Standard & Poor’s (S&P) global conference call addressed the shifting global dynamics for the liquefied natural gas industry by spotlighting four prime players to discuss their strategies and challenges with LNG production.

Liquefied natural gas (LNG) demand is booming, and the U.S., Canada, Qatar and Australia are all fighting to score a bigger piece of the market.

Regarding the U.S. natural gas market, Mark Habib, director of corporate and government ratings for S&P, said that current natural gas production is surging in the U.S., but is not even a blimp on other player’s radar. “The U.S. remains about 10% of the global natural gas market at 30 billion cu ft of gas per day (Bcf/d), and as a result plays a relatively small part in the overall natural gas market.”

The lowest U.S. natural gas prices in a decade sit just below $2 per million British thermal units (MMBtu), while Western Europe’s price is $13/MMBtu and the Japanese and Korean markets are at $17/MMBtu.

Commenting on this price gap, Habib said, “This segmentation has led to very large arbitrage opportunities to exporters that are able to bridge the gap between those segmented markets.”

Habib explained that U.S. prices are low due to the shale boom, which caused a drastic increase in production and led to an oversupplied market. The U.S. has such an excess of natural gas that it could transform from primarily an LNG importer to an exporter within the span of a few years.

“A few years ago, the expectation was that the U.S. would be an import market of about 12 Bcf/d. Currently, as a result of all that excess shale production, the forecast has dropped to around 1.0 Bcf/d for 2012,” he added.

This newly forecast U.S. export market will heavily hinge upon natural gas and crude oil spreads versus production costs, Habib explained. Export activity is underway, as “projects for about 12 Bcf/d have currently applied for Department of Energy export licenses to non-free, trade agreement countries.”

Habib emphasized that several brand new LNG import facilities are now inactive because there is no need for imports due to an oversaturated supply.

Although the U.S. is producing natural gas at high rates, Habib doesn’t think these production rates are sustainable. There is a limit to the country’s natural gas resources and in time it will be exhausted. “The U.S. is not a typical export market, it’s not a stranded market like Qatar or Australia is, rather it’s a very large, robust, and much more evenly balanced supply market,” he concluded.

Looking to the U.S.’ northern neighbor, Gerry Hannochko, credit analyst for S&P, emphasized Canada’s long-standing presence within the natural gas market. While the U.S. has exported natural gas to Mexico at low volumes, Canada has been a major natural gas exporter to the U.S. for years.

Now, Canada has already gotten the green light on two LNG export projects, Kitimat LNG and BC LNG, from the National Energy Board. Both approved projects foresee production in about three to four years.

However, Canada’s lack of a solid LNG infrastructure system will likely cause future export project hurdles. 

Hannochko pointed out that even though Canada has a key geographical location to export to Asian markets, “There’s not enough pipe capacity to provide the gas to potential facilities on the West Coast of British Colombia. There needs to be a whole bunch of other infrastructure built to support these projects.”

Perhaps one of Canada’s biggest success factors has been its ability to control its domestic natural gas market. Canada has maintained an element of control through the utilization of the integrated model and variable cost of production, Habib declared.

Variable cost of production is Canada’s main economic driver, where expenses are directly linked to business activity. Because the gamble of natural gas and oil price arbitrage is not the motivator of Canada’s prices, the country foresees a better-balanced price range in upcoming years.  

Hannochko explained, “You essentially get a long-term hedge on natural gas prices, which I think is going to be very attractive to a number of producers given the current price environment.”

Australia, on the other hand, has a different price approach, said May Zhong, credit analyst for S&P.  

In Australia, “most of the LNG contract prices are linked to core oil prices.” She added, "This is because buyers are comfortable with oil-linked pricing since oil is a well-understood, globally traded commodity.”

There is a sense of price security in Australia that Zhong emphasized with the “S” curve strategy. The Australian market structure heavily relies on the “S” curve, which defends producers in a low-price environment and consumers in a high-price environment. The “S” curve makes the Australian market better-balanced, and, like Canada, gives the country more control over its domestic natural gas market.

LNG projects are not news for the country, as Zhong described Australia’s current project progress. The country dominates the global LNG project construction market with over half of recently proposed projects in Australia. Australia is currently undertaking nine LNG projects, many outsourced from the U.S.

Recent economic challenges have created limitations for the country and sparked a project execution risk. These challenges consist of hefty capital expenditures linked to project construction phases, tight labor and a shifting contractor market. Zhong added that the Australian dollar is also high and therefore increases capital and operational expenses even more.

However, she concluded, "Despite the project execution risk, in our view, the LNG sector should remain investment grade in Australia because most LNG projects are exposed to pricing risk not volume risk."

However, Australia’s biggest competitor for Asian markets is Qatar. Karim Nassif, associate director of infrastructure and finance rating for S&P, affirmed, "Qatar is the largest producer in the world of LNG with 77 million metric tons per year of capacity."

According to Nassif, the key to Qatar's success is its tactic to control the supply chain of LNG production. "This has enabled Qatar to be a pioneer in terms of technology with the largest liquefaction trains and the largest LNG vessels in the market."

Qatar's strong infrastructure has given it the ability to supply LNG quickly in a short period of time. He justified this statement by referring to the recent earthquake catastrophe in Japan. The Japanese were in dire need of LNG supply, and due to the Qataris’ LNG transport resources, Qatar provided LNG quickly and efficiently to Japan.

Nassif revealed the core success factor of Qatar, which heavily rests on its overall economics and production costs. "The very low production cost associated with LNG production has been at the heart of Qatar's success."

Qatar’s LNG projects have already been constructed, and therefore the country is out of the capital expenditure stage and in the operational expenditure stage. Day-to-day project maintenance is substantially cheaper than construction, which has strengthened Qatar’s economic foothold.  

Low breakevens are another prime success factor for Qatar. Qatar can afford a few losses and not be in too deep to rake in profit. Nassif included, "A lot of transactions over the past couple of years have compellingly low breakevens and have allowed the transactions to withstand some severe stresses and maintain robust cash flows."

Although cash flows are healthy, production from Qatar's main natural gas source, the North field, has been capped due to a moratorium on further gas development in the field that was executed in 2005 and will terminate in 2014. The lack of additional production from the North field gas giant has taken away from potential gas supply for Qatar.

Nassif ended on future concerns for Qatar, including changes in the supply and demand dynamic, production technologies like hydraulic fracturing, alternative fuels, and geopolitical issues in the Middle East potentially affecting future LNG production.

Even with these chief concerns, Nassif assured, "The LNG sector remains investment grade in Qatar."

Contact the author, Kate Permenter, at kpermenter@hartenergy.com.