The difficulty faced by delegates at the Copenhagen Climate Change Conference in trying to formulate a new international treaty was predicted, by the many who believe that instead of trying to increase the cost of dirty energy, we should rather strive to reduce the cost of clean energy.

While the high priority and global attention focused on this event acknowledges climate change as a real threat, it also admits a dependence on fossil fuel that is going to be very difficult to break.

Undoubtedly, natural gas is one of the most benign of the hydrocarbon fuels that are extracted from the bowels of the earth, in terms of greenhouse gas emissions and other environmental effects. Coal is by far the most abundant fossil fuel, but with proven reserves exceeding 63 years at 2009 production levels, natural gas holds a comfortable second place.

Significant growth in the size of reserves can still be expected, as new understanding of shale deposits acquired recently in the US allows for exploration of these resources in the rest of the world.

Availability has long been a factor limiting the adoption of natural gas, because the largest natural reservoirs of natural gas lay inconveniently remote from major potential markets.

The challenge of safely transporting natural gas in significant volumes limited its early use to lighting in cities lying close enough to natural sources for low pressure pipeline supply.

Post-World War II advances in welding processes and metallurgical science enabled the installation of pipeline networks throughout North America, the UK and Western Europe.

Today, nearly 50% of homes in the US, the world’s highest per capita energy consumer, depend on natural gas for heating and cooking – and large natural gas pipelines that girdle the continent, link all the major cities and industrial centres. Similar pipeline infrastructure exists across most of Europe.

LNG & supply
Cooling natural gas to -161°C in an energy intensive process, turns it into a colourless, odourless, super-cold liquid and reduces its volume by a factor of 600 times.

Liquefied Natural Gas (LNG) has become an indispensible transport mode, unlocking the economic value of vast reserves of this gas that is in high demand as a primary fuel.

Delivered across oceans as a cryogenic liquid in gigantic purpose built carriers, LNG provides a vital supply of gas to countries with existing gas distribution infrastructure and inadequate local reserves. LNG is also distributed in smaller loads by road and rail tankers.

At least 75% of the world’s natural gas reserves are concentrated in the Middle East, (Qatar, Iran and Russia together hold nearly 60%), followed by Eurasia, and the US.

Indonesia, Kuwait, Venezuela and Libya; all reported increased reserves in 2009. North America and the former Soviet Union dominate world production of natural gas, but while Russian pipeline exports to Europe are significant, North America is now a net importer of LNG, albeit for economic reasons.

The newest entrant into the LNG export business is Russia with an LNG plant commissioned in 2009 that will produce 5% of global annual supply when operating at full capacity.

Other nations that traditionally exported LNG, including Mexico, Canada and Indonesia, are expected to rely on imports in the foreseeable future. These market shifts have encouraged a preference for short term supply contracts and even spot trading over traditional 20 year fixed agreements.

Whereas in 2008 only 14% of the LNG traded was not destined to fixed destinations, this has already risen dramatically and is expected to exceed 60% by 2015.

Australia is a significant exporter of LNG, mainly to Japan, and although current projects are struggling to secure long-term supply agreements, the country reports an urgent need for new discoveries to replace declining output. Less than 25% of the vast petroleum basins that exist there have been explored.

The overall volume of LNG trade is constrained by two physical parameters: the capacity to liquefy and transport LNG. The fact that natural gas has a boiling temperature of -161°C has significant implications in terms of the difficulty and therefore cost of converting it into liquid form. Storing and transporting LNG at such low temperature is equally cost intensive.

Capacity expansion is therefore dependent on the availability of capital to finance projects and the perceived potential risk versus return.

Demand
The rapid expansion of international trade in LNG, since the first commercial shipment in 1964, now offers a reliable, relatively clean energy resource to countries around the globe and far beyond the cost effective reach of pipeline supply.

This has motivated many countries to convert their oil and coal fired electricity generation capacity to modern combined cycle systems fueled by natural gas.

Diversified energy sources are increasingly sought as a means of increasing energy security, and an increased proportion of LNG in the energy mix is seen as desirable by many countries. Continental Europe, Britain and the America’s need LNG to augment their dwindling domestic supplies of natural gas. Japan, historically the world’s largest consumer of LNG, Taiwan and South Korea, are major importers that represented around 70% of world trade in 2009.

China and India are expected to evolve as major markets for LNG during the next decade.

Heavy pollution from the extensive reliance on coal energy underlies the decision of many developing economies, where large populations and industrial growth strategies to raise per capita income have produced seemingly insatiable energy demand, to establish LNG import facilities.

A second east-west pipeline is under construction to feed natural gas from China’s inland reserves and a series of LNG import projects are being established along the eastern coastline.

In Latin America, where large Bolivian reserves have fed pipeline supply to neighbouring countries in that region, import terminal projects in Brazil, Argentina and Chile will provide energy security in the future. Political tensions in Bolivia have stalled upstream investment by these countries, whose import volumes are expected to grow rapidly.

Despite a sustained average growth rate of 8% p.a. between 2000 and 2007, the global demand for LNG equated to only 7% of global natural gas consumption in 2008. Demand forecasts presented at the US Energy Information Administration’s 2008 conference varied from 3%-4% p.a. through until 2020 - up to more than 50% growth by 2013.

The drop in demand for LNG in 2009 of 4.7% (announced in April by Japan’s Institute of Energy Economics) is now expected to exceed 10% or, at least 4% of global demand. Weak demand has resulted in a slump of more than 50% in the spot price for LNG in Asia and 2010 is expected to be a second successive year of excess supply capacity.

While many countries have prevaricated about the dangers of nuclear power, natural gas has become indispensable to most developed economies. Its clean burning flame and convenience in use have made natural gas the fossil fuel of choice wherever it is available, and its range of applications extends from domestic light and heat, industrial boilers and furnaces and electric power generation to hydrogen reformation, fuel cells and numerous others.

A difficult balance
Accurate predictions already skewed by the demand hiccup caused by global recession in 2008/2009 are now further frustrated by project delays in Russia, Qatar, Yemen, Nigeria, Norway and Australia, which have resulted in expected capacity expansion being commissioned at least a year and up to four years later than originally planned.

A total of 90 million metric tonnes (MMT) per annum of new liquefaction capacity is due to be commissioned by 2012 which will about double the output in 2008.

Uncertain investment finance, lack of professional manpower and unbudgeted cost increases are quoted as the reasons for project delays. At the same time, unexpected demand spikes due to the failure of nuclear and hydro power generators in Spain and Japan have absorbed significant volumes of LNG.

The market price for LNG is particularly sensitive to fluctuations in demand because cryogenic liquids cannot be stored indefinitely without significant losses.

Surplus LNG can only be held if it is converted back into the gaseous state and this involves energy costs.

Countries like the US have exploited the lower spot prices during 2009 because they have storage capacity for gaseous product and could import LNG at lower cost than the extraction cost of their own natural gas.

Tumultuous market conditions with soaring prices up to mid 2008, followed by the forecasts of collapsing demand in the midst of a world economic crisis, have created a difficult environment for investment decisions. The pipeline of new projects, that would normally lead to continual reports of increased reserves and planned increases in capacity for LNG production and transport, has been depleted.

Few new projects are likely to be scheduled for completion before 2015 and the slowest LNG production growth since the 1970s is predicted. Strong demand is forecast for the period after 2010 and the natural time lag for new project development will allow demand to catch up, resulting in a demand-supply gap that could exceed 500 MMT by 2015.