Current Status and Perspectives for LNG in the UNECE Region
Introduction and Overview
Under the auspices of the United Nations Economic Commission for Europe (UNECE), a group
of experts has developed this Study with the objective of providing a comprehensive and up-to-
date picture of the Liquefied Natural Gas (LNG) industry. Drawing on the most recent
publications, the authors have analyzed and organized existing information for the purpose of
this Study. Each chapter stands alone, addressing related but specific topics. The four main
chapters describe the LNG market (Chapter 1), the LNG value chain (Chapter 2), the regulatory
frameworks (Chapter 3), and key interoperability and safety issues (Chapter 4).
The study reviews today’s LNG market today, exploring current dynamics and trends as well as
assessing potential developments in the market as a result of recent major events. In addition, the
study includes “technical handbooks” on the LNG chain, a summary of different regulatory
approaches adopted in the major LNG markets, and a comprehensive analysis of interoperability
and interchangeability issues such as gas quality and quality adjustment, operational and safety
issues of LNG facilities, ship-harbor interface, and so forth. A great deal of useful quantitative
information is included in the tables and charts.
The overall objective of the study is to familiarize the readers with the LNG industry and market,
and to present current drivers and potential obstacles for LNG to reach its full potential as an
energy carrier.
LNG market, a very special subset of the gas market
In 1959, the Methane Pioneer carried the world’s LNG means freedom of energy supply
first-ever LNG cargo from Lake Charles in A market with an LNG terminal can access
Louisiana (US) to Canvey Island (UK). Today many suppliers and enhance security of
supply.
one LNG tanker can transport 50 times more
LNG than the Methane Pioneer did fifty years LNG access is not constrained by pipeline
ago. The LNG industry operates more than 100 capacity availability or gas transit disputes.
liquefaction trains with a production capacity LNG is ideal for isolated markets or markets
close to 250 million tons a year, a fleet of more with a single supply source.
than 350 LNG tankers and 90 regasification LNG LNG buyers do not necessarily need to
terminals. commit to long term/high volume gas
contracts.
Global gas demand was estimated by various
LNG can be re-exported as market conditions
sources to be 3,300 bcm in 2012. LNG comprises evolve.
about 10% of the overall natural gas market and
Regasification terminals respresent additional
32% of internationally-traded gas. It is growing
storage capacity.
faster than overall gas demand.
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LNG trade in spot and short-term transactions has increased significantly in the past few years.
This development has been fuelled by increased quantities of flexible supplies from Qatari
producers and from other global portfolio players competing in the market to take advantage of
spot opportunities. LNG is usually more available than pipeline gas and can be supplied in
smaller volumes. LNG gives buyers many options to secure gas supply without necessarily
having to commit long term with a specific producer. LNG is a liquid and as such can be shipped
similarly to oil. There are, however, important differences. LNG markets remain regional in
nature because the availability of shipping does not match the fast growing LNG trade and
because a fairly limited number of global operators control a substantial share of “free” LNG.
Electricity continues to be the final
energy of preference and providing it Spain leads in Europe in the massive use of LNG
is a priority objective in developing LNG contributed to development of a gas market in Spain, a
countries. Natural gas has been the country fully dependent on gas imports and with limited
preferred primary energy fuel for connections to the European gas grid. More than 60% of
Spain’s annual gas demand of 34 bcm is met by LNG.
electric power generation, and LNG is
Twelve different sources of LNG supply enhance both
well-placed to provide needed security of supply and competition. A novel “Please in My
flexibility to power supply portfolios. Back Yard” syndrome made it possible to build 6 LNG
Given its competitive costs and its regasification terminals around the country. The LNG
terminals have ample available capacity and access is
flexibility, natural gas generally and
granted to third parties by a fully independent operator. The
LNG specifically can provide LNG terminals procure the fuel that the country’s combined
important support for renewable cycle gas turbines need for baseload generation and to
energy initiatives. In addition, the support major investments in renewable energy.
