Are Investors Prepared To Capture The Opportunity Of LNG That Emerges From The Recession?

Despite the global financial crisis which has led to a fall in energy demand and prices, the market for liquefied natural gas (LNG) is expected to regain its steep growth trajectory in the mid and long terms.

Despite the global financial crisis which has led to a fall in energy demand and prices, the market for liquefied natural gas (LNG) is expected to regain its steep growth trajectory in the mid and long terms, spurred by anticipated increases in demand, particularly in emerging markets. The exact extent of this surge in demand and related investments in infrastructure is difficult to project, but to capitalize on opportunity when it arises, investors must be prepared to mobilize quickly and establish flexible business and operational models for an unpredictable, high-stakes future.

The LNG industry has developed slowly over the last half century because in most heavy-consuming nations, the domestic energy supply has been sufficient to meet demand. However, as energy consumption has continued to increase around the world (most dramatically in emerging nations), it has become more difficult for many nations to satisfy their energy needs locally. Complicating the situation further, more than a third of the world’s natural gas reserves are located in low-consumption countries, far from where energy demand is highest. Increasingly, nations are turning to the mobility and flexibility of LNG to resolve these imbalances.

Indeed, from 2006-2015, the global market for LNG is expected to increase by 70% and more than triple by 2030. Not surprisingly, investors are anxious to grab their share of this opportunity.

The rise in energy demand led to a peak in energy prices around mid-2008, followed by a recession-generated steep decline. As the short-term impact of the global recession subsides, however, natural gas prices are expected to stabilize again through 2011 and then increase for the foreseeable future. These higher gas prices will make it economically feasible for businesses and nations to again invest in LNG. The cumulative 2007-2030 investment in gas supply infrastructure is expected to be US$5.5 trillion (in 2007 dollars). Out of this, an investment of US$440 billion is expected to be made specifically in LNG infrastructure.

However, the same high prices that spur investment in LNG could eventually become detrimental to the industry. Forecasts by the International Energy Agency suggest that high natural gas prices may ultimately prompt consumers to turn to other fuels.

The question is: will investors be able to scale their LNG infrastructure quickly enough to capitalize on this bubble of opportunity? And equally important, how can they make their businesses flexible enough to withstand the cyclic nature of this industry?

LNG: The Opportunity
Driven by population and economic growth, global primary energy demand is expected to increase by 45% between 2006-2030, with 87% of projected growth coming from non-OECD countries. As a result, their share of world primary energy demand is expected to rise from 51% to 62%. China and India are expected to account for 51% of incremental world primary energy demand from 2006-2030. Even established nations such as the United States are likely to see energy use rise by more than 11% between 2007-2030.