The Dubai Multi Commodities Centre (DMCC) announced on 21 August plans to develop a $1bn LNG storage facility to be located at Techno Park in Dubai with Canadas privately-held LNG Impel. Dubai LNG Storage Hub is expected to have a total storage capacity ranging from 40-65bn cu ft and will offer customers the ability to store, trade and plan supplies of LNG in addition to providing other services such as swaps and quality blending, the sponsors said in a statement. Over time, it will also offer financial derivatives around LNG and shipping. This project is a signal achievement for DMCCs objective to make Dubai the energy hub of the Middle East, and is in keeping with our key role as a promoter of commodity trade and its requisite infrastructure, Chief Operating Officer of DMCC Ahmad bin Sulayem said.
According to the DMCCs Executive Director for Energy Tilak Doshi, the hub will offer greater flexibility to both buyers and sellers, releasing them to some extent from long-term supply contracts. The Dubai-based storage facility will enable core LNG suppliers and buyers to capture value by storing and trading across different months, as seasonal price variations are a key attribute of global LNG pricing. It will also allow a multiplicity of buyers, sellers and traders to arbitrage across several regions, and support derivatives trading as a spot market emerges around the storage facility, he said. The partners in the project said they would launch a bid process for storage capacity at the hub with an initial non-binding bid round commencing on 28 August.
Regional Gas Hub
According to LNG Impels Managing Director for Europe David Shipway, the storage hub will take incremental LNG volumes from regional Gulf producers including Adgas, Qatargas, and RasGas, plus those outside the Gulf. LNG will be delivered by ship and unloaded into storage tanks where boil-off will be limited by a small central liquefaction unit. Mr Shipway told MEES that these producers would then be able to take advantage of summer/winter price swings, which he said could range as high as $9-10/mn BTU, and other geographical arbitrage opportunities. The project sponsors were confident that the financial incentive to store LNG would absorb the costs of unloading, storage and reloading: Eventually we think the Dubai storage facility will become a hub rather like the hubs at NBP (National Balancing Point in the UK) and Henry Hub. Dubai could be a price setter there is no price setter for that part of the world. The idea is that we will provide the facility and the DMCC will hope to develop trading on spot physical and forwards. Then potentially we could get into futures.
LNG Impel is a subsidiary of Canadas Galveston LNG, the closely-held company responsible for Kitimat LNG, the first permitted LNG import terminal planned for the western Canada coast north of Vancouver. MEES understands that the largest shareholder in the company is Sowood, the energy investment arm of the Harvard Alumni Investment Trust. Mr Shipway said that the project would benefit from the likely increase in LNG producers trading on their own account as projects expand in the years ahead. He pointed out that LNG projects were now more bankable than they were when the first plants were built, removing the need for long-term sales contracts to back up financing. Furthermore, with improved sovereign credit ratings for producer countries, governments were increasingly able to make larger state investments in LNG projects. He argued that government shareholders in LNG projects would not in the future necessarily want to place their sales in 20-year contracts, where prices do not reflect short-term price peaks in consumer countries. We see our potential customers not only as producers but also those who have long-term dedicated streams of LNG being supplied to them, who up until now have had to just be part of the LNG stream, he told MEES .
Sufficient Spare Capacity?
Dubais LNG storage plan is designed to boost and facilitate higher levels of LNG trading. But some observers doubt whether there will be sufficient spare LNG production capacity to fill the planned storage. The market is very tight and is expected to remain tight for the foreseeable future: there is lot of demand for gas and a lot of LNG supply is still under construction, said independent gas expert and consultant Alex Forbes, adding that the situation was unlikely to improve in the next 5-10 years. Mr Forbes pointed out that Indonesia was struggling to cover its LNG commitments to clients and Qatar which will be the largest LNG producer later this year is at present sold out. Many Middle Eastern and North African (MENA) producers of LNG are either facing hurdles as they struggle to expand projects (with the exception of Qatar) or are facing the more serious difficulty of securing gas reserves to underpin expansions.
Mr Forbes also pointed out that aside from the question of incremental volume, the global LNG supply chain at present has little flexibility. An LNG contract is a virtual pipeline and all the links in the chain have to be optimized, he said. The Dubai proposal is based on the concept that LNG has become a traded commodity like oil. It hasnt and it wont, for a long time, he added. But he conceded that the Dubai governments commitment to the project added credibility. While 80-90% of LNG is likely to be traded on long-term contracts for the next 5-10 years, there is plenty of evidence that people are thinking differently about the industry this proposal will get a lot of industry people talking, he said. Also, with MENA LNG production set to double from 75mn t/y in 2006 to 153mn t/y in 2010, the massive expansion in supply volumes may change the way that LNG is supplied and marketed in unpredictable ways.
