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--Clyde Russell is a Reuters columnist. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, June 26 (Reuters) - The gap between perception and myth in liquefied natural gas (LNG) is widening, with both buyers and suppliers appearing to subscribe to views that bear limited resemblance to reality.
This dynamic was very much in evidence at this week's Australian Gas Export Outlook (AGEO) conference in Brisbane, where buyers appeared confident that a wave of new projects around the world would leave them spoilt for choice of supply, and at lower prices.
Producers labour under the impression that Asian demand, led by China, is a bottomless pit that will suck up all the LNG they can make, while still earning high, oil-linked prices.
The outlook for LNG is confused and the industry isn't being well served by the lack of clarity.
It's time to try and debunk some of the myths.
Myth 1: A wave of LNG is coming from global projects
At the AGEO meeting this week, senior representatives from a major Japanese LNG buyer and an Indian buyer spoke of the increased supply expected from the United States, Canada and East Africa.
They spoke as if the projects that have been proposed are all likely to become reality, and within the timeframes mooted.
This is extremely unlikely, and what appears to have happened is that project developers have proposed so many new plants that buyers seem convinced they are about to be swamped with offers.
The reality is likely to be far more sobering.
What is certain is that global LNG supplies will get a substantial boost between now and 2019, as the seven projects now being built in Australia come into production.
These will take Australia's annual output to more than 80 million tonnes, so that it overtakes Qatar as the world's top producer.
It is also certain the first U.S. project, Cheniere's Sabine Pass, will start in that timeframe, ramping up to a total of 20 million tonnes.
These projects, and a handful of others now being built, are likely to lead to a small market surplus of LNG around 2018.
But buyers' expectations of a sustained surplus are built on huge new supplies coming on stream in the United States, Canada and the East African nations of Mozambique and Tanzania.
The U.S. Federal Energy Regulatory Commission (FERC) approved construction of Sempra Energy's Cameron plant on June 19, the second such approval after Sabine Pass.
This makes it likely that Cameron LNG will proceed to final investment decision (FID) and start construction.
There are three other projects awaiting FERC approval, and assuming this is granted and the plants are built on announced timelines, U.S. exports will be around 67 million tonnes per annum by around 2020.
Beyond that there is potential for another 220 million tonnes capacity, but whether this is approved and built is very questionable.
Several problems come to the fore. The approval process is likely to change, requiring projects to pay for expensive FERC approval prior to that from the Department of Energy.
Most of these proposed projects don't have committed buyers, or gas supply. Rather many are so-called tolling projects that merely charge for the liquefaction process, with the sourcing of feedstock gas and shipping being buyers' responsibility.
This leaves them highly exposed to U.S. Henry Hub gas prices , which are now about $4.58 per million British thermal unit. However, many analysts believe the trend is higher over the coming years, and U.S. gas prices also suffer from seasonal or weather-event-related spikes.
Canada's regulator has approved plans for nine projects totalling 145.3 million tonnes a year, but only the Chevron-led Kitimat venture is close to taking FID, and even it faces numerous hurdles.
One of these is support from Canada's First Nations, the Aboriginal people across whose land gas pipelines and other infrastructure must be built.
This is proving hard to get, not only for the Kitimat project, but for virtually every other proposal.
The Canadian ventures also lack sufficient firm sales contracts, meaning bankers may be reluctant to finance projects in the absence of a guaranteed revenue stream, even if the economics look viable.
In Mozambique and Tanzania, the only certainty is that large discoveries of offshore gas have been made.
The rest of the proposals there are just ambitious plans, notwithstanding the involvement of serious industry players, such as Anadarko, Norway's Statoil and Exxon Mobil.
Uncertainty over regulatory frameworks and concern over corruption are common to both East African nations, as well as an almost complete lack of any infrastructure in the remote areas where the plants are proposed for construction.
Mozambique LNG's website is still saying it's targeting first cargoes in 2018, but this must be very unlikely, given its current lack of progress.
Overall, once the projects already being built and up to four or five more in final stages of planning in the U.S. are on line, there isn't much in the way of confirmed new supply on the horizon.
Myth 2: U.S. LNG will force LNG prices in Asia lower
This myth is based around the wide gap between U.S. natural gas prices and long-term, oil-linked contract prices in Asia, with Japanese buyers typically paying an average of around $15 to $16 per mmBtu, almost four times the Henry Hub price.
Since U.S. LNG projects can source gas at U.S. prices, the theory goes that adding in liquefaction and transport costs of around $7 per mmBtu, takes the cost of LNG delivered to Japan from the U.S. Gulf Coast closer to $11 per mmBtu.
There are several problems with this, the most obvious being that U.S. producers will sell at a steep discount to Australian and Middle East suppliers.
Rather, it's more likely they will sell at a cost just fractionally cheaper than rivals, so allowing them to maximise profits while ensuring market share.
This myth also works on the assumption that U.S. gas prices will remain low for decades. However, the risk must be for them to rise as increasing demand from electric utilities, industrial users, transport and residential customers starts to soak up even the huge amounts of available shale gas.
It is likely the entrance of U.S. LNG to the Asian market will force changes to the market, perhaps by ending destination clauses and by reducing, or even ending, oil-linked contracts.
But sharply lower prices are not as likely as buyers hope, and even if they were delivered, it would only be for a very short period as new LNG capacity would simply not be built and existing capacity would idle, or run at reduced rates.
Myth 3: China will buy whatever can be produced
China has a pollution problem and needs cleaner energy. That's not a myth, but the belief that the Chinese will be prepared to use ever-increasing amounts of expensive LNG is probably about as hopeful as the iron ore miners who saw demand rising for decades to come.
Yes, China is building re-gasification terminals at a rapid rate, with 50.2 million tonnes under construction or approved, more than doubling the existing 31.1 million tonnes.
There are plans for a further 29.5 million, but even if all this capacity is added, it's by no means certain all will be used.
Chinese demand is likely to reach some 60 million tonnes around 2020, but this can easily be met from new supply already being built.
Additional demand will be added by new import facilities in Southeast Asian countries such as Singapore, Malaysia, Indonesia and Thailand, but again this is likely to be met.
Myths, if widely believed, distort markets and LNG appears to be in this category. Buyers awaiting cheaper LNG have to realise this is unlikely, unless investors with billions of dollars are prepared to back risky projects in the United States.
Project proponents need to do a reality check on the likelihood of finding stable, committed buyers willing to pay prices high enough to justify massive initial investments.
This isn't to say more projects won't be built, but only developments in the United States, Canada, East Africa and elsewhere that offer compelling economics will go ahead, and there won't be that many of them. (Editing by Clarence Fernandez)