 34 (2006): 503507 EL HACHEMI MAZIGHI, Ahmed. “Henry Hub and National Balancing Point prices: What will be the International Gas Price Reference?” OPEC Review vol 29 no 3 (2005): 219-230 FOSS, Michelle. “Introduction to LNG.” Center for Energy Economics, The University of Texas at Austin, (01-2007) Available at http://www.beg.utexas.edu/energyecon/lng FOSS, Michelle. “The Role of LNG in North American Natural Gas Supply and Demand.” Center for Energy Economics, The University of Texas at Austin, (012007) Available at http://www.beg.utexas.edu/energyecon/lng JENSEN, James. “The outlook for global trade in liquefied natural gas projections to the year 2020.” Jensen Associates (08-2007) OREDEIN, Obafemi. “Nigerian Militants Raise Stakes, Threaten to Destroy NLNG.” LNG Express vol XVI no 10 (2006): 3-4 ROGERS, Daniel, and WEEMS, Philip. “Atlantic Basin LNG sees rapid growth; Mideast capacity plays major role.” Oil & Gas Journal LNG Observer vol 4 no 2 (2007) SETHURAMAN, Dinakar. “Samsung to start building giant LNG tanker.” International Herald Tribune, London: 04-2007 Available at: http://www.iht.com/articles/2007/04/03/bloomberg/sxtanker.php#end_main WEBB, Tim. “Gas: Russia’s secret agenda Energy supply is a ‘political weapon’.” Independent, London: 01-2006 Available at: http://findarticles.com/p/articles/mi_qn4159/is_20060108/ai_n15993635 70 “2006 Natural Gas Year in Review.” Cedigaz Press Release, Cedigaz (04-2007) “Be afraid, be very afraid.” Petroleum Economist, London: 01-2007 “Cartel contradictions.” Petroleum Economist, London: 03-2007 “Dawn of a global market.” Petroleum Economist, London: 03-2007 “FACTS forecasts two gas-price convergence trends.” Oil & Gas Journal (01-2007): 26 “Gas price woes.” Petroleum Economist, London: 02-2006 “Liquefaction capacity to increase 24.5 million mt/yr this year; market dynamics unchanged.” Platts LNG Guide Available at: https://www.platts.com/Natural%20Gas/Resources/News%20Features/lng2006/in dex.xml “Liquefied natural gas [2].” Petroleum Economist, London: 06-2007 “LNG the only option as regional gas supply falters.” Petroleum Economist, London: 052007 “No particular place to go.” Petroleum Economist, London: 04-2007 “Pivotal role in gas globalisation.” Petroleum Economist, London: 11-2006 “Refining and marketing.” Petroleum Economist, London: 06-2007 “Surge in interest a long time coming.” Petroleum Economist, London: 01-2007 “They’re all after one thing.” Petroleum Economist, London: 04-2007 “Trading.” Petroleum Economist, London: 04-2007 “US facing price pressure.” Petroleum Economist, London: 11-2006 Cover Photo ‘Federal Energy Regulatory Commission’ www.ferc.gov Online Resources ‘Center for Liquefied Natural Gas’ www.lngfacts.org 71 ‘Energy Information Agency’ www.eia.doe.gov ‘International Energy Agency’ www.iea.org ‘Natgasinfo.com’ www.natgasinfo.com ‘Nigeria LNG’ www.nlng.com ‘Peru LNG’ www.perulng.com Presentations ABUJBARA, Alaa. “LNG supply with emphasis on Qatar’s role in global LNG market.” Qatargas Operating Co Ltd. 23rd World Gas Conference: Amsterdam: 2006 AHMED, Abdul-Kadir. “Nigeria LNG: Keys to Investment & Project Development.” Nigeria LNG Ltd. 2007 CZERNIE, Wilfried. “Security of Gas Supply and Long-Term Contracts.” Ruhrgas AG. IEA Regulatory Forum: 02-2002 DODDS, Alex. “ExxonMobil in Qatar.” ExxonMobil Qatar, Inc. Doha, Qatar: 09-2007 INCIARTE, Gustavo. “Offshore Gas Resources.” PDVSA. University of Oklahoma: 2007 JENSEN, James. “Increasing Global LNG Investments.” Jensen Associates. The LNG North America Summit 2007: 06-2007 JENSEN, James. “The Globalization of LNG Trade.” Jensen Associates. IEA-GTE Workshop ‘LNG: Making Gas Markets Global’: 05-2005 STARK, Pete. “Latin America: Challenges and Opportunities.” IHS. Colorado: 03-2006 VAHIA DE ABREU, Ana Lucia. “The Convergence Between the Natural Gas Prices: Henry Hub and National Balancing Point.” Petrobras. 27th USAEE North American Conference: 09-2007 72