LNG market is a dynamic one: Spain has been the largest EU LNG importer in Europe for
growing number of suppliers and many years, although UK has unloaded more quantities in
recent years. More than 45,000 LNG trucks a year are
buyers, breaks regional barriers to loaded at the regasification terminals and sent to
trade, helps to arbitrage gas price, approximately 400 satellite plants close to industrial and
shows capacity to innovate and has residential customers’ sites around the country.
growth rates that surpassed those of
pipeline gas for the last decades.
Conversely, there are certain disadvantages associated with natural gas and LNG. Gas prices are
notoriously volatile, which can have an immediate and significant impact in short term LNG
contracts. Regarding competitive costs, it is not clear that LNG is the most competitive gas
option as Asian demand is driving up global LNG prices. LNG shipping also contributes to price
variations – the current tight LNG shipping market is a consequence of longer trips to premium
LNG markets, and tightness led to peak charter rates in both 2011 and 2012. Given the huge and
rising capital investments required to develop an integrated LNG project, prices for LNG are not
expected to decline in the future, even if the number of supply sources continues growing as
expected.
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LNG market moving events
Global liquefaction capacity amounted to approximately 350 bcm in 2011, and expectations are
for liquefaction capacity to reach up to 450 bcm in as soon as 2015. Regasification appears not to
be an obstacle to the forecast expansion of worldwide LNG trade as current capacity is, and it is
planned to remain, two times the liquefaction capacity.
The nuclear outages in Japan changed LNG demand
Developments to monitor
not only domestically but throughout the Asia Pacific
• Fukushima’s nuclear accident as driver of
region and, increasingly, in other gas markets as well. gas-fired generation in Japan and beyond.
While LNG demand for power generation in Japan • Economic growth in Asia: new buyers
increased by around 30% in fiscal year 2011, the soak up growing volumes of LNG.
accident in Fukushima also reduced operations at • Uncertainty about future European energy
requirements.
nuclear plants in Europe and has led some countries to • The long-term impact of the Arab Spring
reconsider their nuclear policies altogether. The on the region’s LNG export/import
immediately-available alternative is gas-fuelled power, balance.
and it remains to be seen what the longer-term • Shale gas developments that change
traditional LNG trade flows.
consequences of Fukushima will be.
In addition, growing demand from emerging economies and attractive prices for LNG suppliers
to Asia are shifting LNG trade to Asia, a region that already represents 60% of global LNG
supply. China and India will be especially important in future LNG market dynamics: together
they added more than 25 mtpa of regasification capacity between 2011 and 2012. Any future
supply gap in Asia could be covered mainly by new supplies from Australia and North America
(utilizing the expanded Panama Canal to reach Pacific Basin markets).
Here comes shale gas!
Perspectives for LNG in Europe are less clear
than in Asia, although decreasing domestic gas US shale gas deliveries grew from about 20 BCM in
2005 to an estimated 280 BCM in 2013, 40% of total
production and efforts to diversify supply US gas production. Gas production in the Marcellus
sources are drivers for European LNG growth. Shale formation alone rose ten-fold from 2008 to 9.5
Recent studies issued by the IEA, BP, Cedigaz bcf per day by May 2013. Its production surpassed the
and others all anticipate that LNG demand will total gas production of Algeria at year-end 2012, and is
more than twice Nigeria’s total gas production. Rising
increase further in Europe. LNG’s market shale gas production steadily reduced expectations for
share is forecast to move up from 15% in 2010 LNG imports into the US and, by 2010, domestic US
to 24% in 2020 according to the BP Outlook. gas markets were unable to absorb the additional
Threats to these positive perspectives are the volumes. In the expectation of continued increases in
shale gas production in North America, applications
lasting economic crisis and the strong policy have been filed with authorities in the US and Canada
push of the European Union for energy to export surplus natural gas as LNG from 10 terminals.
efficiency and “decarbonization” of the energy LNG exports from U.S. and Canadian terminals are
system that could curtail energy demand economically competitive in all major markets,
including Europe and Asia Pacific, based on forward
growth. gas price differentials. Comfortable margins can be
demonstrated to 2015 based on current forward prices.
