Insight: Top economies face fuel price spike as LNG supply drops

Fri Jan 18, 2013 1:12am EST
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By Edward McAllister and Oleg Vukmanovic

NEW YORK/LONDON (Reuters) - Global prices for liquefied natural gas are rising toward record highs this year as increasing demand runs up against stuttering supply, threatening to drive up fuel costs in some of the world's biggest economies.

After a record, unexpected drop in LNG output in 2012, production is expected to grow only marginally this year.

Demand, meanwhile, continues to march higher, driven by energy-hungry Asia's rapid economic growth, Japan's near total shutdown of its nuclear industry and a drought in Brazil that has forced the South American nation to buy emergency fuel supplies at high prices.

With 80 percent of global LNG supplies locked up under long-term contracts, it is countries such as Brazil, Argentina, number two economy China and India that rely on short term deals who could face the biggest hit.

LNG helps bridge fuel supply gaps in countries where domestic output fails to keep up with demand. The intricate process of liquefying gas, shipping and regasifying the fuel can also make it more expensive than pipeline supplies.

Spot prices of liquefied natural gas are currently about $18 per million British thermal units (mmBtu), up about $2 from the same time last year, but still lower than record deals above $20 in 2008.

"The supply situation is worse than we thought it would be," said independent LNG analyst Andy Flower, who tracks global export and import volumes. "LNG production declined last year and it doesn't look as though it will increase by much this year."

He added that LNG output has fallen just three other times in the 50 years it has been produced: In 2008 when the global economy was in free fall and in 1980 and 1981 when Algeria halted LNG exports to the United States over a price dispute.   Continued...

A LNG (Liquefied Natural Gas) tanker is anchored off a port in Yokohama, south of Tokyo December 5, 2012. REUTERS/Yuriko Nakao