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Liquified Natural Gas storage poses challenge as production rises

Even as liquefaction capacity of Liquified Natural Gas (LNG) is expected to surge this year, its consumption will drop, making it unclear where will the new capacity be shipped, analysts at Merrill Lynch have said.

A report prepared by Merill Lynch commodity analyst Francisco Blanch said storage capacity of LNG will have to be increased rapidly this year in order to contain the mismatch between production and consumption.

The analysts blamed weaker industrial demand resulting from factory closures and widespread layoffs as the reason behind the contraction in LNG demand.

An increase in supply may result in the building up of a loose market by the end of 2009, the report said.

"Uncertainty around supply does not yet suggest a supply glut. With Taiwan, Thailand, South Korea, India and Japan all buying less LNG, spot activity for LNG in Asia looks weak," it said.

According to the report, LNG vessels that have been turned away from the US are heading towards Europe. However, there is not enough storage capacity in Europe to store it.

"At the moment, the unwanted LNG vessels are heading to the UK and France to replenish low gas inventories following Russian gas disruptions and very cold winter this year. But Europe has limited storage capacity," it said.

LNG may slide below $2.50mmBTU. Switching of industrial users from coal to gas is the "only upside" that the gas sector may witness in near future, it added.

This is the second such report expressing apprehensions about the oversupply of LNG that has emerged in recent days. Energy Intelligence, a New York based agency, had expressed concern that LNG markets may become oversupplied in 2009 and 2010 as an additional 100 mn tn/per annum production capacity comes on-stream in countries like Qatar and Australia.

The agency in its "World Energy Review" said the developing countries will emerge as bigger consumers of the clean fuel leaving behind the developed economies. "The supply-demand balance is poised to turn again in the medium term, as supply project bottlenecks are cleared and over 100 million tons per year of new supply floods the market," the agency said, adding: "The import balance is shifting from the industrialised Asian economies to developing ones, and the US and Europe are poised to regain lost import shares."

By Shashank Shekhar

© Emirates Business 24/7 2009