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Europe may need to reconsider its gas portfolio amidst upheavals taking place where some
traditional suppliers may no longer act predictably. High potential suppliers may not fulfil
development plans in a timely way while others may need to restrain their LNG exportation
plans to cope with quickly increasing domestic demands.
On the supply side the boom has a name: shale gas (see box on previous page). The most
relevant event is the fast development of shale gas resources in North America. Shale gas now
comprises an incredible 40% of total US gas production, up from 4% a decade ago. The US
Department of Energy has authorized exports of 25 mtpa (35 bcm) of surplus natural gas in the
form of LNG in 2016, and further projects have been submitted for approval. Overall US exports
could reach around 50 mtpa (70 bcm) by the mid-2020s. A key question is to what extent ample
availability of LNG for export from the US could threaten planned Australian LNG projects.
LNG trade has also been stimulated by recent discoveries of conventional gas in locations such
as East Africa where maritime transport would appear more competitive than pipelines.
Could increasing LNG liquidity push towards a global LNG price?
The Gas Exporting Countries Forum (GECF), an association gathering a good number of major
gas producing countries, advocates maintaining the oil price link for gas though market
fundamentals work against this position. The current LNG price at Henry Hub (Louisiana) is less
than half the price at European hubs and less than one-fourth the average price paid in Asian
markets. LNG transport costs alone do not justify such differences. A dual pricing mechanism
(oil indexation and hub pricing) is in place in Europe, which prompts constant comparisons and
pricing debates. New import contracts in Europe have been indexed at least partly to spot prices
at the European hubs.
Power generation is the major driver of gas demand today, but most electricity utilities have
alternative primary fuel options to meet their generation needs. Some European utilities have
urged Gazprom, supplier of 3024% of European gas demand, to switch to spot indexation,
arguing they are being squeezed between low electricity revenues and gas prices indexed to a
basket of oil product prices.
With new LNG export capacities in the US and Australia (neither of which are GECF member
countries) expected to be in operation within this decade, together with parallel development of
the LNG carrier fleet, the prospect is that the LNG market will enjoy a fair degree of liquidity by
or before 2020. In a liquid LNG market it may be even more challenging maintain an oil price
link going forward.
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The LNG value chain
Emerging issues in the LNG chain
Chapter 2 assesses the LNG value
• LNG by truck: most LNG is converted to gas and compressed into long
chain, the way it is structured and distance pipelines but it can also be delivered directly to customer sites
operates, and includes a thorough (“virtual pipeline”) when low populated areas do not justify underground
description of risks and LNG contract pipelines or when construction lead-times are too long to meet growing
gas demand.
terms. The chapter sets out up-to-date • Bi-directional projects: liquefaction added to regasification terminals
information on all liquefaction plants with lower construction costs and timelines than greenfield liquefaction
(with a summary of liquefaction projects.
• Floating Storage and Regasification Units (FSRUs), hailed as a low-
technology), LNG tanker fleets, and cost revolution with the potential to become the terminal of choice.
regasification terminals. Several • Floating Liquefied Natural Gas facilities (FLNG): small scale projects
with production capacities ranging between 1.5–3.0 MMtpa but mobile
technical graphics illustrate the and quick to construct can provide a suitable solution to meet gas
different processes. shortfalls.
• Reloading at regasification terminals and ship to ship transfer: the
An integrated LNG project typically progressive disappearance of destination clauses is giving new life to
LNG terminals which not only deliver gas to the local distribution grids
takes about a decade to put into place. but also load methane tankers to trade LNG. Terminals also provide
High upfront capital investment and support to transfer cargoes for re-export LNG before off-loading and
lengthy development periods are from ice-breakers to classic methane carriers.
unavoidable features of these projects and make it necessary to have a strong commitment
among the partners, including the financial participants. The requisite level of commitment has
instigated a number of different formulae or partnership structures that have evolved along the
years. Some of these approaches set forth in this study involve:
• Traditional structure with a selling consortium contracting with one or more energy utilities;
• Integrated project structure controlling all the links of the LNG chain;
• Aggregators holding a portfolio of LNG supply sources for onward sale to downstream
markets and their own (or chartered) fleets of LNG carriers; and
• Tolling model where the “toller” enters into a lease contract with the infrastructure owner
under a fixed charge.
The different approaches seek to reconcile investment needs with market requirements while
complying with changing regulatory frameworks that seek to protect customers and encourage
competitive markets. The challenge is how to make business models suited to attract investment
compatible with competition-seeking rules such as the unbundling of commercial activities and
infrastructure management, or with the skepticism of authorities about long-term contracts.
Liquefaction
Liquefaction is the most capital and energy intensive component of the LNG value chain. It
consists of chilling natural gas to the point where it becomes liquid, at an average temperature of
–160o C (–260o F), which is an energy-intensive process: 275-400 kWh/ton LNG. This step
represents more than half of the total capital investment and more than half of LNG production
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costs. Investment costs for a liquefaction plant have increased dramatically during the last
decade, from about $400 per ton of capacity in 2004 to $1,000 per ton in 2008. The main reasons
for the increase have been the shortage of key EPC (Engineering, Procurement and Construction)
contractors, challenges in finding a skilled workforce, and rising costs of steel. Costs moderated
after 2008 due to the global financial crises but further reductions are not expected.
Regasification
Regasification (or vaporization) consists of returning LNG to its regular gaseous phase at about
5º C using heat exchangers. Typically, regasification represents 10% of total investment in the
LNG value chain and 8% of gas production cost. More than 75% of the world’s regasification
capacity is located in five countries: Japan 30%, US, 20%, South Korea, 12%; Spain, 8%, and
UK, 6%, and total regasification capacity is much higher than liquefaction capacity. Storage
tanks represent nearly 50% of the total cost of a regasification terminal. Currently, the largest
LNG storage tanks have a capacity of 200,000 m3.
Shipping
The global fleet has expanded in the past decade to a total of more than 358 vessels, with a
combined capacity of about 52 million m3 of LNG. Shipbuilding is rising again in response to
major demand growth in the Asia Pacific region as economies recover and as LNG demand
grows in Japan following the Fukushima disaster. Shipping can represent between 8 and 12% of
total investment in the LNG value chain and around 15% of gas costs.
Qatar has driven the increase in ship sizes as Rasgas and Qatargas projects have ordered 45 ships
bigger than 200,000 m3 (14 Qmax (263,000-266,000 m3 and 31 Qflex 209, 200-217,300 m3).
The rationale has been to enable further destinations and improved efficiency in LNG transport.
Though most LNG transport has been carried out in large-scale LNG carriers to ensure economic
delivery, small LNG carriers are emerging as a way to address constraints and restrictions at
smaller ports closer to final customers. The capacity of small LNG carriers ranges between 500
cubic meters and 12,000 cubic meters.
Other than enlarging the capacity of LNG ships, development has focused on new propulsion
systems, containment, and winterization/ice class (ships ordered by the Snohvit and Sakhalin
projects). Prevailing containment technologies are membrane systems installed in around 70% of
ships, and spherical Moss (30% of the fleet, approximately).
The high price of diesel compared to boil-off gas since 2010 has been a strong incentive to
modify vessels to accept boil-off gas as their fuel. On board re-liquefaction allows an operator to
arbitrage between LNG and HFO/diesel. Today, most LNG carriers use boil-off from their cargo
as fuel for steam boilers and propulsion but there is an opportunity to broaden maritime use of
LNG if the industry and regional governmental and port authorities develop the infrastructure to
store and supply LNG more widely than at present.
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Is there an ideal regulatory framework for LNG?
Chapter 3 deals with Regulation and presents the approach to regulate the LNG industry in such
major importing regions or countries as Europe, US and Japan. The chapter explores the
strategic and societal rationales underpinning each kind of regulation. There is consensus that no
single system of regulation is valid for different markets, for different institutional arrangements
and for different political priorities. Each case requires careful assessment and even a mix of
different regulatory models may be appropriate. Nevertheless, a comparative analysis of existing
regulatory frameworks can help anticipate how certain rules might attain or impede attainment of
desired objectives.
The regasification terminal is the step of the whole LNG value chain that tends to attract the
most interest from a regulatory perspective because it is an important means of access to gas
markets. The regulatory framework that applies to a regasification terminal would be a
prominent factor in the attractiveness of investment or the number and kinds of players who may
access a particular market.
Extensive and detailed attention has been given in Chapter 3 to the main pieces of regulation on
LNG in the European Union, Directive 2009/73/EC and Regulation 715/2009, which are integral
part of the so-called “Third Energy Package”. The chapter also assesses how European LNG
terminals are operated: services offered, access rules, booking procedures, congestion
management and capacity allocation mechanisms, programming and nominations, tariff and
contracts, and so forth.
In addition to specific operational issues, there are abstract matters of general interest and with a
significant impact on the regulatory approach to LNG terminals such as access regimes,
secondary markets, and construction permits.
Access regimes
European legislation enshrines the principle of regulated third party access (TPA) to all essential
infrastructure. However, the objectives of encouraging investment in LNG terminals,
diversifying supply sources and overcoming limitations caused by insufficient pipeline
connections, have triggered several exceptions to this principle. Regulated and non-regulated
access regimes coexist in Europe, and can even be applied to the same terminal. It is difficult to
talk about a common European approach to TPA to LNG terminals.
Japan imports most of the gas it consumes and all imported gas enters as LNG. There is not a
nationwide interconnected pipeline system and each of the 27 LNG terminals operating in Japan
is dedicated to supply specific power plants or neighboring gas markets. Construction of a new
LNG terminal is as possible so existing LNG terminals are not categorized as essential facilities.
For this reason, there is not regulated but negotiated TPA to LNG terminals and, in practice,
there is no TPA access. In other parts of Asia TPA is not even considered.
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In the US, the three LNG terminals in operation were authorized under open access regulation
(similar to TPA) but the “Hackberry decision” of 2002 represented a major policy shift in the
regulatory approach. This decision and subsequent codifying legislation waived open access
requirements for import terminals (subject to demonstrating lack of market power) and treated
them instead much like gas wells, which are not subject to price regulation in the US. This step
was intended to foster investment in LNG import terminals within a context of uncertain future
natural gas production in North America and a perceived need to import significant quantities.
The Hackberry decision affected not only the US but also fostered lively debate in Europe and
other parts of the world about the type of regulation needed encourage investment in LNG
import terminals.
The key question behind the access regime for LNG regasification terminals is whether these
facilities are regarded as part of the downstream or of the upstream business. If they are part of
the downstream business, then the argument could be made that LNG terminals should be
considered essential infrastructure and, therefore, must be regulated just like other transmission
infrastructure. If they are part of the upstream business then they could be considered part of the
production portfolio and subject to a more light-handed regulatory approach. Countries that have
opted for negotiated access have had poorer results in terms of third party-access to LNG
terminals, but terminals not subject to a regulated regime have generally enjoyed more stability
and predictability in rate of returns, which is a means of attracting investments. Therefore, the
choice of regulated or negotiated access as the access regime will depend on policy priorities.
Unbundling of LNG terminals is an issue linked to and with a clear influence on access
conditions. Where LNG terminals are considered part of the downstream gas infrastructure
unbundling requirements are usually applied. Under some regulatory regimes an effective
separation of commercial and infrastructure interests is deemed to be a requisite to ensure the
independence of LNG operators but even under these regimes there are LNG terminals that are
not subject to unbundling requirements. In Europe, the unbundling of LNG operators has not
been imposed by regulation but has been the consequence of unbundling transmission companies
that also operate LNG terminals.
Secondary markets
An effective secondary market at LNG terminals is a valuable tool to increase market liquidity,
minimize contractual congestions and prevent capacity hoarding. Primary holders of capacity can
be required to place back on the market all the capacity they do not intend to use through
bilateral deals or through a formal secondary market. European regulators in particular are keen
on eliminating barriers to the creation of secondary markets for the above reasons but also to
facilitate access to short-term capacity for spot cargos so taking into account the needs and
constraints of small players. Even LNG terminals exempted from TPA in the US and the UK
(Isle of Grain, South Hook and Dragon LNG) have secondary markets in place.
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Construction permits
Finally, there is an issue not directly related to the way existing LNG terminals are managed but
on how new terminals are permitted and built.
Developing new infrastructure in an increasingly environmental-sensitive world involves time-
consuming procedures and complex negotiation with different government levels and agencies to
the point that a wrongly-designed regulation on authorizations may neutralize the positive effects
of good regulation in other areas. This complexity, often related to the NIMBY syndrome (unlike
the PIMBY syndrome observed in Spain, is particularly relevant in some countries like Italy. IT
has been a driver for the emergence of new and creative alternatives such as offshore LNG
receiving facilities (FSRU, FLNG).
Interoperability and safety in international LNG trade.
Chapter 4 analyzes LNG quality issues and initiatives to harmonize LNG specifications in order
to obtain full interchangeability and appropriateness to new gas uses. The chapter also explores
quality adjustments that can be performed at the different steps of the value chain. In addition,
the chapter addresses the physical engineering compatibility of liquefaction plants and
regasification terminals and the requisites of LNG tankers or ship-shore interface. Chapter 4
contains appendices detailing useful information on specific topics such as gas quality
requirements in LNG importing countries, LNG quality average in exporting countries, vessel
approval procedures at regasification terminals and a complete list of international associations
involved in LNG quality.
The chapter draws three broad conclusions:
• The LNG industry has achieved the high level of safety throughout its 50-year history.
• The operational safety standards and their compatibility throughout the LNG chain have been
a result of industry commitment. Regulations have typically followed or complemented the
industry initiatives.
• Though there is room for improvement, existing differences in LNG specifications,
liquefaction plants, receiving facilities, local operation procedures, LNG tanker designs, and
so forth have not been a barrier for development of global LNG trade.
Despite these achievements, the industry needs to maintain the initiative and anticipate the
challenges inherent in a rapidly growing business. New supply sources and an expanding
number of LNG facilities and users pose challenges which can be grouped in two broad
categories, LNG quality and information sharing.
LNG quality
The issues of LNG quality and interchangeability are of common interest to producers and
purchasers of LNG due to increased liquidity in the LNG market. Gas quality concerns involve
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sulphur and mercury content, as well as calorific value. Gas interchangeability is the ability to
substitute one gaseous fuel for another in a combustion application without materially changing
operational safety, efficiency, performance or materially increasing air pollutant emissions. At
the moment the world is split into three areas where different specifications predominate:
• the Asian market with rich gas requirement (high calorific value, high Wobbe number),
• the Atlantic Basin with preference for leaner gas, and
• the European Union that is trying to harmonize specifications among member states to
make acceptable a wide range of lean and rich LNGs.
Full harmonization of traded LNG quality is unlikely because different gas fields have different
compositions and the liquefaction process influences its quality. Some degree of harmonization
of LNG specifications is necessary to acceptance at all LNG terminals and by a majority of end
users. This issue is especially important for electricity generation using combined cycle gas
turbines, which currently are the fastest growing and largest potential gas users.
The impact of different qualities of gas on the performance of domestic appliances is under study
by many organisations with the objective to assess the impact of a wider range of heating values
and Wobbe Index on their safety, operations and efficiency. Blending, mixing of LNG during
offloading, mixing of LNG during send out and ballasting are all methods of controlling the
quality of LNG to conform to contractual conditions and end-use requirements. A final objective
is to ensure that all LNG importing countries and end users have access to all sources of supply.
Standardization and sharing of information
There is presently a huge body of knowledge on operational issues of the LNG chain. The
information comes from a range of sources, is located in a multitude of reports, and is growing
rapidly. For LNG to become a truly global industry, important efforts are needed to normalize
the information and to make it widely available and understood. Dialogue that has always existed
among players in the LNG chain, even players from distant regions, must be encouraged and
focused on the standardization and exchange of information. Regulatory bodies should be part of
this dialogue as well. Such efforts would contribute to increasing compatibility, added
operational efficiencies and improved safety throughout the whole LNG chain.
A main conclusion of this study could be that if natural gas is an essential energy source for a
sustainable future, LNG is the gateway to a global gas market.
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